If you find yourself in a price war, you’ll need to understand how it started in order to respond effectively. Often the best counterattack does not involve a retaliatory price cut.
IN THE BATTLE TO CAPTURE THE CUSTOMER, companies use a wide range of tactics to ward off competitors. Increasingly, price is the weapon of choice – and frequently the skirmish degenerates into a price war.
No matter who wins, the combatants all seem to end up worse off than before they join the battle.
Avoid a situation where there is little talk from a company about service, quality, brad equity and other nonprice factors that might add value to a product or service.
Every price cut is potentially the first salvo, and some discounts routinely lead to retaliatory price cuts that then escalate into a full-blown price war. That’s why it’s a good idea to consider other options before starting a price war or responding to an aggressive price move with a retaliatory one.
“Price wars are becoming more common because managers tend to view a price change as easy, quick, and reversible action.”
The goal here is to describe an arsenal of weapons other than price cuts that managers who are engaged in or contemplating a price war may also want to consider.
Take Inventory
Generally, price wars start because somebody somewhere thinks prices in a certain market are too high. Or, someone is willing to buy market share at the expense of current margins. Price wars are becoming more common because managers tend to view a price change as an easy, quick and reversible action. By understanding their causes and characteristics, managers can make sensible decisions about when and how to fight a price war, when to flee one — and even when to start one.
The first step, then, is diagnosis. [Once option was to lower its price in a tit-for-tat move.] [Ask customers for their support, pointing out that if the smaller supplier was driven off the market, its customers would be facing a monopolist. The short-term price cuts would turn into long-term price hikes.].
Intelligent analysis that leads to accurate diagnosis is more than half the cure. Good diagnoses involve analyzing four key areas in the theater of operations. They are customer issues such as price sensitivity and the customer segments that may emerge if prices change; company issues such as business’s cost structures, capabilities, and strategic positioning; competitor issues, such as a rival’s cost cost structures, capabilities, and strategic positioning; and contributor issues, or the other players in the industry whose self-interest or profiles may affect the outcome of price war. [For a more detailed explanation of such analyses, see sidebar “Analyzing the Battleground.”]
| Tactic | Example |
|---|---|
| Nonprice Responses | |
| Reveal your strategic intentions and capabilities | Offer to match competitor's prices, offer everyday low pricing, or reveal your cost advantage |
| Compete on quality | Increase product differentiation by adding features to a product, or build awareness of existing features and their benefits. Emphasize the performance risks in low-priced options. |
| Co-opt contributors | Form strategic partnerships by offering cooperative or exclusive deals with suppliers, resellers, or providers of related services. |
| Price Responses | |
| Use complex price actions | Offer bundled prices, two-part pricing, quantity discounts, price promotions, or loyalyt programs for products |
| Introduce new products | Introduce flanking brands that compete in customer segments that are being challenged by competitors |
| Deploy simple price actions | Adjust the product's regular price in response to a competitor's price change or another potential entry into the market |
Stop the War Before it Starts
Make sure your competitors understand the rationale behind your pricing policies. In other words, reveal your strategic intentions. Price matching policies, everyday low pricing, and other public statements may communicate to competitors that you intend to fight a price war using all possible resources. Look to compete on dimensions other than price.
Making sure that your competitors know that your costs are low is another option–one that effectively warns them about potential consequences of a price war. [low-cost structure: low fixed costs, low variable costs] Price consistently with your strategic positioning of brand differentiation. Always price to follow your customers’ perceptions of quality. eg, focus on quality not price.
Respond with Nonprice Actions
Sometimes an analysis of the market reveals that several customer segments exhibit different degrees of sensitivity to price and quality. Understand the basis for certain customers’ price sensitivities let’s managers creatively respond to a rival’s price cut without cutting their own prices.
For example, a company might be able to focus on quality, not price.
One way companies can avoid a price war is to alert customers to risk – specifically, the risk of poor quality. A related weapon is to emphasize other negative consequences.
Another way companies can avoid a price war is to alert customers to risk – specifically, the risk of poor quality. Stress product performance and emphasize product enhancements such as improved reliability and performance [performance sensitivity]. Brand equity–build customer recall and recognition through a highly effective advertising campaign.
Or, emphasize other negative consequences. [contingency plan] Emphasize dire and unpalatable consequences.
A final non-price option involves seeking help, or appealing to contributors to weigh in on the competitive situation. [government, customers, vendors, channel partners, independent sales representatives, and other like-minded players if the price war could mean the company’s demise.
