I have come across a really interesting article lately from a very notable source, the Harvard Business Review, about the topic of the price war and how to fight it (or not). I recommend a thorough reading but for those of you who have a more schematic mindset I’ll make a list of, let’s say, the best practices to adopt in case of a price war occurring in your market. I also have a first-hand example of a price war broke out among the European producers of hard chrome plated steel bars in 2008 whose consequences are still underway.
Let’s start with some useful and precise information:
- Price is the weapon of choice for many companies to ward off competitors;
- But it’s not all about price! Your competitive move against a price war, instead of a retaliatory price-cut, can be a diagnosis of quality, service and other non-price factors that might add value to your product or service.
A good analysis revolves around four key areas:
- Customer issues: what’s the price sensitivity of your customer segment? If prices change, are new customer segments going to emerge? Needless to say, some consumers are more sensitive to quality than price. In the B2B, for instance, buyers are often willing to pay more for prompt delivery or reliable quality as a guarantee of their businesses running smoother and more profitably.
- Company issues: what are your business’s cost structures, capabilities and strategic positioning? Changes in technology or business practices can affect cost structures and, if successful, might lead to price-cut (for instance: outsourcing vs in-house activities), but this must be coherent with your pricing strategy.
- Competitor issues: what are your rival’s cost structures, capabilities and strategic positioning? Understanding, and even empathizing with, your competition must be the backbone of your analysis. Your market research can lead you to ask yourself which competitors you should watch: direct competitors only or even indirect ones? By identifying your current and potential rivals, their strength and weaknesses, you will draw important pricing implications that can answer some key questions, such as: how does price fit their strategic position? How do they make pricing decisions? What are their capabilities and resources?
- Contributor issue: before engaging in a price war, you must also consider other factors, like profit margins for suppliers and distributors, commissions for sales representatives, after-sale service etc., which might considerably affect the outcome of a price war.
If you have carried out a smart analysis, you will realize you have in front of you 5 different ways to fight a price war:
- Stop the war before it starts by revealing in advance your strategic intentions and your cost advantage;
- Adopt a non-price tactic, by focusing on quality, and consequently by alerting customers to the risk of poor quality and other negative effects;
- Adopt a selective-pricing tactic, by modifying only certain prices or by cutting prices in certain channels;
- Fight it out, if a competitor threatens your core business, if you have a cost advantage, if you have more economic resources than your competitor, if you can achieve economies of scale, if you identify a large and growing segment of price-sensitive customers.
- Retreat and cede some market share, if you are not willing to prolong a costly battle.
Now, as mentioned, I can give direct evidence of the price war engaged by the hard chrome plated steel bars producers in Europe from 2008 until today. Please fill out the form below to get these insights.
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If you have any comments, input or observations, feel free to share them here. I’d be happy to know your thoughts.