Why read this? : You need a clear competitive strategy to succeed in e-Commerce. We explore what Porter’s cost leadership, differentiation and focus strategies mean for online selling. Plus, we share examples of each approach. Read this to learn how to craft a clearer competitive strategy in e-Commerce.
How you decide to compete in a market has a big impact on what your business does. For example, it shapes your pricing strategy. How you manage costs. Which benefits to highlight. How big a range to offer. It drives your positioning, competitive advantage, and customer experience.
But how do you choose how to compete? What actual choices do you have?
Porter’s generic strategies
Professor Michael Porter’s generic strategies model suggests there are 3 main ways to compete :-
- cost leadership.
- differentiation.
- focus.
Your first choice is whether to compete on low cost or with a unique position in the market.
Low cost?
The low cost position focuses on price and cost. You follow classic economic theory that price drives demand. Keep the price low and more people buy. Sell more and you keep costs low. Low costs make you more profitable.
You get economies of scale. A broad target audience. Wider distribution. High volumes so you spread costs. You run frequent sales promotion and price discounting campaigns to drive sales.
Or unique position?
The unique position approach focuses more on differentiation. You show customers your brand is different. And you persuade them the difference is worth paying for.
Your target audience pays more than they’d pay for a cost-leader brand. They believe the difference meets their needs better. It’s a unique experience worth the extra cost.
Examples of a unique position competitive strategy in e-Commerce include :-
- faster delivery times.
- access to expert advice.
- exclusive products and services.
Broad or narrow audience?
With the unique position you also choose whether to go for a broad or narrow target audience. Broad means it’s differentiation. Narrow means a focus approach.
This choice changes how you activate your strategy. It impacts the range you offer and your order to delivery system, for example.
So, 3 options. Cost leadership. Differentiation. Or focus.
Cost leadership strategy
Cost leadership keeps the price low. It assumes cheaper products sell more than expensive ones.
Offer a better price than competitors and you sell more. Sell more and keep your costs down with economies of scale. It’s simple, but in many cases highly effective.
However, not every customer buys the cheapest product. You have to work out how important price is to customers, by working out the price elasticity.
Price elasticity
Price elasticity measures the relationship between price and units sold. You express it as a ratio or index. It predicts how many more or less units you’ll sell per 1% change in the price.
For example, a price elasticity of 5 means a 5% volume change for every 1% price change. This applies to both price rises and price cuts. Raise the price by 1% and volume goes down 5%. Cut the price by 1% and volume goes up 5%.
You work out the price elasticity using a statistical approach called econometric modelling. It analyses large amounts of activity data to find correlations and relationships. This helps you work out which activities have the most impact on sales. It typically covers 2-3 years of data and includes :-
- historic sales and prices (regular and promotional).
- media spends.
- advertising campaign details.
- new product launches.
- distribution and availability levels.
Your price elasticity is the sales effect of a price change with the effect of your other marketing stripped out. You use it to work out your best regular price. And how often and how much to price discount.
Cost leadership and price elasticity
High price elasticity (>3, for example) means sales are highly responsive to price. It suggests price matters more than other buying decision factors. Brands are seen as generic with little brand loyalty.
Cost leadership works well with high price elasticity categories. The products are usually seen as commodities with relatively low levels of branding.
As per our price discounting article, there are pros and cons to using price as a marketing lever.
The pros of using price
On the plus side, it’s simple. Customers find price easy to understand.
Online customers can also easily compare prices between sellers.
It’s also quite easy to change prices online. It’s a minor website change you can usually do in a few clicks. That’s far easier than changing price in traditional retailers.
Sales promotions and price discounts are good for grabbing attention.
They pull in more online shoppers, tempted by the chance of a bargain. You can create a sense of urgency by time limiting the offer – e.g. “50% off this week only” and so on. Customers don’t want to miss out, so are more likely to buy. (See our behavioural science article for more on this idea of scarcity).
