Pricing In Eye Care: Would You Rather Adopt A Low-Cost Strategy, Differentiate, or do Both?

According to Harvard Business School Professor and one of the best thinkers in strategy and competition, Michael Porter, a low-cost strategy is a zero-sum game. The strategy should not be a zero-sum game but a competitive position, “deliberately choosing a different set of activities to deliver a unique mix of value.” He emphasizes the importance that a business needs to understand the market and its competitors and build its strategy accordingly. For example in eye care, specialization is one way to promote operational effectiveness, reduce costs, and be able to command a higher price in exchange for the products and services you deliver. The competitive strategy of specialized practitioners basically consists of differentiating their services from their competitors rather than competing over commoditized products having recourse to a low-cost strategy which drives the competition to do the same leading to the erosion of profits by lowering prices. The only winner in this type of competition is no doubt the customer and not any of the competitors.

From a technical point of view, a low-cost strategy is generally demonstrated by cheap prices, low quality products, limited choice, reduced profits, commoditization, and the absence of customer service, whereas a differentiation strategy is demonstrated by higher prices, better customer services, better products, wide choice, customizable offers, and certainly higher profits.

From a strategic point of view, a practice has a choice between becoming a low-cost or a differentiator who provides value (design new appealing products, constantly innovating, creating new product mix, branding, delivering exceptional experiences, etc). Generally incumbents in a market charge premiums and over time they develop their business to serve a specific segment in the market. They rarely consider shifting to a low-cost strategy unless a new entrant targets the same segment they are serving. In this situation what used to be an offensive strategy toward the new entrant shifts into a defensive strategy based on cutting prices, making exclusivity deals with key suppliers, and heavily advertising challenging the competition with better prices. Conventional wisdom suggests that incumbents in a low-cost competition are not at an advantage. In most of the cases where the incumbents managed to become at an advantage, they created another unit to compete with the new entrant. Because a low-cost operation’s sources of competitive advantage aren’t the same as those of the parent company, the newly created unit was housed separately.

Low-cost new entrants will continue to appear in the market, while some target noncompeting market segments others will compete over the incumbent segments. If incumbents decide on a low-cost strategy they are at disadvantage. However, wise incumbents that create a separate completely independent unit will have a chance to win when they understand that there will always be consumers who make their choices based on price and consumers who value the differentiator offerings. The old unit will remain as a differentiator whereas the newly created unit can escape the zero-sum game by adopting an offensive strategy aiming to slash prices, tap new markets, bring new features, connect with new suppliers, and secure new channels of distribution.