【正文】 her business serves, incumbents needn’t worry—for the moment. They can observe without engaging the petitor. That waitandwatch strategy often works for panies that market products for people at the very top of the pyramid, such as wines, perfumes, and cosmetics. For instance, when Europe’s supermarket chains launched privatelabel water, it had little impact on market leaders such as Evian, Perrier, and San Pellegrino. Bottled water is a superpremium product, and store brands serve consumers who rarely buy it. Sometimes, entrants at low price points can provide a fillip to incumbents’ business. Take the case of easyCruise, set up by the Londonbased serial entrepreneur Sir Stelios HajiIoannou, which has boosted Europeans’ interest in cruises. The line’s ships serve as floating hotels that dock in the afternoon and leave late at night, which allows passengers to entertain themselves at the ports of call. Since easyCruise doesn’t offer lavish meals and expensive shows, it is able to charge low prices. Its customers are typically people in their twenties and thirties, many of whom cannot afford the allinclusive packages other cruise lines offer. Although easyCruise is doing well, incumbents such as Royal Caribbean and Cunard have left this new petitor alone rather than diverting resources to attack it. They believe that when easyCruise’s passengers are older and richer, they will turn to the established lines for traditional cruise vacations. That may be an exception to the rule. Most lowcost players alter customer behavior permanently, getting people to accept fewer benefits at lower prices. EasyCruise’s passengers may never switch to the higherpriced cruise lines. Moreover, lowprice warriors are aided by the fact that consumers are being cynical about brands, better informed because of the Inter, and more open to valueformoney offers. When market leaders finally acknowledge the threat from lowcost rivals, they usually try to match or beat their prices. All the available evidence, however, shows that price wars don’t work in incumbents’ favor. Not only is pricing below cost illegal in many countries, including the United States, but also lowcost business models are designed to make money at low prices—a fact that executives tend to forget. In a race to the bottom, the challengers always e out ahead of the incumbents. For instance, in the late 1980s, Aldi, Dell, E*Trade, and Southwest Airlines more than held their own when Carrefour, Compaq, Fidelity, and United, respectively, triggered price wars that were supposed to drive the challengers out of business. Even when market leaders copy the critical elements of lowcost players’ business models, they are unable to match their prices. That’s because the individual elements of the model don’t matter as much as the interactions among them. Consider Inter bookings for airline tickets, which don’t deliver the kind of cost reductions to traditional airlines that they do to lowcost carriers. First, lowcost players generate 98% of their bookings through their Web sites, while only 20% of incumbents’ customers use the Inter to make reservations. Inter bookings are more attractive to the leisure travelers who use lowcost carriers than to business travelers, who often fly to multiple destinations. Consequently, when traditional airlines set up Interbased booking systems, the impact on their costs is limited. Second, an Interbased reservation system is inexpensive to develop and maintain when all the aircraft in a fleet are identical, there is only one cabin class, tickets are not refundable, and passengers can’t reserve seats. However, the traditional airlines’ systems must provide for multiple cabin classes, handle several kinds of tickets, provide several levels of refunds, and reserve seats, making them expensive investments. Third, most incumbents participate in industrywide reservation systems such as Sabre, which robs them of control over some seats. Finally, the traditional airlines have set up works of travel agents, which would rebel if the carriers made a plete shift to direct bookings. For all those reasons, traditional carriers are unable to reduce their booking costs to the levels the discount airlines have achieved. Slashing prices usually lowers profits for all incumbents without driving the lowcost entrant out of business. I learned that firsthand while serving as a consultant to a European teleequipment provider that was peting against traditional rivals as well as a lowcost Asian petitor for a multimilliondollar contract in Africa. All the bidders kept cutting prices in order to best the Asian rival’s offer, which proved to be the lowest after every round of bidding. Eventually, the tele giants discovered that the Asian pany had offered a 40% discount on the lowest price the customer could negotiate with its rivals! Not surprisingly, the lowcost pany won the contract. In addition, although the tele giants would not have made profits on their lowest bids, the Asian contender seemed likely to do so. When Differentiation Works When businesses finally realize they can’t win a price war with lowcost players, they try to differentiate their products in a lastditch attempt at coexistence. This strategy, the consultant’s favorite antidote, takes many forms. Companies, we’re told, should adopt the following approaches: Design cool products, as, say, Apple and Bang amp。 la HarleyDavidson and Red Bull. Sell experiences, as Four Seasons, Nordstrom, and Starbucks do. Since the tactics I’ve mentioned are wellknown, I will not discuss them in detail. My research shows, however, that three conditions determine their efficacy. First, smart businesses don’t use these tactics in isolation. For instance, Bang amp。 then set up a lowcost carrier called Go, which it sold in 2020 to easyJ