Secret to Surviving and Thriving in a Price War

December 29, 2011  |   San Diego Bookkeeping   |     |   Comments Off on Secret to Surviving and Thriving in a Price War

The best way to deal with a price war is to never have to fight in one. The way you do that is to avoid having a product or service that is easily compared by your customers to other similar offerings your competition might have. This is much easier said than done, of course but it is still a worthy goal and many have achieved it in all kinds of industries.

Think of Apple. Their tablet, the ipad, costs a lot more than any of their many rivals and yet they sell more even at a higher price while their competition has to resort to price wars in fighting each other for the left-overs.

If you can figure out how to be the Apple in your niche then you’ve got it made. If you can’t think of any reason for someone to come to your business over any of your competition then you are in trouble. If the only reason you can think of for someone to come to you over anyone else is because you have the lowest price, then you are asking for trouble because price is the easiest point to compete on and sooner or later you won’t be the lowest and then you have to ask yourself if you can go even lower.

The bottom line is to find another point, or several, of differentiation that will not only make your customers seek you out and remain loyal, but it will make them willing to do so even when there are other options that cost less than you do. That is the real answer to how to win a price war.

PS- the only way you can rally do any of this and make smart decisions about your business is if you have your financial situation well wired and you know your numbers backwards and forwards (ie- you have a great bookkeeper and accountant!). Otherwise, you won’t know where you can go with prices, margins and volume vs. discounting and someone else is going to come along and eat your lunch anyway.

What do you do when your competitors change their prices? You really have only two choices: respond or ignore them.

If the competitor’s price goes up or down, it seems intuitive that you should move your price up or down as well. But slow down and think before you act. Consider these three issues.

1. Can you segment your customers? Price segmentation is simply charging different prices to different people for the same or a similar product or service, like student or senior discounts, VIP tickets, or coupons.

Revisit customer segmentation now. Does your competitor really serve the same customers as you? If so, can you segment the market so you lower prices only to customers who really consider this competitor?

For example, when Southwest Airlines would enter a new market offering lower prices, the major airlines responded with lower prices, but not across the board. It didn’t have to lower its first-class price, nor did it have to lower its prices for loyal business customers used to frequent-flyer perks.

Notice in this example products that are highly differentiated don’t need to be discounted, nor do products that are targeted to different customer groups. If you want to be somewhat immune to competitive price pressure, focus on differentiating your products, in other words, adding value, and targeting customer segments with offerings designed for them.

2. Do your customers know? Often your customers don’t know the prices of your competitor’s products. You need to respond only if your customers know.

3. Why did they do it? Read the industry news and your competitor’s press releases. Try to find out why your competitor made a price change. It may be attempting to get rid of excess inventory or trying to fill a factory. Its costs may have gone up. The price change may be temporary and not necessary for you to follow suit.

The most common cause of price wars is someone trying to increase market share, which usually means taking share from your competitors. The fastest way to do that is by lowering your prices. You reduce your price, more people choose your offering over those of your competitors, and voilà, your market share goes up.

There are three places where you should look for percolating price wars. While price wars are always ill-advised, you need to recognize conditions in which a competitor may choose to start and likely win a price war, and to realize when you’re in a position to win the war.

  • Increased market share: Significantly increased market share is possible only for companies that don’t have large market share today. A dominant company with more than 50 percent share is less likely to start a price war than a company with 20 percent share. It’s much more painful for a dominant company to initiate or respond to price decreases.
  • Market growth: In many new markets, lowering prices makes the market grow more quickly. The flat panel TV market is a recent example where the prices started high and as the prices fell, more and more people purchased them. In markets where the demand curve is steep (small price changes significantly affect overall demand), driving down prices increases the number of customers, which can grow the size of the overall pie.
  • Lower costs: If a company can dramatically lower its costs by increasing volume, then it’s more likely to start a price war. Although its price per unit is lower, so is its cost per unit. This could result in an overall gross margin that’s the same or even higher than before.

You don’t have to win a price war; you have to survive it. To survive, simply get out of the way. This doesn’t mean quit the business or leave the market. It means differentiate your products and segment your customers.

When it comes to price wars, think hard. Who in your industry could start one? How could you survive it? How could you win it? Since you never know what your competitors are thinking, always remain vigilant controlling your costs and doing the best you can at segmenting the market, portfolio pricing, and at differentiating your products.

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