Are you playing chicken or chess?

October 4, 2012

By Bob Johnson, NAID CEO

I grew up loving the game of chess. My grandfather taught me how to play.

Chess pieces on chessboard — Image by © Royalty-Free/Corbis

As most readers may already understand, to succeed at chess, players have to think many moves ahead to anticipate the likely reactions of their competitors. In business, we also have to think ahead and anticipate the wants and needs of our customers.

However, when it comes to pricing services, a “race to the bottom” price strategy flies in the face of this principle. When price is the competitive tool, the player essentially engages in a game of chicken, which means he or she is not thinking long term or considering the competitor’s next move. The player disregards how the other guys in the market will react or defend their businesses and, most likely, retaliates by using the price card against his or her competitors to steal profitable accounts. If the price cutters were really aware of the mess they were creating for themselves, they would see they were actually setting up their own demise.

Also, there are some people who might say they are using price to cull the market. They mistakenly believe they can outlast the market. In their “game of chess,” they plan to play the price card until they have run the other guys out of business. When they are the last man standing, they assume they can adjust their prices back to profitability. This has worked in many industries; however, not in the destruction industry. For instance, with some notable exceptions, most of the significant players that were in the industry 12 years ago have been acquired by consolidators but yet the number of competitors today is higher than ever. If a company decided to spend whatever it took to drive away its competitors, as soon as the price rose to a profitable level, every city in the country would have new competitors within a few months. By thinking ahead and considering your competitors’ possible reactions, you can see the fallacy of the “we’ll be the last guy standing” argument. As one NAID member said to me, “When a competitor uses price to get business, they pee in the pool. The only problem is they have to swim in the same pool.”

Next Tuesday, I will suggest an alternative to the price strategy so stay tuned.