Question: Stemming customer defection in a price war

We are a regional communications company offering low cost broadband solutions to urban users. Through our use of innovation and better understanding of local market conditions, we have been able to wrestle marketshare from global corporations many times our size.

These corporations have finally started seeing us as threat, and are trying extreme pricing tactics aimed at driving defection in our customer base. We are sure that these pricing breaks are temporary in nature, and aimed at us.

We want to reach out to the defectors, offer them incentives to switch back to us. But we are not sure how our loyal customers will react when the news of these incentives reach them.

Would like to get your perspective on driving loyalty among the most vulnerable customers, without alienating others.

Expert Insight

In a way, you are reaping what you have sown. By offering the lowest prices in the marketplace, you attracted the least loyal customers...those who are price sensitive rather than loyal to your unique and differentiated offer based on something other than price. The big guys can and will crush you because they have deeper pockets and can easily outlast you.

Trying to win back customers based on price is chase to the bottom, a game you can't afford.

Your only choice is to flank...that is you need to change the basis of competition with a completely DIFFERENT offer. This is what MCI did with their Friends and Family offer. Their billing software had the ability to bill customers in "clusters" giving group discounts which AT&T and others could not do quickly and which would cost millions in reprogramming to do. This promotion also worked because the group discounts were based on everyone staying in. If someone tried to opt out, the entire groups bills would go up causing peer pressure to get back into the group thus lowering everyone else's bills. The loyalty was driven by the group.

Another classic and wildly profitable flanking move was AT&T's partnership with Apple for an iPhone Exclusive contract. 40% of AT&T's new customers came from other cellular carriers because those customers wanted to get the iPhone.

There are many ways to flank but all of them are based on changing the basis of competition. That is what you must do to survive.

As for your loyal customers...when they get wind of your deeper discounts, they will force you to provide them or switch to the big guys. That would be a very bad will kill your current profitability.