Using Selective Pricing Actions
Employing complex options such as multiple-part pricing, quantity discounts, time-of-use pricing, bundling, and so on lets price warriors selectively cut rates for only these segments of the population that are under competitive threat.
One common – and classic – tactic is to change customers’ choices, or reframe the price war in the minds of customers. Smart managers use quantity discounts or loyalty programs to insulate themselves from a price war. They also avoid across-the-board price cuts.
Therefore, another selective-pricing tactic might be to modify only certain prices. By targeting only certain products for discounts you can still counter others’ pricing ploys.
Managers can localize a price war to a limited theater of operations – and cut down the opportunities for the war to spill into other markets.
On another selective-pricing, companies may use a fighting brand. ie, a low-priced product. Know the different segments of price-sensitive customers. “Cheap” equals poor-quality… Fearful of failures… Always charge what the market will bear. You may not need a new brand to counter a price cut, just a new package. eg, drop the price of a new economy-size product with a “buy one, get one free” offer… [cannibalization]
Companies may also opt to cut prices in certain channels. Perhaps the single largest driver of price cuts and resulting price wars is excess capacity. The temptation to revive idle plants [machines] by stimulation demand through lower prices is often irresistible. But smart managers consider other options first. For instance, companies in the packaged-goods industry frequently sell off-brand or private-label versions of their national brands at low prices, ensuring that any price wars won’t damage the brand equity of the national brands. eg, manufacturer protects its image by selling excess capacity under a private label.
If simple retaliatory price cuts are the chosen means of defense in a price war, implement them quickly and unambiguously so competitors will know that their sales gains will be short-lived.
But engaging in “stealth marketing” by selling low-priced, functionally equivalent alternatives through unrelated brand names or in foreign markets may still trigger price wars. if consumers recognize that the quality of the private-label product is comparable to that of the branded option, then the price of the branded option will need to drop. in many cases, it is best to leave plant capacity idle, since the attempt to revive it may trigger margin-destroying price competition. in fact, the idle capacity can be used a a weapon; a company then wields the credible threat of being able to flood the market with cheaper products should a competitor start cutting its prices.
Fighting it Out
Although we feel that direct, retaliatory price cuts should be a last resort, we do recognize that it is sometimes simply impossible to avoid a price war.
Clearly there are times when you must engage in a preemptive price strike and start a price war – or respond to a competitor’s discount with a matching or deeper price cut of your own. For instance, when a competitor threatens your core business, a retaliatory price cut can be used to signify your intention to fight long and hard. Similarly, when you can identify a large and growing segment of price-sensitive customers, when you have a cost advantage, when your pockets are deeper than competitors’ pockets, when you can achieve economies of scale by expanding market, or when a rival can be neutralized or eliminated because of high barriers to market entry and reentry, then engaging in price competition may be smart.
But, there are several long-range implications of competing on price. First, a pattern of price cutting may teach customers to anticipate lower prices; more patient customers will delay their purchases until the next price cut. Second, a price-cutting company develops a reputation for being low-priced, and this reputation may cast doubt on the quality and image of other products under the umbrella brand and on the quality of future products. Third, price cuts have implications for other players in the market, whose self-interest may be harmed by lower prices.
If simple retaliatory price cuts are the chosen means of defense in a price war, then implement them quickly and unambiguously so competitors know their sales gains from a price cut will be short-lived and monetarily unattractive.
Retreat
On rare occasions, discretion is the better part of valor. Consequently, some businesses choose not to fight price wars; instead they’ll concede some market share rather than prolong a costly battle. Focus on developing innovations… For example, at 3M, 40% of its revenue five years from now will come from new products. With high-volume, low-margin items it is often best to withdraw.
It’s Never Too Early to Prepare
It’s in companies’ best interests to reduce price competition because price wars can harm an entire industry. But, diplomatic resolution of price wars are generally impossible because overt diplomacy is a form of price collusion and may attract regulatory oversight. As a result, price leaders (cost structures, strategic postures) often engage in subtle forms of diplomacy that use market forces to discipline renegade companies that threaten industry profits.
Price wars are a fact of life. If you are currently in a price war, understand that you can use several nonprice options to defend yourself and recognize that it is sometimes best to cede the turf under under contention and seek greener pastures. If the current combatants can’d be vanquished, it may be wise to observe the price war from the sidelines and enter the fray after everyone else has been eviscerated. Sometimes, to the bystanders go the spoils of war.