Wednesday, December 15, 2010
Wednesday, December 1, 2010
Coopetition For Coaches: The Synthesis Of Competition And Cooperation - II
Continuing from our previous post...
Let us now focus on a particular example.
One challenge every business faces is retaining existing customers vs. acquiring new customers. Since you don’t need to educate existing customers on your offering, the cost of marketing will be lower. Moreover, studies have shown that the success rate of repeat sales to current customers is significantly higher than the success rate of new sales to prospects. However, there will always be a certain amount of defection with existing customers and just to maintain current revenue, new customers are essential. Consequently, this is not an either/or decision – it is an example of a polarity. A business must find a way of doing both - retaining existing customers AND acquiring new customers to remain viable.
Let’s narrow our discussion to the first side of this polarity. One of the easiest things to do is to adjust the price of your offering. Price is not always the determining factor for retaining existing customers, but it would be foolhardy to dismiss it as not a consideration. In a business-to-business market with big-ticket items where contracts are the norm, a most-favored-customer clause or a meet-the-competition clause are often successful. What can be done in a mass market? There are two issues to consider if you decide to keep existing customers happy by simply charging them a low price. The first is that you’ve just lowered your profit. The second is that you risk starting a price war. The act of lowering prices is both an offensive and defensive move. Your low prices will attract some of your competitor’s customers away. While this may increase sales initially, your competitors may eventually respond by lowering their prices to lure their former customers back. After the first round of sales, you are back to square one but with lower profits all the way around. This is how price wars start and nobody wins including the customers if the entire industry is damaged. So the goal would be to lower your prices only for your current customers without at the same time threatening your competitor’s customer base. Is there a strategy for doing so?
Actually, General Motors faced this challenge back in 1992. Credit is due to Brandenburger and Nalebuff for this outstanding example contained in their Co-opetition book. The big three automakers back then were all engaged in cash-back offers, dealer discounts, end-of-year rebates and other incentive programs. Profits were low, competition was fierce and demand was flat. The solution to this challenge pulled together many of the concepts discussed thus far. GM teamed up with Household Bank, a major distributor of co-branded credit cards to offer the GM MasterCard. Cardholders would earn a rebate equal to 5% of their charge volume, which could be applied to the purchase or lease of any new GM car or truck, subject to a rebate ceiling. Household Bank in effect became a complementor to General Motors.
What does game theory predict regarding the reaction of current and potential GM customers along with competitors like Ford? If both GM and Ford are offering comparable cars at $20,000, the market will divide on the basis of personal preferences. One can assume that only customers planning to purchase a GM vehicle would accept the GM MasterCard and rack up loyalty points that could only be redeemed through a GM purchase. If the typical rebate is $1,000 GM could conceivably raise prices $500 and still keep existing customers happy since they would be getting $500 off the price of a comparable Ford. Ford is not at all threatened since a comparable GM vehicle is now $500 higher. In fact, it only took five months for Ford to team up with Citibank and offer their own credit card loyalty program. This turns out to be a win-win situation for both GM and Ford. GM and Ford are less tempted to cut prices to lure new customers, because people are reluctant to forfeit rebates in their current loyalty program. This means higher profits for both manufacturers, which solved the first of the three problems. GM effectively changed the game from lose-lose to win-win. The fierce competition between automakers to steal each other’s customers dropped dramatically solving another one of the three problems. Finally, by attaching an expiration to the rebates, consumers had an incentive to buy now since prices were going up and they would lose their rebate. This solved the last of the three problems.
This is an outstanding example because it illustrates the use of complementors, the use of game theory, how the rules of the game can be changed for advantage and how the coopetition concept can be used to craft a superb strategy. It also demonstrates how counter-intuitive strategy can be. Most people would think that a good strategy would be to charge your current customers more than you charge potential new customers, since you want to tempt the latter through the use of lower prices. However, you must always take into account how other players in the game will react.
Let’s now consider another example that should be familiar to most businesses including coaches. A request for a bid comes in from a large potential client whose current contract with a competitor is up for renewal. How do you respond? Most likely you realize that the chances of landing the account are small and the bid is likely just to be used as leverage to extract a better deal from the current coach. However, if you don’t bid there is no chance of getting the business and you risk alienating a potential customer. So it only appears to make sense to bid and do so aggressively, correct? Savvy business people have learned that the greatest success comes not from competition, but from controlling the rules of the game as GM did in the example above. How can you change the rules to your advantage? The answer will be provided in the webcast.
So how can we use this particular model of coopetition in the coaching business? What are some complements to coaching and how can these be exploited to craft an outstanding strategy that will drive up profits? The webcast will address these issues. Finally, most coaching businesses today are still comprised of solo practitioners and let’s face it – a large number of non-billable hours are devoted to filling up the marketing pipeline with the hope of converting a percentage of those names to paying clients. There are more powerful models of coopetition that can be used to tackle this challenge that the webcast will address. Please join us. Details are on our website at www.strategyforcoaches.com.
