| Can You Build A Strong
Brand Based On A Low Price?
By Jacky Tai
Principal Consultant, StrategiCom
16 Apr 2007
I am sure you have often been told that if you compete
exclusively on price, you will die because in the China
Age, you can’t possibly survive if you compete on price,
especially if you are located in a high-cost country
like Singapore, for example. That is not entirely true.
You can be located in a high-cost country and still
compete successfully based on having a low price. In
fact, you can even build a powerful brand based on your
low price.
Really? What’s the catch? There must be a catch, right?
Yes, but I will get to that in a while. First, let us
look at the price ladder. Where are you on? If you are
on the high end or the low end of the price ladder,
then you have a chance to become a strong brand. If
you are stuck in the middle, you are in danger.
If you take a look at most categories, you will find
that the 2 segments that are booming are the high end
and the low end of these categories. Take the automobile
industry for example. Where is the growth coming from?
Premium brands like BMW, Mercedes-Benz, Audi and Lexus
are doing great. Budget brands like Hyundai and Kia
are also doing great.
It’s the middle segment that is dying. Brands that
are stuck in the middle like Ford are in danger of being
killed. In most markets, the BMW 3 series now outsell
the Ford Mondeo. If you are stuck in the middle, you
are being squeezed from the bottom by budget brands
and crushed from the top by premium brands. Buyers typically
don’t like complications. They either buy from the high
end or the low end. Being stuck in the middle is no
place to be. Remember that!
Structural Cost Advantage
If you want to build a strong brand based on a low price,
here is the catch. Your low price must be a result of
structural cost advantage. A structural cost advantage
is something that is built into the way you do business
or manufacture your product. A structural cost advantage
is not something that can be easily copied by your competitors.
Moving your production facilities to a low-cost location
like China or Vietnam is not a structural cost advantage.
That can be easily copied by just about any of your
competitors. In fact, they might have done that even
before you thought about it.
Squeezing your suppliers is not a structural cost advantage.
Squeezing suppliers is often counter-productive as it
will result in shortcuts that will ultimately affect
quality. I am not saying that you should not negotiate
for a good price but the laws of diminishing returns
apply here – there is a point where further cost reductions
simply cannot be made without compromising quality.
Cutting your labor or your employees’ pay is not a
structural cost advantage. Although labor cost is a
huge component of any company, the laws of diminishing
returns apply once again. There is only so much labor
or pay that you can cut. Beyond a certain point, you
are compromising the ability of your company to compete.
A company that is understaffed or staffed by demoralized
employees (as a result of lousy pay) cannot compete.
But this seems to be a favorite tactic among Singapore
companies. What companies like these are saying is simply
this, “We are bankrupt of ideas and the only thing we
can think of to reduce costs is to squeeze our employees.”
Companies like these have about as much chance of becoming
a powerful brand as a snowball has of surviving in a
volcano.
If you want to build a strong brand based on a low
price, find a structural cost advantage. How?
Ikea
Ikea is the biggest brand in furniture. Its founder,
Ingvar Kamprad, is one of the richest men in the world
today thanks to Ikea’s success. Ikea is a brand that
was build on a low price. The last time I shopped at
Ikea was 8 years ago. I recently went back because I
needed a larger book shelf and to my surprise, Ikea
prices today are even lower than before, or so it seems
to me. How did they do it?
Ikea furniture is designed to be easy to store, easy
to transport and easy to assemble. Ikea invented the
concept of flat packed furniture. As you might have
known, furniture are bulky things that take up a lot
of space. And space costs money. By using flat packed
furniture, Ikea saves a lot of money in terms of storage,
transportation and even assembly. This structural cost
advantage gave Ikea its permanent low price and built
Ikea into a powerful brand.
Dell
Dell sells its computers direct to end users. This saves
them a lot of money in terms of middlemen costs. That
is a structural cost advantage that has allowed Dell
to go from a tiny outfit operated from founder Michael
Dell’s parents’ garage to the being the No. 1 computer
company in the world for many years. Dell has recently
lost its No. 1 position to HP but I believe that has
nothing to do with Dell’s direct sales model but more
to do with the fact that Dell is better known for desktops
and desktops are falling behind laptops as the computer
of choice.
Southwest Airlines
This is probably a brand that you have never heard of
unless you travel a fair bit to the States or if you
are from the airlines industry. Southwest is the first
budget airline in the world, established 36 years ago
and it has made money in all but 1 year. Impressive
track record. Today, the Southwest model is used by
every budget airline in the world.
Their structural cost advantage came from flying just
one type of aircraft – the Boeing 737 which made it
cheaper to service and cheaper to train crew. They don’t
use expensive hubs but fly direct to destination. They
also don’t have advanced ticket booking which would
have necessitated the use of expensive ticketing systems.
This structural cost advantage allowed Southwest to
compete on price and build strong brand based on budget
travel.
Can Branding Give You
Structural Cost Advantage?
That depends on what your definition of branding is.
At StrategiCom, our definition of branding is differentiation.
Branding was invented 4,000 years ago to differentiate
cows. Branding is still used to differentiate cows,
except cows come in the form of products and services
today. So, branding is differentiation. And brands that
were built on low price such as Ikea, Dell, Southwest
Airlines, Toyota and Wal-Mart were all brands that have
structural cost advantage. How did they achieve their
structural cost advantage? By being different. They
did things differently from everyone else in their industry.
So, branding can actually give you a structural cost
advantage – strange as it may sound.
If you don’t have structural cost advantage, you better
not try to compete on price or you will end up with
a bloody nose and a bleeding bank account. The good
news is, there are 10 rules of brand building that all
strong brands are built on – regardless of whether they
are local, regional or global brands. I have spoken
and written at length about these 10 rules and now they
form the backbone of the highly acclaimed book, “Transforming
Your Business Into A Brand” (Marshall Cavendish). Have
fun reading it.
If you have any questions or comments about this
article, please e-mail me at jacky.tai@strategicom.com.
I would be most happy to discuss them with you.
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