Definition: Non-price competition involves ways that firms seek to increase sales and attract custom through methods other than price. Non-price competition can include quality of the product, unique selling point, superior location and after-sales service.
Models of perfect competition suggest the most important issue in markets is the price. And for a homogenous product like potatoes, consumers will generally want to buy the cheapest potatoes. However, many markets do not fit this model of perfect competition. In many markets, the price is only one of many factors which influence which good/service you buy. For example, if you go for a restaurant meal, do you choose the cheapest? Unless you are on a strict budget, factors like the quality of the food and service are likely to weigh more heavily.
In the real world, firms are seeking to attract custom through the methods of non-price competition. This includes a unique selling point (the best coffee), securing the best location and/or offering internet delivery.
Non-Price competition in Oligopoly/imperfect competition
The majority of industries are a form of oligopoly with a few firms dominating the market. The firms in an oligopoly can compete in price, but often non-price competition becomes the most important factor dominating the market.
The kinked demand curve model suggests that in oligopoly prices will be stable – leading to firms concentrating on non-price competition.
In monopolistic competition, there is freedom of entry, but firms have a degree of market power (inelastic demand curve) because of product differentiation. Therefore, firms in monopolistic competition have a motive to try and improve their product differentiation and brand image.
How firms compete
This shows a mixture of factors both price and non-price competition, that can become important in markets
Examples of non-price competition
Loyalty card – Some big business have invested considerably in loyalty cards which give ‘rewards’ or money back to customers who build up points/spending. Airlines use Airmiles to try and encourage repeat custom. Supermarkets use loyalty cards like Tesco points/Nectar(Sainsburies)
Direct mailing – a key method of retaining customers is through gaining access to their email address and then sending targetted promotions and news about new features/products. Some firms may give loyal customers the chance to get special deals or products not available to the mass market.
Subsidised delivery. Amazon has been successful at pushing Prime Delivery accounts. This promises free next day delivery. Amazon is offering this delivery service as a loss leader. The cost of delivery is often higher than what a customer is actually paying. However, in the long-term, the convenience of Prime Delivery is changing shopping habits. Buying something on Amazon and having it arrive at your doorstep the next day, means customers are not wanting to go into town, park and shop at traditional stores. Amazon is steadily gaining more market power and market share.
- Supermarkets like Tesco and Sainsbury’s are also investing in online delivery of groceries. Again the cost to supermarkets of delivery is higher than the price customers are paying, but now it is established supermarkets don’t want to risk losing market share by making delivery more expensive.
Ethical/charity concerns. Some firms may promote an ethical line of marketing, for example, ‘fair-trade’ coffee appeals to customers who wish to buy goods with a social conscience.
Unique selling points. In recent years, firms have concentrated on offering differentiated products and products that can be customised to consumer preferences. For example, food companies are offering a greater diversity of products, such as gluten free, sugar-free, vegan – niche products which appeal to a small segment. 3D Printing means firms can increasingly allow customers to be more specific in specifying the size, length and colour of products. Mass produced, homogenous ‘Off the shelf’ products increasingly feel outdated.
Advertising/brand loyalty. Firms spend billions on advertising because repeated exposure to famous brands can make consumers more likely to buy ‘trusted’ brands. High brand loyalty can also create barriers to entry. For example, many firms have tried to enter the market for cola, but have been unsuccessful, due to the success of Coca-Cola and Pepsi in creating strong brand loyalty. Even the internet has done nothing to disturb this duopoly.
After-sales service. For some goods, like TVs and car, offering free after-sales service can be a factor in encouraging customer trust. It can also be a profitable aspect of the business. For example, Apple Care offers a three-year warranty, but it is priced at a good margin.
Cultivation of good reviews. In an online world, good reviews are increasingly important – especially for industries like tourism. Therefore, firms have an incentive to encourage happy customers to leave reviews. If you buy something from Amazon – quite frequently the 3rd party firm selling the product will include a leaflet – asking you to leave a positive review on Amazon. One printing company I used offer £5 cashback for any published review on social media.
Offering bundles of products. Supermarkets may group ingredients which make an Indian meal together. The hope is that it will encourage people to try new ingredients. The profit margin can often be higher on bundles of products. For a company like Apple, they push new technology – which requires you to buy very expensive adapters from them. Recently I got a new MacBook Pro. To connect my Apple Monitor to the new USB-C port, I had to buy an adapter from Apple costing £45. (This is using market power to push related goods/services0
Foreseeing trends in markets. Many successful retailers have gone out of business because they were stuck with old business models. Successful firms need tremendous adaptability and innovation to move into new markets and trends. For example, retailers who successfully moved into an online presence have been more adaptable to trends in consumer behaviour.
Pay for the best workers. In some industries, success may all depend on the quality of the staff. For example, restaurants may want to employ the top chef. Football clubs the best footballers and managers. In other industries, firms may work hard to keep the workforce motivated by share employee schemes – giving workers a share in the firm’s fortunes.
Combination of price and non-price competition
Sometimes firms are using a combination of price and non-price competition. For example, three for the price of two.