Let us now focus on a particular example.
One challenge every business faces is retaining existing customers vs. acquiring new customers. Since you don’t need to educate existing customers on your offering, the cost of marketing will be lower. Moreover, studies have shown that the success rate of repeat sales to current customers is significantly higher than the success rate of new sales to prospects. However, there will always be a certain amount of defection with existing customers and just to maintain current revenue, new customers are essential. Consequently, this is not an either/or decision – it is an example of a polarity. A business must find a way of doing both - retaining existing customers AND acquiring new customers to remain viable.
Let’s narrow our discussion to the first side of this polarity. One of the easiest things to do is to adjust the price of your offering. Price is not always the determining factor for retaining existing customers, but it would be foolhardy to dismiss it as not a consideration. In a business-to-business market with big-ticket items where contracts are the norm, a most-favored-customer clause or a meet-the-competition clause are often successful. What can be done in a mass market? There are two issues to consider if you decide to keep existing customers happy by simply charging them a low price. The first is that you’ve just lowered your profit. The second is that you risk starting a price war. The act of lowering prices is both an offensive and defensive move. Your low prices will attract some of your competitor’s customers away. While this may increase sales initially, your competitors may eventually respond by lowering their prices to lure their former customers back. After the first round of sales, you are back to square one but with lower profits all the way around. This is how price wars start and nobody wins including the customers if the entire industry is damaged. So the goal would be to lower your prices only for your current customers without at the same time threatening your competitor’s customer base. Is there a strategy for doing so?
Actually, General Motors faced this challenge back in 1992. Credit is due to Brandenburger and Nalebuff for this outstanding example contained in their Co-opetition book. The big three automakers back then were all engaged in cash-back offers, dealer discounts, end-of-year rebates and other incentive programs. Profits were low, competition was fierce and demand was flat. The solution to this challenge pulled together many of the concepts discussed thus far. GM teamed up with Household Bank, a major distributor of co-branded credit cards to offer the GM MasterCard. Cardholders would earn a rebate equal to 5% of their charge volume, which could be applied to the purchase or lease of any new GM car or truck, subject to a rebate ceiling. Household Bank in effect became a complementor to General Motors.
What does game theory predict regarding the reaction of current and potential GM customers along with competitors like Ford? If both GM and Ford are offering comparable cars at $20,000, the market will divide on the basis of personal preferences. One can assume that only customers planning to purchase a GM vehicle would accept the GM MasterCard and rack up loyalty points that could only be redeemed through a GM purchase. If the typical rebate is $1,000 GM could conceivably raise prices $500 and still keep existing customers happy since they would be getting $500 off the price of a comparable Ford. Ford is not at all threatened since a comparable GM vehicle is now $500 higher. In fact, it only took five months for Ford to team up with Citibank and offer their own credit card loyalty program. This turns out to be a win-win situation for both GM and Ford. GM and Ford are less tempted to cut prices to lure new customers, because people are reluctant to forfeit rebates in their current loyalty program. This means higher profits for both manufacturers, which solved the first of the three problems. GM effectively changed the game from lose-lose to win-win. The fierce competition between automakers to steal each other’s customers dropped dramatically solving another one of the three problems. Finally, by attaching an expiration to the rebates, consumers had an incentive to buy now since prices were going up and they would lose their rebate. This solved the last of the three problems.
This is an outstanding example because it illustrates the use of complementors, the use of game theory, how the rules of the game can be changed for advantage and how the coopetition concept can be used to craft a superb strategy. It also demonstrates how counter-intuitive strategy can be. Most people would think that a good strategy would be to charge your current customers more than you charge potential new customers, since you want to tempt the latter through the use of lower prices. However, you must always take into account how other players in the game will react.
Let’s now consider another example that should be familiar to most businesses including coaches. A request for a bid comes in from a large potential client whose current contract with a competitor is up for renewal. How do you respond? Most likely you realize that the chances of landing the account are small and the bid is likely just to be used as leverage to extract a better deal from the current coach. However, if you don’t bid there is no chance of getting the business and you risk alienating a potential customer. So it only appears to make sense to bid and do so aggressively, correct? Savvy business people have learned that the greatest success comes not from competition, but from controlling the rules of the game as GM did in the example above. How can you change the rules to your advantage? The answer will be provided in the webcast.
So how can we use this particular model of coopetition in the coaching business? What are some complements to coaching and how can these be exploited to craft an outstanding strategy that will drive up profits? The webcast will address these issues. Finally, most coaching businesses today are still comprised of solo practitioners and let’s face it – a large number of non-billable hours are devoted to filling up the marketing pipeline with the hope of converting a percentage of those names to paying clients. There are more powerful models of coopetition that can be used to tackle this challenge that the webcast will address. Please join us. Details are on our website at www.strategyforcoaches.com.
Subscribe to:
Posts (Atom)
