Beating Price Wars and Big Players in the Homogeneous Product Market
Competing in markets with homogeneous products can be a difficult endeavour. Whether you are a new player trying to get in the door or a small business trying to scale, you will face challenges not only in pricing, but also in navigating complex relationships between suppliers, larger competitors and market dynamics. In this article, I look at major obstacles businesses encounter when entering as a smaller player in a market dominated by bigger companies, and explore strategies and creative solutions to overcome them.
Introduction: Competing in Homogeneous Markets
Competing in markets with homogeneous products can be a difficult and competitive endeavour. Whether you are a new player trying to get in the door or a small business trying to scale, you will face challenges not only in pricing, but also in navigating the complex relationships between suppliers, larger competitors and the market dynamics at play.
In this article, I look at some of the major obstacles businesses encounter, particularly when entering as a smaller player in a market dominated by bigger companies, and I explore strategies and creative solutions to overcome them.
The Power Dynamics with Suppliers
One of the most challenging situations in a homogeneous product market is the power dynamic between you, the supplier and the larger competitors. If you are a small business attempting to stock a product directly from the supplier, you may find that the supplier is already working with much larger players who hold significant leverage over the supplier's decisions.
The Pressure from Larger Competitors
When a new player enters the market, established competitors often have a strong enough relationship with suppliers to demand exclusivity or preferential treatment. A common tactic is:
"If you allow this new seller to stock our product, we will stop promoting it, or worse, we will stop selling it altogether."
This puts immense pressure on the supplier, and as a result, they may turn away smaller players unless they can prove they have the financial capacity to move the product.
How Data Science Helps
In situations like this, data science and growth hacking strategies can become game changers. I have used sales data from comparable products and growth metrics after initial growth hacking efforts to convince suppliers to give us a chance. By showing that we can rapidly scale sales through innovative online strategies, we have been able to make the case for stocking the product.
Dependency on a Few Products and Risk Management
Once you manage to convince a supplier to sell their product, you may find yourself in a situation where your business becomes highly dependent on a specific product. This often occurs when you are dealing with fewer product options, and a single failure in product sales could significantly impact your bottom line.
The Pricing War Dilemma
In most cases, if you offer products cheaper than your competitors, and they cannot match your prices, they often turn to the supplier and demand uniform pricing across all sellers, ensuring that the price is set at a minimum threshold.
This creates a static pricing environment, where competition moves from price differentiation to more controlled, uniform pricing. In these cases, businesses must fight to differentiate through value added services rather than just price.
Market Dynamics and Elasticity
In homogeneous product markets, price elasticity of demand (PED) plays a major role. Since products are interchangeable, consumers are very sensitive to price changes. A small change in price will often lead to a significant change in demand.
The formula for Price Elasticity of Demand (PED) is:
The One Price Fits All Problem
When you start winning by offering products at a cheaper price due to your reduced marketing costs, competitors might not be able to follow your pricing structure. The next step is often that they will escalate the issue to the supplier and ask for consistent pricing across all sellers. The supplier will likely comply, ensuring that everyone sells the product at the same price, putting a stop to your pricing advantage.
This is where things get tricky. As pricing becomes static, all competitors are forced to sell at the same price, making it harder to compete based on price. The market becomes less dynamic, and the focus shifts to non price strategies, such as customer experience or value added services.
Market Dynamics: How Customers Move Between Brands
When price competition becomes minimal, customer movement is largely influenced by factors such as brand loyalty and service quality. If a competitor offers better customer service or faster delivery, customers are likely to shift, even if prices are the same.
We can model this movement using the Customer Retention Rate (CRR):
And the Customer Churn Rate (CCR) is:
Creative Solutions: Beating the Big Players
In our specific case, dealing with a homogeneous product market, we found ways to get creative. We leveraged the Solidus platform to build completely customised modules that others could not replicate. We also researched competitors through Wappalyzer, identifying which eCommerce platforms they were using, so we could tailor our approach.
The Referral Programme
We created a friends and family referral programme, which had never been done in our industry before. It allowed both new customers and referrers to receive discounts, and importantly, we tracked Word of Mouth (WOM) impact, which proved to be a game changer.
Every new customer received 3 percent off their first purchase, and the referrer got 5 percent off each referral's purchases for the next three months. The beauty of this was that we used custom banners for social media, which were dynamically created for each user, rather than generic ones, making the campaign far more engaging.
Measuring Success
This programme had a massive impact, and the Word of Mouth generated from this referral system not only boosted sales but also caused competitors to stop selling the brands we were offering, even those that initially rejected us.
As a result, we managed to beat the big players at their own game, and the supplier saw the immense value in working with us. Sometimes, the smaller players come out on top, and we made sure that we stayed agile, innovative and responsive to market changes.
Final Thought: Patience and Innovation Win
Competing in a homogeneous market dominated by big players requires creativity, strategy and the willingness to go beyond just price competition. Leveraging data science to automate pricing, utilising customer loyalty programmes and creating customised solutions are key strategies that can help smaller businesses gain a competitive edge.
In the end, patience and innovation are what set the small businesses apart from the giants. If you can build a loyal customer base, sustain your pricing strategies and stay nimble, you can survive and thrive even in the most competitive markets.