The Last Man Standing game is one of the nastiest ever, as it exploits poor situational awareness of the competition, buys you time, and makes a price elasticity work for you.
If it is played against skilful players, it can lead to market fragmentation, which is the default output anyway. So, there is a lot to win, and almost nothing to lose.
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.
- The market is after a recent transition from Product type to Commodity type component, or, ideally, you are leading that transition. The increased efficiency, transferred risk and reduction of an initial investment (See Industrialisation in the Glossary) cause many customers to at least experiment with the solution, and some of those experiments will be successful.
- The solution is price elastic, meaning the price is the most important factor deciding about the adoption. Current solutions (especially those in the Product space) are too expensive to be used in a long tail of user needs.
- The effect of scale has to be very probable, meaning there are good perspectives on reducing costs, possibly through automation of things.
- A perfect relationship with investors.
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.
How to not get caught
- Do not be lazy, aim for efficiency. Always.
- If you suspect the Last Man Standing scenario being applied to you, work harder than competition on removing the constraint, and be the company that does price cuts before everyone else.
- Use open (if applicable) to alleviate the constraint and fragment the market.
- Successful execution of the Last Man Standing creates a sensing engine for the ILC Pattern.
- I can’t think of many other fields (except computing for now) in which this game could be applied.
- An Online Mapping Course