Last man standing
You put high prices to make demand match your production capabilities and make your competition not care about their efficiency. Then you invest all the profits in your efficiency, cut prices and observe demand surge and problems of your competitors realising that efficiency was in fact critical.
- You look for the price of the solution that gives you optimal profits given what you can build right now. The expectation is that shortly after industrialisation, you should manage to get extremely high margins (100% or more).
- As soon as you have a market confirmation, you invest as much as you can to alleviate efficiency constraints. This postpones profit materialisation (a lot more money later is better than some money now), but, most importantly, it hides your real efficiency. Your competition analysing your financials will see much lower margins.
- Point 2 requires an excellent relationship with investors/owners. They have to trust you, as you can’t reveal everything (f.e. your actual efficiency). If investors do not trust you personally, they will remove you from the company or will sell stocks.
- Your competition is, by now, trying to build an equivalent of your solution, but they will use your pricing as a benchmark. Which means, they will take your price, and will try to earn ‘normal’ or ‘decent’ margins on it.
- Since you have been investing in efficiency and scale, you have a lot of spare capacity. You can safely drop prices to stimulate demand. Congratulations. Your competitors right now face two problems:
- their margins are gone
- they do not have the capacity to deal with new customers.
- Attempts to mitigate those issues consume a lot of time, and basically render your competition harmless. They can retain their customers, but are very likely to switch to defensive measures (licensing, agreements), and become essentially harmless.
- Go to 2. Rinse & repeat until you are the Last Man Standing.
- Recent transition from Product to Commodity
- Price Elasticity of Demand: much greater consumption can be driven by lower prices
- Scale efficiencies are apparent: Cost reductions are available with proper investment
- Access to necessary capital for needed investments
- Stay focused on efficiency
Amazon Web Services
I can’t think of many other fields (except computing for now) in which this game could be applied.
- Work harder than the competition on removing the constraint, and be the company that does price cuts before everyone else.
- Use open approaches (if applicable) to alleviate the constraint and fragment the market.