The cons of using price
Price changes impact your profit and loss. Too many price discounts and you eat into your profits. This can be tough if retailers push you to do more price promotions. They often do this to drive traffic to their store. That usually benefits them more than you.
Plus, if you price discount too often, the customer starts to expect it. They stop paying full price because they know you’ll be going on promotion again soon. That hits your profits.
Customers might also pantry fill. They stock up when it’s on promotion. But that means it’s longer before they buy again. Another hit on your profits.
Then, you’ll have customers buying at the promoted price who’d have bought at the full price. More damage to your profits.
Finally, even when price discounts bring in new customers, these customers are often brand switchers. They buy the cheapest brand every time. They’ll never become loyal customers.
Cost management
You also have to consider how you manage costs in this approach. The top of the profit and loss is tight because price is low. To follow a profitable cost leadership competitive strategy in e-Commerce, you have to manage 2 types of costs :-
- variable costs.
- fixed costs.
Variable costs
Variable costs relate directly to how much you produce. Cost goes up for every item you make.
For example, manufacturing variable costs cover raw materials, packaging and supply chain costs like storage and transport. Other production costs like utility bills can also be variable. The more you make, the higher your electricity and heating costs, for example.
For service businesses, you apply variable costs to the staff and technology which provide the service. If sales go up, you need more people and more systems capacity to meet demand.
For e-Commerce businesses, the main variable costs are storage and delivery costs.
You have to store and transport every item you sell. These costs vary by how much you sell.
To reduce the cost per unit sold, you look for economies of scale and efficiencies.
For example, you negotiate better deals with warehouse and shipping suppliers. You negotiate a discount for putting more business their way.
You look for other efficiencies in the order to delivery system. Using full pallet loads and full truck containers, for example. These types of supply chain activities help you keep costs low.
(See also our selling with Amazon article to learn how they keep costs low).
Fixed costs
Fixed costs are all other costs not directly related to making the product. You have to pay these no matter how many products you sell. E.g. :-
- rent or mortgages on operating offices, premises and warehouses.
- management and admin salaries.
- insurance and interest payments.
- advertising and promotion costs.
Ideally, you eliminate unnecessary costs. You keep the necessary costs to a minimum. For example, many companies look at where they locate operations to keep costs low.
Amazon, for example, is well known for being very tight on fixed costs.
When they started, they famously made their desks out of recycled doors rather than buy new ones.
They’re also well known for making staff travel in economy and not business class. (Fairly ironic given the cost of their leader’s recent space flight was put at over $5bn).
This cost focus keeps profits higher when you compete on price.
Cost leadership example - Bunnings
Let’s look at an example of cost leadership in action. We’ll look at Bunnings, the Australian DIY and gardening retailer.
You don’t have to scroll far on their website to find their low-price guarantee.
This type of offer is a sure sign of a cost leadership competitive strategy in someone’s e-Commerce offer. They compete on price.
Low-price guarantee
Bunnings price guarantee is a specific selling policy they outline on their site :-
If you find a lower competitor price for an in-stock item, we’ll beat it by 10%.
Even with lots of exclusions (trade quotes, stock liquidations, commercial quantities and marketplace products), this is still clearly cost leadership behaviour.
They make this offer so no one can undercut them. They’re the market leader. They have economies of scale and use these to keep their price and costs low.
Price approach on product pages
You can also see their price focus in how they set up product pages.
Take the first category page on their site, for example. Automotive tools / car accessories.
You can see prices prominently displayed with a large font here. When you want to highlight a good price, you use a large font. (Similarly, to downplay price, use a small font).
They also use charm pricing. This is when you set a price at $x.99 or similar, rather than rounding it up. This makes the price seem more attractive. Logically, it’s only 1 cent. But studies show it can make a 5-10% difference in sales. It’s a very common cost leader price tactic.
(For another cost leadership example, see Myer in our online fashion shopping article).
Differentiation strategy
Differentiation is the main alternative for businesses that don’t compete on price.
