Let’s first define what a price war is, so we are all on the same page. According to Investopedia “a price war is a competitive exchange among rival companies who lower prices to undercut one another. A price war may be used to increase revenue in the short term, or as a longer-term strategy to gain market share. Price wars can be prevented through strategic price management (with non-aggressive pricing), and a thorough understanding of the competition.”
Price wars can occur in different industries, and are triggered for various reasons. The main benefactor of price wars are consumers, while the industry is the one who suffers, by eroding profits.
So what are price wars are good for? In the words of Edwin Starr, “absolutely nothing.” If you wish to see in detail how a price war can unfold when it goes unchecked, I recommend reading "Tweeter etc." a Harvard Business School Case by John T. Gourville and George Wu. It carries you into the trenches of a price war and helps you see some of the missteps. However, if you want to skip to the end and see the demise of Tweeter etc., watch the video below.
The strategy behind avoiding a price war is complex, and I will do my best to provide general guidelines. Like in any war, you need to have an objective as well as a strategy. However, don’t stress when the first bullet flies and your strategy goes out the window. Keep calm and switch to an emerging strategy to achieve the objective.
So let’s dive-in!
How Do I Avoid A Price War (Aggressor)?
How Do I Avoid A Price War (Defender)?
- Use a Value-Based pricing strategy
- Do not undercut the competition. Undercutting competitors sends a signal to your competitors that you are willing to engage in a price war and only leads to fewer profits
Always Assess The Situation Before Reacting To Competitors
If the competitor provides:
- Less Value - Do a better job communicating value
- Same Value - May need to price match or wait it out. Could be a market penetration strategy by the aggressor. A market penetration strategy should end with a price increase by the aggressor. Such behavior from your competitor may lead to customers returning to you since they feel cheated by the competitor’s price change.
- More value - The danger of a price war begins. The aggressor is trying to use a market penetration strategy. If the competitor is not raising the price to normal levels and not getting the hint that they are pushing prices down, you may need to look at how to reduce costs, and price appropriately using Value-Based pricing to keep the same amount of profits
Price Wars are complex beasts and require multiple strategies to avoid or exit. It is why I believe the term Fog of War is appropriate, as it’s not always clear what your competitor is doing. You may not even be in a price war. Consider if your competitor is potentially reacting to a consumer behavior they are seeing and not necessarily trying to start a price war. It could be that the competitor has noticed that willingness to pay is going down and are merely reacting to it. Some of this assessment can be done by purchasing market reports, as well as analyzing your data.
Here are a few on going price wars you may or may not be aware of: