Price wars in Candytown


By John Roche, Haybrooke CEO

There was once a small principality, called Candytown. The residents of Candytown each had a very sweet tooth and, to accommodate the demand for sweets in the province, there were four confectionery manufacturers. The confectionery manufacturers each had a 25% share of the sweet market and were situated in the four walled corners of the town. It was a large perimeter wall, 30 feet high. People rarely visited Candytown; and no one tended to leave.

Everything was fine in Candytown until one fine day one of the confectionery makers started a price war. They wanted to own a greater share of the sweet market in the province and had brought in a consultant to help them achieve it. When asked how they could own a greater share of the confectionery market, the consultant replied:

“Easy. Make more sweets.”

“What do you mean, make more sweets?” asked the confectionery maker.

“I mean exactly what I said. Make 30% more sweets. Do this and you will reduce the unit cost of making each sweet by 30%. You can then sell them for less than the other three confectioners. You will then own a greater than 25% share of the market.”

“But Candytown already has three other confectionery makers. Together we make as many sweets as the townsfolk want to consume. If we make 30% more sweets, there will be too many sweets. We will be creating a sweet surplus?”

“That’s right, there will be a surplus, but the surplus will be owned by you and you can sell the surplus sweets cheaper, because they have cost you 30% less to produce.”

The confectionery business owner got out a sheet of paper and did some simple maths. He worked out that if the business were to make 30% more sweets and sell them for 30% less, revenues would stay the same – but they would have to make and sell more sweets.

“That’s OK” said the consultant. “You might not increase revenues, but you will have a greater market share. Plus, once the competition can no longer compete, they will likely go out of business. Then you will have an even greater sway over pricing in the market. Or, better still, you could sell your sweets 15% cheaper and keep 15% of the productivity savings for yourself. This way you can increase market share and make more money.”

The confectionery maker thought this was a good idea, so it instructed its sales staff to immediately reduce prices by 15%. It simultaneously ramped up its sweet manufacturing capabilities by 30% by installing a shiny new, super-fast sweet-making machine.

A few weeks later, the effects of surplus sweets making in Candytown was beginning to show. The three other confectionery manufacturers were struggling to sell the volumes of sweets they had once sold to the townsfolk and were watching enviously as the fourth seemed to be the only one making any money. A second confectionery manufacturer decided to call in the consultant, who offered the same advice:

Make more sweets.”

“What do you mean, make more sweets?”

“I mean exactly what I said. Make 30% more sweets. Do this and you will reduce the unit cost of making each sweet by 30%. You can then sell them for less than at least two of Candytown’s other confectionery makers and you will own a greater share of the market.”

“But Candytown already has three other confectionery makers, one of whom has actively created a surplus of sweets over the last few months. Collectively we make more sweets than the townsfolk want to consume. If we make 30% more sweets, there will be way too many sweets. We will be contributing to an ever-growing sweet mountain.”

“That’s right, there will be a big surplus, but the surplus will be owned by you and you can sell the surplus sweets cheaper, because they have cost you 30% less to produce.”

The confectionery business owner got out a sheet of paper and did some simple maths. They figured that if the business made 30% more sweets and sold them for 30% less, its revenues would stay the same – but they would have to make and sell more sweets.

“That’s OK” says the consultant. “You may not increase revenues, but you will have a greater market share. Plus, once the competition can no longer compete, they will likely go out of business. Then you will have an even greater sway over pricing in the market. Or, better still, you could sell your sweets 15% cheaper and keep 15% of the productivity savings for yourself. This way you can increase market share and make more money.”

The confectionery maker thought about this for a while and decided it was a good idea. It instructed its sales force to reduce prices by 15% henceforth and simultaneously pushed up its sweet manufacturing capabilities by 30% with the installation of a new, faster sweet-making machine.

However, things did not go as smoothly for the second confectionery maker as it did with the first. There was now a 60% surplus of sweets in Candytown and the townsfolk had begun to expect cheaper prices for all confectionery. So, even though the plan had looked good on paper, it had now become quite a scrap in the marketplace, especially when up against the first confectionery maker.

Despite these challenges the second confectionery maker managed to claw back some of its market share, although not to 25% where it had once been solid.

After a few more months of misery in the confectionery market, the other two confectionery makers, who were now in dire financial straits, decided they had no choice but to call in the sweet talking consultant. At a group presentation the companies were offered the same advice:

“Make more sweets.”

“What do you mean, make more sweets?”

“I mean exactly what I said. Make 30% more sweets. Do this both and you will reduce the unit cost of making each sweet by 30%. You can then sell them for the same price as the other two confectionery makers in this marketplace and you will potentially regain your market share.”

“But Candytown has four confectionery makers, two of whom have been responsible for creating a surplus of sweets over the last few months of some 60%. This is a walled province with a population that has remained static for generations. There is already way too many sweets than the townsfolk can consume – even if they wanted to. If both our companies make 30% more sweets, there will be a sweet surplus of 120% in Candytown – more than twice as many sweets as consumers are demanding!”

“That’s right, there will be a massive surplus, but at least half of that surplus will be owned by you and you can sell the surplus sweets cheaper, because they have cost you much less to produce.”

The confectionery business owners got out a sheet of paper and did some simple maths. They worked out that if they manufactured 30% more sweets each and sold them for 30% less, revenues would stay the same – but they would now have to make and sell more sweets.

“That’s OK” says the consultant. “You might not increase revenues, but you will have potentially regained some of your lost market share. Plus, once the competition is no longer able to out-compete you, they might go out of business – unless they can find a way to out-produce you once more. Whilst this is happening, you will have a greater sway over pricing in the market. Plus, you could sell your sweets 25% cheaper and keep 5% of the productivity savings for yourself. This way you can undercut the entire market, whilst increasing market share and still make a little bit of money.”

The confectionery makers thought they didn’t really have any other choice but to accept the advice of the consultant, so they instructed sales staff to reduce prices by 25% and simultaneously ramped up sweet manufacturing capabilities in order to justify it. Both companies installed new, faster sweet-making machinery to execute the new business plan; as recommended by the consultant.

Candytown soon became a place with an enormous glut of sweets:

Sweets were everywhere, for the confectionery makers had collectively created a 120% surplus between them. And, because there were so many spare sweets that needed to be sold, none of the confectionery makers could seem to retain an advantage in the market for long. As a result, swingeing price cutting now dominated the landscape of the confectionery marketplace. So bad did it get that, eventually, two of the confectionery makers went out of business outright and the other two remained at critical commercial loggerheads with each other for years to come.

Despite all this, one party did derive some benefit: the confectionery machinery manufacturer itself.

Years before the confectionery market had begun ramping up productivity the machinery manufacturer had been suffering a steady decline in demand for its sweet making machinery. This was due, in no small part, to the falling demand for confectionery in Candytown, which had waned as consumers became increasingly aware of alternative taste sensations and the negative health impacts of eating too many sweets. The market had, in essence, stagnated, with the confectionery makers themselves seemingly happy with a long-term, stable demand for its products; in trading equilibrium.

The message that changed the confectionery marketplace and transformed the fortunes of the machinery manufacturer was simple:

“Make more sweets.”

And Candytown was never the same again.

THE END?