Customers buy a product by weighing the benefits they receive versus its cost. Benefits are usually obtained through a product’s features. A company can choose a strategy of offering products which are differentiated from its competitors by superior features . Such differentiated products are usually sold at a high price. Alternatively, a company can choose a strategy of offering products similar to its competitors but at a low price.
A company may also chose to pursue different price/features strategies in different parts(segments) of the market (usually defined by different customer needs). For example, Dell offers low priced desktop computers, targeting price conscious small businesses. Dell also offers leading edge features in its notebooks at a high price targeting the mobile executive.
A product brand is often associated with its positioning on the matrix (BMW v Haundi Sony v Acer
We summarize these Price and Feature decision as follows:
I Commodity (Flash Memory)
II Going out of business (IBM PC business sold to Lenovo in China)
III Buying market share with big price/performance leadership (usually a temporary promotion). Blockbuster’s price war with Netflix
IV Premium products (Mercedes)
Products can become standardized (PCs, Flash Memory, DVDs, etc.), which makes continued differentiation very difficult, and competition is then predominately on price and operational efficiency (lowest cost to produce)
To maintain differentiation companies must invest in R&D and marketing. These higher costs necessitate a higher price to maintain profitability .
It is often difficult to pursue a low cost strategy in one segment while simultaneously focusing on a differentiated strategy in a different segment. . Companies that try are said to be “straddling” a market and losing focus. For example United Airlines formed a separate subsidiary (United Shuttle) to compete with Southwest Airlines for price-conscious (less interested in service) customers in the Western US. Because of its premium price full service history and culture, United was not able to focus on and fully embrace the allow cost activities necessary to compete with Southwest.