Price war ahead for life science consumables?

I hope by now you’ve heard about our latest report Prospering in a Down Market: Strategies for Life Science Suppliers.  We’re of course gratified by the sheer number of companies that have purchased this report (it’s nice to know that with all the major life science suppliers among our clients we’re doing our part to level the playing field by ensuring everyone is working with the same baseline market data!)

At the same time, we’ve been fielding a lot of questions and requests for more in-depth analysis.  One in particular that we’ve been dealing with a lot this week was the finding that a surprisingly large number of scientists claimed they’d be willing to switch suppliers if they could get a 10-12% discount on the various categories of consumables they purchase for their labs.  The driver behind this potential switching behavior of course is the economic crisis is having on budgets for life science products.

We found it surprising because we’ve been studying customer switching in this market for many years. We know that a substantial percentage of scientists continue to use a brand to avoid incurring real or perceived switching costs, rather than due to loyalty and satisfaction. Particularly in the life sciences, switching costs can be substantial and can include the fear of losing the money and time already invested in optimizing a vendor’s products to work with specific instrumentation, unhappiness over forgoing a long-term relationship with a favorite sales rep, unwillingness to buy products from vendors that do not have institutional purchasing agreements, and concern over whether a product from a new vendor will work with an existing protocol – just to name a few.

Without going into proprieratry research we’ve conducted for clients, in the past scientists have told use they require at least a 25% price savings, on average, to even consider switching brands.  Seeing that drop to 10-12% is pretty startling.  In a market where switching rarely occurs, could the recession actually prove to be an “once-in-a-lifetime” opportunity to capture market share through price leadership?

I think the answer is yes – but with a couple of important caveats.

First, remember that the desired level of discount for each product category expressed in our survey are discounts off what the scientists are currently paying – NOT your list prices.  For some vendors in some categories cutting prices this deeply simply may not be feasible.

But let’s face it… when you’re talking about the markets for cell biology kits/reagents, gene expression analysis, protein purification/separation, RNAi and plasticware there are some very strong players with deep pockets.  They might just be tempted to slash prices and capture as much share as they can as quickly as possible.  It’s certainly happened in consumables in before (oligos in the mid-90’s come to mind).

But as many firms in many market’s have found out – starting a price war you can’t afford to win can put you out of business.  For one thing, you’re probably going to have operate at or below your bottom line for an extended period of time; maybe even as long as this recession is putting pressure on lab budgets.

As you bring your prices down it won’t just be customers who sit up and take notice – competitors will be paying attention too.  If your closest competitor’s break-even point is right about where yours is, you can expect to see their customers start to defect to your brand the closer your price gets to your actual cost.  On the other hand, if they’re a leaner company and manufacturer than you, you’ll have to go even lower before switching begins.

It’s important for you to war game both customer and competitor reactions to your prices.  They may just try and wait you out and tell their customers you’ve got lower prices because your products are simply inferior.  But that’s probably not going to fly with most lab consumables – when customer begins to defect, the competitors will start to lower their prices as well.  How low they will go, and will it be necessary for you to the match their new prices?  When things begin to spiral out of control in a downward direction, we can expect to see a lot of second- and third-tier suppliers in these product categories fall by the wayside.  Not because their actual costs are as high as the big players, but simply because they won’t be able to sustain operating below the bottom line for any sustained period of time.  We’ll discuss this further later this week.