Price Wars
A company can fight a price war without eroding its brand equity and profits. Besides retaliatory price cutting, there are other ways of reacting to price cuts initiated by a competitor.
Of all the variables of a company’s marketing strategy, it takes the least time for executives to make changes in their pricing strategy. However, such changes also trigger several unexpected and mostly unwanted repercussions from competitors, customers and also within the organization.
Change in pricing strategy usually means initiating a price cut. Such a price cut invariably triggers a chain reaction in the industry, with competitors usually trying to outdo each other in cutting prices, leading to a decline in the overall profits of every player in the industry.
Price then becomes the main competitive tool which eventually undermines the investment that the company may have undertaken to develop any differential advantage, for instance, superior quality, better delivery systems or superior technology. It also makes customers expect and want more price reductions, affecting the industry’s competitiveness irreparably.
Companies in such situations must decide their response strategies. When faced with a competitor who has reduced prices, most companies choose to retaliate with price cuts. It is however important to explore other possibilities before succumbing to the inevitable price war.
The company should first analyze the situation. It should evaluate customer issues such as price sensitivity of the target segment, competitor issues such as their cost structures, intentions, competencies, and company related issues, i.e. its own cost structures, competencies, vision before initiating any action whatsoever. It should also analyze the impact of the present price cut on suppliers, government etc. Waiting for some time to test the real time effect of the price cut initiation (instead of merely analyzing the situation) may also be a sensible idea for some companies.
6 Ways to Fight a Price War
1. The company may choose to reveal its strategic intentions to its competitors without responding to the price cut in any other manner. For instance, it may reveal its low cost structure to competitors that could allow it to sustain the price war longer, if required.
It may also let it be known to competitors that it does not intend to compete on the basis of price in this market. Maybe the firm could alert the regulators indirectly against such predatory moves of the competitor. The basic intention of this move is to scare the competitor, or to let it know that it would eventually lose out in the race.
2. The company may choose to compete strictly on non-price based measures. If a competitor has reduced prices, and perhaps others are also willing to do so, the company may either decide to persist with existing price levels or even increase prices. The main purpose is to prevent damage to the brand image in the market (especially if the brand carries a premium image among the target audience).
The company would also have to emphasize high quality or value-added features in its communications or provide more value or denigrate the attempt of competitors to shift the focus of customers away from quality to price. Perhaps they could also try to convince customers of the dangers of buying lower priced products, or warn them against future competitive moves (such as the dangers of monopolistic tendencies if other competitors were driven out of the market because of predatory pricing).
3. It is important to remember that there is life after price wars for brands. The brand should strengthen itself by providing more features and benefits and advertising more stridently. A stronger brand is the ultimate deterrence against price slashing competitors. But if brands reduce prices indiscriminately during the price war as a retaliatory measure, it damages the brand image for good.
4. The company may selectively respond to such price cuts to avoid an all out war. For instance, the company may give quantity discounts. It may engage in value pricing i.e. charge a higher price from customers who want more features, and lesser price from those who want a stripped down version of the product.
It may offer peak services at usual prices, and cut down prices at non-peak hours to stimulate demand. This method allows responding to the price cut in a manner that prevents damage to the brand’s reputation. It also allows adequate time to the company to plan further moves and sense the impact of the competitor’s price cuts with less risks.
5. The last option for the company is to fight the price war. The company has to resort to this option if its stokes in the industry are high i.e. the business is strategically important for the company. However, the ability to fight out the war depends on the financial strength of the company.
However, the intensity and the time for which the war would be waged would depend on other players in the industry. Stronger players with larger stakes would stretch the war for a longer time. Therefore, the industry dynamics should be weighed carefully before the company goes whole hog.
6. If the company cannot fight the price war, and it is foreseen that the war would be fought by other stronger players in the industry, the company should start planning exit strategies. There is no point fighting a battle which one can never expect to win.
References:
http://www.investopedia.com/terms/p/price-war.asp
http://www.entrepreneur.com/article/222528