Some buyers decide what to buy on factors other than price. You set your brand up to appeal to these other factors. Customers choose you and pay more because you meet their specific needs. That’s the essence of a differentiation competitive strategy.
Brand identity
For example, you differentiate with your brand identity. You create a relevant mental association for your target audience, which becomes more important than price. Price elasticity is low. Customers value your point of difference more than a lower price.
Look at cars, for example. No car competes on price alone. Most try to associate themselves with a specific buying factor. Volvo and safety. Volkswagen and reliability. BMW and performance.
These associations usually come from the Reason Why and the Reason to Believe in the brand’s positioning statement.
For e-Commerce brands, that difference often focuses on the service they offer.
Service offer
For example, say your e-Commerce benefit is making it easier to buy. Easy re-ordering with subscriptions. Access to expert advice such as healthcare brands like Blackmores and Nutricia offer.
Or you make the make the order to delivery system work better. You offer faster, more convenient delivery options. Guaranteed delivery by a certain time. Evening or weekend deliveries. Many customers will pay more for this type of service.
Differentiation example - Jimmy Brings
Dan Murphy’s is the market leader in the Australian online alcohol delivery category. Like Bunnings, they dominate their category with a cost leadership Lowest Price Guarantee approach.
But their size means they can’t move as quickly as smaller players. That’s where competitors like Jimmy Brings come in. They use a differentiated approach to their competitive strategy in e-Commerce.
Instead of price, they focus on speed of delivery.
For example, on their home page, they claim they can deliver wine, beer and spirits in 30 minutes to most places in Sydney.
Speed of delivery
Speed matters to some customers in this category. If you’re throwing a party, for example (to celebrate the end of a lockdown) or unexpected guests turn up (unlikely in lockdown).
Jimmy Brings organises itself around this Point of Difference. They don’t deliver from a centralised warehouse. Instead, they use their vans as mobile mini-warehouses. They position them around the city to deliver anywhere within 30 minutes. This setup supports their differentiated competitive strategy in e-Commerce of fast, local deliveries.
They don’t compete on price. For example, a bottle of Nature’s Harvest Organic Shiraz is $4 more than the same bottle at Dan Murphy’s.
But, they promise to deliver within 2 hours for a flat $6.50 delivery charge. More often, it’s within 30 minutes.
Compare that to Dan Murphy’s delivery service. Their 2-hour delivery option costs $15. Their standard delivery charge is $6.90 (still more than Jimmy Brings) for a 2-4 business day delivery. So you can see Jimmy Brings differentiates itself on speed of delivery (and not price or range).
Differentiation means trade-offs
Differentiation competitive strategies in e-Commerce means trade-offs in your marketing plan. You omit or cut back on some actions to overdeliver on your point of difference. You make audacious choices to cement your place in the market.
Jimmy Brings doesn’t compete on range, for example. Its vans can only hold so much product.
They stock 35 different red wines. Dan Murphy’s offers thousands. That’s the trade-off between distributing from mobile vans and from a warehouse.
Customers who want fast delivery don’t care so much about range or price though.
Speed matters. That’s what Jimmy Brings focus on.
(For another delivery differentiation example, check out The Iconic in our online fashion shopping article).
Differentiation and cost management
Managing costs is different with differentiation. You prioritise what’s best for the customer (irrespective of cost) over what’s best for the company’s short-term profits. So, you invest in systems which deliver the point of difference. And you don’t economise on what it takes to give the customer what they need.
For example, Jimmy Brings has to pay for its network of vans and drivers to offer speedy delivery. Their transport costs will be higher than Dan Murphy’s.
But the result is faster deliveries. A different customer experience. They cover the cost from the extra the customer pays for the benefit of fast delivery.
Focus strategy
A focus approach is the final competitive strategy in e-Commerce. It’s like differentiation, but with a focus on a narrower target audience.
