Snapshot : You need a clear competitive strategy in e-Commerce to succeed. Porter’s 3 generic strategies model helps you narrow your choices. Your choices are cost leadership, differentiation or focus. Your choice impacts how you run your online business. We cover the pros and cons of each in this article with examples to show each strategy in action.
Porter’s generic strategies model shows 3 different ways to compete in any market. How you choose to compete impacts how you run your business.
What prices you charge. How you manage costs. Which benefits you focus on. How big a range you offer. Your strategy choice shapes your positioning and your competitive advantage. It shapes the overall customer experience.
How you choose to compete is a pretty important decision then.
Porter’s generic strategies
In 1980, Professor Michael Porter identified 3 competitive strategies businesses can follow :-
- cost leadership.
He showed you can apply these strategies to any type of business. You start by deciding whether to compete on a low cost basis, or with a unique position in the market.
The low cost position focuses on price and cost. You follow classic economic theory that price drives demand. Keep the price low and you get more people buying. Sell more and you keep costs low. Low costs help you stay profitable.
Or unique position?
The unique position approach focuses instead on differentiation. You make customers recognise your brand is different. And you persuade them that your difference is worth paying for.
Your target audience pays more than they’d pay for a cost leader brand. They believe that difference helps them meet their needs better. You create a unique experience customers pay more for.
A typical unique position competitive strategy in e-Commerce could 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 it’s a focus approach.
This choice changes how you bring your strategy to life. It impacts the range you offer and your order to delivery system for example.
So, 3 choices. Cost leadership. Differentiation. Or focus.
Cost leadership strategy
Cost leadership keeps the price low. It’s based on the economic assumption that cheap products sell more than expensive ones.
Offer a better price than competitors and you sell more. Sell more and keep your costs down because you get economies of scale. It’s a simple approach, but often highly effective.
However, not every customer buys the cheapest product. You have to work out how important price is to customers.
You do this by working out the price elasticity.
Price elasticity measures the relationship between price and units sold. You express it as a ratio or index. It predicts how much the volume will change for every 1% change in the price.
For example, a price elasticity of 5 would mean a 5% volume change for every 1% price change. This applies to both price rises and price cuts. Raise the price 1% and volume goes down 5%. Cut the price 1% and volume goes up 5%.
You work out the price elasticity using a statistical approach called econometric modelling. It works by gathering large amounts of activity data. You analyse this data to look for correlations and relationships. You use statistics to work out which activities have the most impact on sales. This analysis typically covers 2 to 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 volume effect of a price change when you strip out all your other marketing. Use it to work out the best regular price. Use it to work out how often and how much to price discount
Cost leadership and price elasticity
High price elasticity (say over 3 for example) means sales are highly impacted by price. It suggests price matters more than other buying influences. Brands are seen as generic and inter-changeable. There’s 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’s 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.
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. Customer’s don’t want to miss out, so are more likely to buy.
(This uses the idea of scarcity – see our article on behavioural science for more on this).
The cons of using price
This can be tough if retailers push you to do more price promotions. They often do this to drive visits to their store. That usually benefits them more than it does you.
If you price discount too often, the customer starts to expect it. They stop paying full price because they expect to buy on promotion. That hits your profits.
Customers might also pantry fill. They buy extra when it’s on promotion and stock up. But that means it’s much longer before they buy again. Your profits get hit again.
Then, you’ll have customers buying at the promoted price who’d have bought anyway at the full price. That’s more money lost out of your profits.
Finally, even when price discounts bring in new customers, these customers are often brand switchers. They buy the cheapest brand every time. So, they’re never going to be loyal customers.
You also need 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 successfully, you need to also keep costs low.
Cost management covers two types of cost – variable and fixed.
Variable costs relate directly to how much you produce. Cost goes up for every item you make.
For example, in 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 led businesses, you apply variable costs to the staff and technology that 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 transport.
You have to store and transport every item you sell. These costs will 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 from warehouse and shipping suppliers. You negotiate a discount for putting more business their way.
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.
These include :-
- 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 how 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
Bunning’s 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.
Why? Well, studies show customers scan prices quickly. They anchor on the first part of the price, not the full price. So, on a $9.99 price for example, they focus on the $9. They don’t register the $.99 part as much.
Logically, it’s only $0.01 under $10. But the studies suggests many people value it more like the difference between $9 and $10. Sounds crazy, but this $0.01 discount often leaders to a 5-10% increase in sales. That’s probably why Bunning’s does it so often.
