 
Question:
What can we do to reverse the price erosion that we have experienced in our industry?
Answer:
The answer to this question turns on the cause of the erosion; different causes require different responses. Your first challenge is to accurately identify the cause.
- In the worst case, you may simply have lost what was a differentiation in your product or service that justified a premium price. In all likelihood, this resulted from competitors getting better at offering more for less. The simplistic answer that many pop marketing theorists offer is to innovate faster. Clayton Christensen, in The Innovator's Dilemma , makes a good case that such a strategy often fails since, once products reach a certain level of performance, the incremental cost of each additional innovation becomes small while the incremental cost to create it keeps increasing. At some point, people are happy with the commodity. The key to profitability in those cases is not to fight the trend, but to change your business model to exploit it. [See Chapter 12, page 274 of Nagle, The Strategy and Tactics of Pricing, 4th edition, for a discussion of how to manage for profitability in a mature market.]
- You may have created conditions for price erosion by empowering your buyers to negotiate away the value of your differentiation. In this case, the problem is totally reversible, although the process takes time. It first requires changing the mindset of your own organization to think in terms of maximizing the value of your brand franchise, not just the value of your top line sales. Then it requires re-educating customers that there is a relationship between the prices they and other customers pay and the value they receive.
- You may have a competitor who is deliberately diving down prices to gain share. The question you must answer is whether that competitor has some competitive advantage enabling them to engage in that strategy profitably. If so, find a niche that that competitor cannot serve before you become toast! No one ever wins by trying to fight Wal-Mart or a Dell head-on without a comparable cost advantage. In many cases, however, competitors engage in aggressive price competition without such an advantage. In that case, there are numerous ways to contain them. The key is to do so without undermining your own profitability in the process.
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