Cutting prices is the Nuclear Option. Once executed, there is no going back. You have to live with what you did for the rest of your lives
There is no question that business in India is under stress. It doesn’t matter which segment of the economy you operate in, everyone is facing some level of disruption that is causing us to react in various ways.
The Indian tourism industry is no different. There has set in a very strong sense of the “Chicken Little Syndrome’, a sense of despair or passivity which blocks the audience from actions. (Google it, its comes from an early 19th century folk tale).
What makes me say this? You do. Because it’s the only thing I read on Facebook and WhatsApp everyday. Complaints, moaning, despair. The level of pessimism in our industry seems to be high.
The reaction has also been pretty consistent. Fight on price alone. We have taken the culture of Athithi Devo Bhava a bit too far. When the customer says jump, we say how high. When the client says drop prices, we say by how much.
This is NOT a discussion of big agent versus small. Because I see this behavior more from the smaller and medium companies where the desire to get business at any cost has overtaken the sense of business sustainability.
Competing on product, competing on innovation, competing on creativity are all tough. It takes investment of time and money. Competing on price, is easy. I can see how in a tough market one can see reducing prices as an easy and a reversible action. This may give short term gains. But it also leads to a price war and long-term consequences.
I remember when in the early 2000’s the Hyatt in Delhi dropped its rates for a particular operator to $52 cpai. The reaction was severe with every other hotel matching or going lower to survive. Tour operators did the same with their margins. The recovery never came. We know of so many great European accounts where business was taken at a loss. No one has ever been able to make real money of those since.
Price – the only weapon that seems to be left. A weapon that erodes brand value, that erodes all the hard work one puts in to building their business.
Cutting prices is the Nuclear Option. Once executed, there is no going back. You have to live with what you did for the rest of your lives.
Why are so many behaving this way? Well, there are two key reasons. First, dropping prices can be done quickly and doesn’t require much thinking. Changing product or introducing innovation takes more time and effort. The Second reason is that dropping prices look like a cheap option. In the marketing mix of the ‘Four Ps’ – Product, Place, Promotion and Price. The price is the only one that does not cost money.
Many think price reductions are reversible. Has anyone in our segment ever been able to increase prices after a drop? Is the foreign agent sitting with a kind heart to help us be profitable? Or he is sitting playing one tour operator against another? Keep in mind, when you drop price, your competitor’s response is to do the same and the loop starts. There is rarely reversal. I have never seen it.
So, what can companies do instead of cutting their prices? There are several things, all of them connected with adding value to the consumer or the client.
The first thing is to rethink your value proposition by offering more for the same price. These can be things that cost relatively little but have a meaningful impact for the customer. Would it not be smarter to give the customer more value for what they are spending? Offer more options and choices?
A second option is to have brand differentiation and sell different things to different segment. Like hotels do with luxury brands and budget brands in the same portfolio. We know of companies doing this.
Third is to be better at the way you communicate your value proposition to the customer. My business philosophy has always been that when business is down, you need to increase your marketing and communication. That’s when you need to express your fresh ideas the most. Unfortunately, the conventional action is to do the opposite.
Finally; as one looks at price, one also needs to look at costs. How can you reduce your costs? Realign your expenses. Firing employees is not the only solution. Find other areas where you can squeeze out a few dollars. Every little bit counts.
When all of this has been done is when you should look at price reductions as a tool to compete. It should be your last option as it is by far the riskiest of all action you can take.