You offer these specific segments products and services which are unique and hard to copy. This creates a small but loyal segment of the market who love your brand above all others. These customers happily pay more because they’re such fans of the brand. And they tell other people about your brand too.
Unique Point of Difference
The unique Point of Difference comes from the Reason Why and Reason to Believe in the brand’s positioning.
It can relate to the :-
- quality of product or service.
- the sourcing or performance of ingredients and materials.
- other relevant factors like your sustainability or production values.
Veblen Pricing
This unique position also leads to the unusual phenomenon known as Velblen pricing. This is where the traditional price – demand relationship works in reverse. Raise the price and you make a product more desirable. Sales go up, not down.
It happens in categories where price implies quality and scarcity. (See our behavioural science article for more on scarcity).
Customers pay a premium to show off their status.
A good example is the Bugatti Veyron. Only 450 were ever made. They’re so rare that when someone sells one, it’s usually for more than it originally cost.
The same effect happens in other categories like fashion and jewellery. The more unique or exclusive a product, the more people will pay for it.
Focus example - UGG Australia
Our focus competitive strategy in e-Commerce example doesn’t use Veblen pricing though.
Not many people buy Bugattis. So we wanted to look at a more relatable example instead.
UGG boots are a unisex style of sheepskin boot which originate from Australia.
While many stores sell UGG boots online, most of these are made outside Australia.
One store – Uggs Australia – has taken a focus position and only sells Uggs made in Australia. It claims it’s the only 100% Australian-made UGG boot seller and has the only sheepskin footwear tannery in Australia.
Their șite focuses on the authenticity and origin of the product. They only sell UGG-related products.
They sell 32 types of women’s Uggs and 15 types of men’s Uggs in a range of colours. No other products other than accessories like cleaning materials.
It’s a good example of a focus position. A unique selling message (the only UGG boots 100% made in Australia). And a focus on highlighting that position.
It’s nice and simple for customers. This is the only choice if you want genuine 100% Australian UGG boots.
They’ll have a small but loyal segment of customers who value this authenticity. They don’t have to waste time chasing other customers who don’t value this position.
Hard to copy but limits the number of customers
This focused competitive strategy in e-Commerce has many advantages. It creates a unique and defendable position that’s hard for competitors to copy. There’s less pressure to cut costs because your loyal customers value what you do. And they’re willing to pay for it.
Of course, the downside is you limit the size of your market. There’s a maximum number of customers you can appeal to. It’s important to check your niche audience is big enough to sustain your business model before you go down this route. You may need to consider moving to differentiation to get more customers.
(Check out our online fashion shopping article to see how Converse run a focus competitive strategy).
Conclusion - competitive strategy in e-Commerce
You decide your competitive strategy as part of the e-Commerce planning process.
Cost leadership focuses on price and cost. You keep both low to maximise unit sales, drive economies of scale and be efficient.
It’s about selling a wide range of products and having a clear price offer. We showed Bunnings as a good example.
Differentiation looks for buying factors customers value more than price. For example, your brand identity or extra services.
It’s about offering something different which customers will pay more for. For example, offering speedy delivery as Jimmy Brings does.
Focus extends the differentiation to a specific small segment. You own a unique and defendable position that’s hard to copy. However, you limit the number of customers by making such a specific offer.
Check out our e-Commerce planning process guide and our e-Commerce competitive advantage article to learn more. Or, get in touch if you need help with your competitive strategy in e-Commerce.
Photo credits
Woman holding credit card near Macbook : Photo by Pickawood on Unsplash
Red tulip / Yellow tulip : Photo by Rupert Britton on Unsplash
Coins spilled from jar : Photo by Josh Appel on Unsplash
Shop Window Price Discounts : Photo by Artem Beliaikin on Unsplash
Packages inside a courier van : Photo by 🇨🇭 Claudio Schwarz | @purzlbaum on Unsplash
Amazon on phone : Photo by Christian Wiediger on Unsplash
Bugatti : Photo by David Levêque on Unsplash
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