For business who don’t compete on price, a differentiation strategy is often the best approach.
Some buyers base their decisions on factors other than price. You set your brand offer up to appeal to one or more of these buying factors. That’s the essence of a differentiation competitive strategy. Customers choose you because they value the way you meet their needs. They’re prepared to pay more for that value.
For example, you create a point of difference with your brand identity. You create a mental association that’s particularly relevant to your target audience. This association becomes more important than price. Price elasticity is low. Customers care less about the price, because they value the association, the point of difference more.
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 focusses on the service they offer.
For example, you base your e-Commerce positioning around making it easier to buy the product. Easy re-ordering with a subscription model. Access to expert advice on choosing products such as healthcare brands like Blackmores and Nutricia do when they give the customer access to dietitians and midwives.
Or you make the make the order to delivery system work better, with faster and more convenient delivery options. Guaranteed delivery by a certain time. Evening or weekend delivery options.
Customers value these extra options, and are willing to pay more for them.
Differentiation example - Jimmy Brings
But their size means they can’t move as quickly as smaller players in the market. That’s where competitors like Jimmy Brings come in with a differentiated approach to their competitive strategy in e-Commerce.
Instead of price, they focus on speed of delivery.
On their home page for example, their lead message is they can deliver wine, beer and spirits in 30 minutes to most places in Sydney.
Speed of delivery
Speed will matter to some customers in the alcohol market. 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 organise themselves around this Point of Difference. They don’t deliver from a centralised warehouse or stores. Instead, they use their vans as mobile mini-warehouses. They position them around the city to deliver anywhere within 30 minutes. This set-up supports their differentiated competitive strategy in e-Commerce of fast, local deliveries.
They don’t compete on price. A bottle of Nature’s Harvest Organic Shiraz for example is $16.99 compared to the same bottle at Dan Murphy’s at $12.99.
But, they promise to deliver all products within up to 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
Jimmy Brings can’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 though don’t care so much about range or price.
Speed matters. That’s what Jimmy Brings focus on.
Differentiation and cost management
Managing costs has a different emphasis with differentiation. You prioritise what’s best for the customer long-term (irrespective of cost) over what’s best for the company’s short term profits.
That means you invest in the systems that deliver the point of difference. You don’t economise on what it takes to give the customer what they need.
For example, Jimmy Brings needs to pay for its network of vans and drivers to offer speedy delivery. Their transport costs will be way higher than Dan Murphy’s for example.
But the result is faster deliveries. A different customer experience.
They cover these costs from the extra the customer pays to benefit from the higher level of service, or whatever the point of difference is.
A focus approach is the final competitive strategy in e-Commerce. It’s an extension of differentiation, but with a focus on a much narrower target audience.
You offer these unique target audiences products and services which are unique and hard to copy.
You find 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. They go out of their way to tell other people about your brand.
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.
This unique position also leads to the unusual phenomenon known as Velblen pricing. In some categories and brands 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 of this is the Bugatti Veyron. Only 450 were ever made. They’re so rare that when someone sells one, it usually goes for more than its original asking price.
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 Bugatti’s, so we wanted to look at a more relatable online focus business instead.
UGG boots are a unisex style of sheepskin boot that originates from Australia.
While there are many stores selling 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. Uggs Australia backs this claim by stating it has the only sheepskin footwear tannery in Australia.
Their șite focusses on the authenticity and origin of the product. They only sell UGG related products.
They sell 32 different types of women’s Ugg boots and 15 different types of men’s Uggs boots in a range of colours. No other products other than relevant 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 focussed 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 intense pressure to cut costs because you have loyal customers who value what you do and are willing to pay for it.
Of course, the downside is you limit the size of your segment. There’s a maximum number of customers you can appeal to. It’s important to check your niche target audience is big enough to sustain your business model before you go down this route. To get more customers, you may well need to look at differentiation rather than focus.
Conclusion - competitive strategy in e-Commerce
You decide on your competitive strategy as part of the e-Commerce planning process.
Cost leadership focusses you on price and cost. You keep both low to maximise volume sales, drive economies of scale and be efficient.
It’s about sell a wide range of products and having a clear price offer. For example, the low price guarantee we showed in our Bunnings 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 that customers are willing to pay more for. For example, offering speed of delivery as we showed in our Jimmy Brings example.
Focus extends the differentiation to focus on a specific small segment. You to own a unique and defendable position that’s hard to copy. However, you limit the number of customers by making such a specific offer.