Ongoing economic trends across every imaginable industry are making a noticeable lean towards price wars and cutting prices.  We often try to gauge whether or not one brand’s decision to engage in a price war will in turn lead its industry competitors to tumble down a slippery slope that is nearly impossible to recover from.

There are few instances where one major brand will lower prices to compete and its competitors will resist, instead harnessing and touting their unique competitive advantage – where customers value a brand’s offerings regardless of price.  Having this competitive advantage is priceless.

Coffee and the businesses capitalizing on the beverage have created a popular, highly-demanded industry thriving on consumers’ value perception rather than on price. Within a period of weeks between January and February 2010, McDonald’s lowered prices to compete on coffee prices in attempt to undercut Dunkin’ Donuts, while Starbucks raised its already high cost of coffee.

Starbucks’ decision disappointed even the most loyal Starbucks fans, who had valued the brand and experience enough to have continued paying the significantly higher price for a variety of coffee-based drinks rather than converting to Dunkin’ Donuts or McDonald’s coffee. 

McDonalds undercut its own competitive advantage by lowering its value in a defensive step to differentiate in price from Dunkin’ Donuts.  Mark Nunnelly, managing director at Bain Capital, says the market share of Dunkin’ Donuts is consistent and rising, and he doesn’t see the competition to be McDonald’s vs. Dunkin’ Donuts so much as he sees each of these entities taking business away from small, often locally-owned convenience stores.

Meanwhile, with its recent unannounced raise in prices, Starbucks is delivering the ultimate test of its competitive stance .   In a competitive marketplace, the best way to increase bottom line profits and maintain your competitive position  is to engage in strategic planning that involves discovering and touting your brand’s competitive advantage.

 Although Starbucks may face the hardest hit from the coffee price war McDonald’s created in the midst of a weakened economy, Starbucks’ most loyal customers have stuck around, choosing to demote their high-priced beverages for more plain and inexpensive choices rather than convert to a competing retailer.   

The minute an organization disregards unique factors that customers value most and instead takes its products and services and lowers prices to compete, it is engaging in a price war. 

Choosing to compete on price sacrifices a brand’s competitive rankings, and it is difficult — if not impossible — to recover from. After all, if you offer someone your product for a nickel today, and they return for more tomorrow, what does your brand offer, aside from price, to keep the consumer returning if you were to raise the price to a dime or a quarter?   

Dunkin’ Donuts may be holding on tight, but Starbucks has developed a strong feel in its branding and atmosphere, providing what customers value most regardless of price.  It isn’t so much about the beverage as it is about the atmosphere in which a customer is enjoying it. 

After all, in comparison to McDonald’s and Dunkin’ Donuts, Starbucks offers a social atmosphere akin to a public living room, where people convene to study, work, meet and socialize.  This competitive differentiator is how Starbucks stands out from both McDonald’s and Dunkin’ Donuts.

Tags: compete on price, competing retailer, Competitive Advantage, competitive differentiator, competitive rankings, consumers value perception, customers value most, cutting prices, engage in a price war, engaging in a price war, lower prices to compete, lowered prices to compete, lowers prices to compete

This entry was posted on Tuesday, March 9th, 2010 at 11:37 am and is filed under Avoiding Price Wars, coffee price wars. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.