Is Pricing A Competitive Advantage?

The Wall Street Journal had an article this morning detailing the tough times retailers are facing. Macy’s, The Gap, Abercrombie & Fitch, and Neiman Marcus all experienced a drop in their December sales. The one exception, Wal-Mart.

This caught my attention because I just blogged a few days ago about Detroit’s competitive advantage (or perhaps lack thereof) over foreign manufacturers. Ideally, a competitive advantage is what differentiates a company from the competition when price is no longer a differentiator, but the numbers Wal-Mart put up in December perhaps suggests that price can be a lone, competitive advantage.

One example in an industry outside of retail is Southwest Airlines, which enjoys a structural cost advantage because they only fly one type of aircraft – the Boeing 737. This allows them to dramatically reduce maintenance and operation costs, and thus ticket prices. The disadvantage is their services are severally limited by the 737s range, so they can’t offer transoceanic flights.

In order to gain a true price advantage over its competitors, a company needs more than just low prices. It has to have a fundamental cost advantage to justify such prices, such as a long-term purchasing price on contracts or materials for manufacturing.

But on the flip side, customers often value other attributes, such as greater selection, product quality and durability, location, superior service, etc. So in the end, I think it boils down to businesses properly identifying a combination of both, as all these attributes, when considered in terms of the product price, constitute what marketers refer to as “value for the money.”