PUBLISHED ON 2019-02-12
Price war is an appropriate term since it involves casualties on both sides. There are many reasons to avoid it!
Pricing has a significant impact on a company’s income and small changes can dramatically change a company's economics. Price wars are sometimes unknowingly started by both sides: one company begins lowering the price on a product and the competitor reduces prices on other key product as a response to the other's move: it can be a real escalation. Avoiding a price war is a really important goal.
Here we are with some suggestions to avoid a price war and continue to profit through the ongoing price challenges you will encounter in your business.
Show ability to respond quickly
This may be a hard decision since it may lead to a price war but it can also be a peace keeper. Respond quickly to competitors' price lowering to show that you have a strong capacity to deal with competitors' efforts to knock you out and gain your market share.
Your competitors will understand they'll have a hard time trying to compete with you. PricePaladin, a tool for price tracking and monitoring will let you keep an eye open on immediate price changes.
Pay attention: the downside of this strategy is that for a undefined period of time you'll have to lower prices and reduce margin but if you can resist the newly started price war should resolve quickly avoiding future losses.
Analyze the actions of competitors before reacting.
Misreading the actions or intentions of competitors is often the cause of price wars that ruin profitability.
Often there are exogenous causes such as new local regulations or regulations, the need to free up inventory or other causes that may suggest that a competitor's lowering of prices is aimed at repositioning the market. In order to avoid misinterpretations that could lead to large cuts in profit margins, it is advisable to analyze in detail the attitude of the competitor before taking action.
Use a communicaiton strategy
Speaking clearly and if possible communicate a strong pricing strategy, even if it may seem threatening or provocative, can instead have the effect of making it clear to the competition that if you are facing a price war, you will certainly be ready to fight it.
In practice, through an effective communication strategy, you try to minimize the chances of a price war.
A known case of a communication strategy in terms of price warfare was when Chrysler, under the threat of new competitors in the minivan sector, announced to the commercial press that it would produce a minivan at very low prices, specifying that it was very confident that in the event of a price war it would prevail.
Chrysler publicly announcing that it wanted to defend its market share, indicated to the competition that it would lose much money in order to keep the market.
Making a competitor desist from starting a price war through an effective communication strategy is a decidedly successful tactic.
Exploiting the capacity and flexibility of your company
One of the main causes of price wars is often the presence of more supply than demand. In such conditions, a price clash is easily achieved simply because you enter a phase of struggle for the maintenance of your market share.
Before proceeding with the increase in production capacity, one should often ask oneself a question about the fact that the new availability of products does not saturate the present market.
In cases where there is a possible problem of overproduction, the forecasting analysis needs to be addressed more carefully. Evaluate how it is possible to counteract a drop in demand (since supply is too high) by trying to convert production or availability to other forms: for example, a manufacturer of decorative elements for furniture can try to resell the product in combination with others instead of as a single product.
It may be very useful to understand if the product itself can make up for the lack of other niches that were not initially focused on.
Making the most of your business's ability to be flexible to change can avoid a price war whose result is often very expensive even where the war is won.
Knowing the customer's price sensitivity
Any pricing strategy requires a strong understanding of the price sensitivity of customers, especially during those phases when new competitors enter the market.
There are a number of known cases where new competitors enter the market and offer significantly lower prices. In all honesty, it is quite logical and well known that where there are reasonable margins, it is only a matter of time before other competitors enter the market.
Generally, the response to these situations implies a lowering of the price even by the company that was already present in the market, but in some cases it was seen that a firmer and colder response allowed to make an analysis that let understand that the existing brand enjoyed more respect from customers. This element allowed the initial brand not to reduce its prices or at least to see them fall slightly, maintaining its reputation and even strengthening its position as a luxury brand.
A possible addition of value to the brand therefore allows to avoid a price war that can not always be afforded and also in some lucky cases to improve profits by exploiting a stimulus of danger as a lever for improvement.
In general, the best approach is to apply these tips and minimize the chances of a price war. A price war has a bitter account for all parties involved, including the "winners". Initiating a tough price-based confrontation with a competitor can be very costly and it is better to find a meeting point if possible and work together to avoid damaging each other.
In any case, we can see once again how important it is to remain vigilant on the trend of prices exposed by our competitors: for this purpose PricePaladin, a tool for price tracking and monitoring is an essential help to monitor prices and not lose all the market opportunities that arise.