How Your Startup Can Survive A Price War
Years ago, I ran a business where we had developed a groundbreaking product called the MAX232. The product was so successful that fourteen competitors eventually built what they believed were exact replicas of our MAX232.
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Many of our competitors, including Texas Instruments and Analog Devices, were much bigger companies than we were. They had the ability to manufacture products at lower costs than we could.
Their strategies were obvious. TI, Analog Devices, and the rest would offer their version of the MAX232 at a lower price than we would.
Despite the relentless price pressure, we maintained our market share. And we kept our gross margins above 70%.
As I look back, I realize TI and ADI might have been able to crush us, but they didn’t. The answer to why we beat our larger competitors explains both how you can defend yourself against a price oriented competitor, and how you can win with a price oriented strategy:
You need to understand that it’s almost always not about just having a lower price.
TI, ADI and the rest would announce their replicas of our MAX232 at around a 15% discount to our products. Each time our competitors lowered their prices we would lower our prices in return.
This is where we did the right thing, and this is where TI and ADI blew it. Our larger competitors assumed we would just give up as they kept lowering the price.
Instead we kept innovating while they never did innovate.
We kept coming up with new innovations and products that offered more value to our customers. This made the MAX232 less relevant over time because we moved customers to newer and better products. TI and ADI were left in the dust.
But it also shows the fatal flaw of just relying of TI’s and ADI’s lower price strategy:
You need to lower prices AND innovate if you’re going to win in a price sensitive market.
To this day I’ll never understand why TI and ADI didn’t try and leapfrog our position in the market. Instead, they seemed happy just following us. With their superior manufacturing capability, they might have won if they had innovated.
The lesson I took away from a small, startup perspective is that David can beat Goliath. You don’t fight their strength (in this case lower costs), but you take advantage of the inherent slowness big companies operate with.
You can’t be afraid to obsolete your own products.
Speed kills.
We moved at a rapid clip, introducing innovative product after innovative product, essentially obsoleting our earlier products. So by the time TI and ADI eventually tried to replicate our latest product, we were on the next thing.
They never did catch up. We dominated the market, building a $200M/year business with gross margins greater than 70%.
For more, read: What If Facebook Enters Your Market?