Non-price competition

Overview

Non-price competition is a marketing strategy "in which one firm tries to distinguish its product or service from competing products on the basis of attributes like design and workmanship". It often occurs in imperfectly competitive markets because it exists between two or more producers that sell goods and services at the same prices but compete to increase their respective market shares through non-price measures such as marketing schemes and greater quality. It is a form of competition that requires firms to focus on product differentiation instead of pricing strategies among competitors. Such differentiation measures allowing for firms to distinguish themselves, and their products from competitors, may include, offering superb quality of service, extensive distribution, customer focus, or any sustainable competitive advantage other than price. When price controls are not present, the set of competitive equilibria naturally correspond to the state of natural outcomes in Hatfield and Milgrom's two-sided matching with contracts model. It can be contrasted with price competition, which is where a company tries to distinguish its product or service from competing products on the basis of low price. Non-price competition typically involves promotional expenditures (such as advertising, selling staff, the locations convenience, sales promotions, coupons, special orders, or free gifts), marketing research, new product development, and brand management costs. Businesses can also decide to compete against each other in the form of non-price competition such as advertising and product development. Oligopolistic businesses normally do not engage in price competition as this usually leads to a decrease in the profit businesses can make in that specific market. Non-price competition is a key strategy in a growing number of marketplaces (oDesk, TaskRabbit, Fiverr, AirBnB, mechanical turk, etc) whose sellers offer their Service as a product, and where the price differences are virtually negligible when compared to other sellers of similar productized services on the same marketplaces. They tend to distinguish themselves in terms of quality, delivery time (speed), and customer satisfaction, among other things.

Market structure

Although any company can use a non-price competition strategy, it is most common among oligopolies and monopolistic competition, because firms can be extremely competitive. Firms will engage in non-price competition, in spite of the additional costs involved, because it is usually more profitable than selling for a lower price, and avoids the risk of a price war.

Oligopolistic competition

Non-price competition often occurs in oligopoly, where few firms dominate the market. Due to the little or few firms in the market, these firms tend to compete in non-price measures to distinguish themselves. Such competition would be otherwise known as quality competition where oligopolistic firms depend on their quality improvement intensities to survive. In order to distinguish themselves well, these firms can compete in price, but more often, oligopolistic firms engage in non-price competition because of their kinked demand curve. In the kinked demand curve model, the firm will maximize its profits at Q,P where the marginal revenue (MR) is equal to the marginal cost (MC) of the firm. Hence, a change in MC would not necessarily change the market price, implying rather stable and sticky market prices.

Monopolistic competition

Monopolistic market structures also engage in non-price competition because they are not price takers. Due to having rather fixed market prices, leading to inelastic demand, they engage in product differentiation. Monopolistic markets engage in non-price competition because of how the market is designed where the firm dominates the market. In order to sustain in the market, they have to innovate and improve on their product development to appeal to consumers. The new trade theory suggests that the model of monopolistic competition plays a big role in explaining trade trends in trade patterns where product development drives product differentiation. Under monopolistic competition, firms engage in non-price competition to innovate and further boost their brand image.

Main types

There are two main branches of non-price competition. This is where firms branch out to create new avenues for themselves to remain competitive in a market where prices are rather sticky. Such streams of non-price competition include product differentiation and/or development and advertising and/or promotion.

Product differentiation

Product differentiation allows for a firm to establish its products from its competitors to win over a greater market share. The more different the products of rival firms are, the lower the cross effects between their markets with regards to both non-price and price variables. By offering a wide range of products, firms can not only achieve economies of scope, but also be able to expand their market base. However, such product differentiation measures may result in significantly higher overhead costs.

Advertising and promotion

Promotion can be considered an umbrella term to include all advertising, branding, public relations and packaging. This strategy includes all aspects of non-price strategies to continuously capture market attention. Advertising is divided into two categories:

Informative: This form of advertising includes informing consumers about product features, details descriptions.[1] Persuasive: This form of advertising engages with the consumers on an emotional level. Such advertising methods are highly linked to behavioural economics which takes advantage of the heuristics and bounded rationality of consumers when making decisions. Advertising mediums can be designed specifically to meet with the expectations of consumers as well as the size of the market. Firms aim on reaching as high targets as possible by making use of the network effects of advertising. Promotional means depend on a number of factors such as the nicheness of the market, and allocated promotional budgets.

Examples

There are many ways of how firms can engage in non-price competition to increase their market share and retain their customer base. Examples are such like loyalty programs, subsidized delivery, unique selling points, brand recognition, ethical and/or charitable concerns, after-sales service, positive feedback reviews, marketing campaigns and many more. The few of the more important and common examples of non-price competition are as follows.

Loyalty programs

Most firms offer out loyalty cards in order to capture market attention and retain customers. Loyalty cards are a form of differentiation where customers are given incentives to purchase from that specific firm.

Subsidized delivery

Firms such as Amazon offer free delivery for customers through membership programs, such as Amazon Prime, using delivery convenience as a non-price competitive feature.

Unique selling points

Firms with unique selling points are a result of focused differentiation because products are customized to consumer preferences. For instance, food companies now engage in promoting health foods which cater to healthy-living which has become a norm nowadays. Such products can have gluten-free options, sugar-free options and even low-carb alternatives. Some unique selling points might also be a result of good packaging that aim to capture consumer attention.

Accumulation of positive reviews

Many large companies rely on positive reviews from previous customers in order to gain positive feedback from others. Such methods are important because it gives other new consumers an anchor to base the quality of their products on, and creates a certain level of trust from the amount of positive feedback received.