Never use this strategy when your startup is facing a lower priced competitor
The CEO of Hawaiian Airlines, Mark Dunkerley, announced this past Tuesday that Hawaiian Airlines is considering a basic economy class--a no-frills ticket for a very low price--fares as a response to the looming threat of Southwest Airlines entering the Hawaii market.
At face value you can see why lower prices might be a reasonable response to an airline famous for its lower fares--but it actually reveals a poor mindset about competition. The best way to face your competition is to focus on your category superconsumers--the highest profit, highest passion customers in your category--to figure out a way to grow the pie, not shrink it.
This may seem obvious, but many companies and startups don't realize their growth strategy is predicated on stealing shares with lower prices or similar products--which often ends up losing money in the end. There are three specific lessons Hawaiian Airlines should have followed--and are critical for all startups to get right:
1. Never lower price if it shrinks the category.
I've researched Nielsen data across 75 categories and found that when categories grow, one percent of brands capture 80 percent of category growth. Trying to grow in a declining category is extremely difficult, so startups should avoid any actions that might shrink the pie.
There are only a few very specific conditions when lowering price can be a good idea--for example, if you can credibly be the lowest-cost provider for a sustained period of time. For Hawaiian Airlines, this might be possible--but I wouldn't want to get into a price war with Southwest Airlines.
I've seen a good number of startups base their entire strategy and reason for existing by offering a disruptively lower price. You have to be more than just a lower price for the long haul. In my experience, only about 10-20 percent of consumers in a category buy just on price. Most consumers care about benefits, too.
2. Focus on increasing benefits, while holding prices constant.
The far better way to respond to a lower priced competitor is to add benefits.
Early on, Keurig faced a conundrum about an extremely popular accessory called "my K-cup" which allowed consumers to bypass the branded K-cups and fill them with their own coffee. It turns out that the availability of "my K-cup" made the entire ecosystem far more popular--it sent a message to consumers that Keurig cared about them.
Most people just wanted the option to make their own coffee, but in practice rarely did so. It was a win-win.
Hawaiian Airlines has a lot of options. The company could "Groupon" a ton of impulse activities like restaurants, surf lessons, or other fun experiences that fiercely compete for tourist dollars. It could upgrade and expand its lounge options for long layovers. It could create refreshment stations at the gate to start the paradise experience earlier for tourists (and extend the vacation just a little bit longer for those leaving).
Startups must remember that the value equation is a function of both price and benefits. Give equal, if not more, time to benefits. Don't just focus on price.
3. Ask your superconsumers what must be true to raise prices.
As I write in my book (which is about superconsumers), these high-passion and high-profit consumers exist in every category--including airlines. These consumers are more than willing to pay more or buy more because they love the category, but if you offer them something they really value.
For Hawaiian Airlines it could be local business travelers who go back and forth across the islands. Maybe they're locals or regular visitors who want a subscription service where they're guaranteed a first-class seat.
Maybe they're tourists who want a multi-month pass for the duration of their stay to travel an unlimited amount on seats that are available. Maybe they're homesick ex-locals like me visiting family, who want a Costco-like club membership that locks in preferred pricing reserved for a kama'aina (literal translation is "friend of the island").
Every startup can find superconsumers in the category they compete in. A disruption from a lower priced competitor might be the perfect time to introduce a new pricing innovation that increases prices via an entirely new offer.
(Eddie Yoon Founder, EDDIEWOULDGROW / Inc.)