Fighting a Price War

In the 21st century, marketplaces have become more competitive. This is because the availability of information has become the norm. Consumers can now choose amongst competing products and make an informed choice. As a result, getting customers has become increasingly difficult. This has given rise to price wars on several occasions. Since companies find it difficult to woo customers using other tactics, they have begun using price as a weapon.

Price wars happen because someone somewhere in the industry believes that prices are high and that they can make money by rationalizing them. However, often all competitors follow suit and offer retaliatory price cuts. This often leads to a precipitous decline in the prices which may be good for the customers. However, such extreme price cuts are definitely bad for the industry. For instance, in the year 1992, the airlines in the United States had indulged in an all-out price war. The end result was that air travel reached record highs during that year. At the same time, the airline industry made losses that were enough to wipe out all the profits that they had earned since inception.

The above situation clearly illustrates that a price war is devastating for all the participants involved. It does not matter who wins the war because at the end everyone is worse off. However, price wars are not optional. If one competitor begins a price war, others are often dragged into it. In this article, we will look at some strategies required to sustain and fight in a price war.

Responding To a Price War

• New Product Development: Companies facing price wars often resort to creating a new product. A new product can be very useful in such scenarios. For instance, a new product may have better technology or some perceived benefits. Hence, the company may not have to match the price cuts of their competitors. Instead, they can justify the higher price because they have a better product. On the other hand, many companies also use new products to ensure that their brand is not diluted. Instead of taking the competition head-on, they create a new product, the purpose of which is to fight with the low-cost products. This brand is intended to keep the competition at bay while the main brand continues to target the higher customer segments.
• Strategic Partnerships: One possible response to a price war is to try and cut off the supply lines of the competitor. They are more focused on generating demand. It is for this reason that they are likely to neglect their supply chain. Hence, companies can offer discounts and exclusive deals to suppliers instead of customers. The idea is to create stock outs and shortages for the competitors. Customers are likely to prefer a more expensive product if they offer better customer service. Creating a supply-side monopoly allows a company to increase the level of their service while simultaneously decreasing the level of their competitors.

• Quality Wars: Companies facing a price war should conduct in-depth market research. In some cases, this market research shows that customers are not very sensitive to price. In such case, price cuts by competitors need not be retaliated. Instead, the company should focus more on the quality of its offering. The message being sent out to customers and the world at large should be that the competitor’s products are cheap because they lack in quality. Customers must be made aware about the risk that low quality products pose to their safety. This will create fear in the minds of the customers and the company will be able to successfully defend itself against the aggressive price war mounted on it.

  Entering a price war can also do damage to the brand equity created. Hence, companies must instead compete on quality because even if they fail, at least the brand equity, which they have spent years trying to build, still remains intact.

• Complex Pricing: If the company cannot circumvent a price war, then they are forced to drop prices. However, this also needs to be done tactfully. If this is not thought through correctly, the profits of the company may take a severe hit. The key here is to ensure that the prices are only dropped in areas where the company faces a threat from the competition. Hence, instead of giving a general price cut, resorting to complex pricing procedures is a better strategy. Here companies use techniques like price bundling, two-part pricing, etc. This has two benefits. Firstly, since prices are bundled, the overall volume of sales rises and the profitability increases. Secondly, the brand image of the company does not suffer because the price cuts are not openly visible to everybody.
• Retreat: Sometimes retreating is a better option than fighting it out. Price wars can be a drain on the entire organization. Hence, if the losses are small, then the company should simply retreat. This is because a prolonged price battle causes customers to expect lower prices. As a result, the sales volume and the market share both take a beating.

Hence companies should instead focus on offering a new product in a new market. Instead of branding itself as a cheap supplier, companies must try to be innovative.

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The article is Written By “Prachi Juneja” and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.