If the competitor’s price goes up or down, do you also move your price up or down? Slow down and think before you act. Consider these issues:
Segment your customers?
Price segmentation is charging different prices to different people for 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 consider this competitor?
When Southwest Airlines, a known disruptor, entered a new market offering lower prices, the major airlines responded with lower prices, but not across the board. They didn’t lower their first-class prices, nor did they lower their prices for loyal business customers used to frequent-flyer perks.
In this example, products that are highly differentiated don’t need to be discounted, nor do products that are targeted to different customer groups. Focus on differentiating your products by adding value, and targeting customer segments with offerings designed for them.
Do your customers know?
Often your customers don’t know the prices of your competitor’s products. Respond only if your customers know.
Why did they do it?
Read the industry news to find out why your competitor made a price change. It may be trying to get rid of excess inventory or to fill a factory. Its costs may have gone up but if the price change is temporary it’s not necessary for you to follow suit.
The most common cause of price wars is to increase market share, which usually means taking share from your competitors. The fastest way to do that is by lowering prices. But usually, your competitors will lower their prices in response. They’re not going to sit back and let you take their share. Now both companies have the same market share as before, only at lower prices. Certainly it wasn’t worth it.
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The initial aggressor may do this repeatedly until it finally realises it will not ‘win’ a price war. By then, the damage is done.
Don’t use price as a lever to increase market share unless you’re certain you’re in a position to win a price war.
Winning a price war should mean ending up with more profit when the price war is over. But now your prices are lower, so if your profits are to be higher, you must make them up in increased market share, market growth and lower costs.
While price wars are always ill-advised, you need to recognise conditions in which a competitor may choose to start and win a price war, and to realise 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 already have large market share. A dominant company with more than 50% share is less likely to start a price war than a company with 20% 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 prices started high and as they fell, more and more people purchased them. In markets where 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 lower its costs by increasing volume, 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 higher than before.
You don’t have to win a price war; you have to survive it. This means differentiating your products and segmenting 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 differentiating your products.
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