I have noticed this past week that American cell phone service providers have decided to compete on price (a number of companies are advertising their new lower prices). While that might sound like good news for consumers, in the long-term it is not feasible for these service providers to compete on price.
Why Cell Phone Service Providers Should Not Compete on Price
Competing on price is a mistake for cell phone service providers, for several reasons:
1. All-or-none proposition. A company that tries to be the low-price leader (whether the company is a cell phone service provider or not) is setting itself up for an all-or-none outcome. If it succeeds at providing the lowest price, it will likely gain marketshare and make some money. But if it fails – i.e., if another company beats it to the bottom – then it has very few remaining strategic options. It will have already scaled back its cost structure and reduced extra customer services (the unique things that could otherwise differentiate the company). It must therefore either (a) try to survive as the second-lowest price service provider or (b) try to work its way back up the price structure (a difficult process at K-Mart found out after it lost to Wal-Mart, the world’s current low-price leader).
2. Least durable type of competitive advantage. But even if a cell phone service provider succeeds at being the low-price leader, it faces a serious problem. Competing on price creates the least durable type of advantage. At any time, another company with a lower cost structure can move in and become the new low-cost leader. As explained above, a company that tries to be the low-cost leader and fails (or succeeds and then is displaced) has few strategic options.
3. Leaving money on the table. Even if a cell phone service provider succeeds in the long-term at being the low-price leader, it is probably leaving a lot of money on the table. In my own cell phone purchases, I have routinely sought out the cell phone and service package that allowed me to do the most (e.g., in 2003 I bought a T-Mobile Sidekick because it allowed me to browse the web, e-mail, chat, and so forth, all of which was pretty novel at the time) – not necessarily the lowest price phone and service.
Conclusions About Cell Phone Service Providers Competing on Price
From my consumer perspective, it seems that the safest model for a cell phone service provider is to offer services that the other providers do not offer, and thereby differentiate itself. At any rate, I am absolutely certain that lowering prices is not the answer.