As we discuss in class when contrasting cost leadership vs. product differentiation strategies, the cost leader is in a dangerous position.  All it takes to knock of a cost leader is for someone to be even cheaper…not that cost leaders can’t be successful (Costco, Walmart, etc.) but the majority of firms need to offer value that they can charge a fair price for without racing to the bottom to be the cheapest provider.

This article is for everybody else: those who choose not to compete on the basis of cost and low price. This article is for companies that can and should compete on the basis of performance, for which their customers willingly pay higher prices.

By competing on performance instead of price, you shift the battle to where your company’s strengths lie—in the ability to deliver unique benefits. So-called performance pricers are adept at three core activities: identifying where they can do a superior job of meeting customers’ needs and preferences; shaping their products and their business to dominate these segments; and managing cost and price in those areas to maximize profits.

The Wall Street Journal on Monday had a feature section that contained many good articles related to management theory but the quote above came from a piece that suggested that more companies need to find their strengths, match those strengths to needs in the marketplace, and price their products/services accordingly (i.e. higher) to maximize profits.  There is an element of Value Chain cooperation at the end of the article as well.  Typically the way prices have been set has been a closely guarded secret but there are times when cooperating with customers and/or suppliers can result in two companies doing things together to lower costs, for example, that they would have been unable to do on their own.  This creates value for both participants and can tie together companies to work together in the future.

WSJ Executive Adviser (A Special Report): Pricing — Raise Your Prices! Face it: Most companies can’t compete on price; And the good news is they don’t have to. Frank V. Cespedes, Elliot B. Ross, Benson P. Shapiro. Wall Street Journal. (Eastern edition). New York, N.Y.: May 24, 2010. pg. R.8