4 Steps to Avoiding a Price War
Price wars come in different shapes and sizes. Some are very acute with a focus on one product or service while others are across-the-board attacks on a broad range of products. Some may be concentrated into a narrow period of time while others may be protracted over several years. Regardless of the specific characteristics of a price war, it is almost always started by accident – often because someone misread competitive actions or misjudged market conditions.
Because pricing has such powerful leverage on profit margins, price wars can be extremely destructive to a firm’s financial performance. Consider the company with an EBIT of 8%. An erosion of just 2% in price realization will drop earnings by 25%. Price wars can be equally destructive to the profitability of an entire industry when all participants respond with price reductions.
Our pricing consultants find that the best defensive strategy to a price war is to avoid entering or initiating it altogether. Here are four steps to preventing or avoiding a price war:
- Avoid tactics that force competitors to respond with a lower price. Understand and communicate your differentiation in benefits and minimize the focus on price. It’s easy to sell on price, but this is a shortsighted strategy that generally does not yield long-term benefits to you or your industry. Keep your messaging focused on real economic benefits – in other words, the value your product or service delivers. Be sure your sales team is well trained on selling economic value, too.
- Understand your competitive value position. Have a clear and objective understanding of how your offering compares to the competitive offering in terms of delivered value. Are you using a higher-value product to compete with a competitor’s lower-value product? Do you feel pressure to drop the price of this product in order to compete? Don’t try to force one product to compete in all situations. Often, the best strategy is to create another product version with reduced benefits to compete at a lower price level.
- Avoid misreads of competitive and market developments. Each competitor often believes that the other company started the price war. Avoid knee-jerk reactions in response to a competitor’s lower price, instead taking the time to understand the reason(s) behind it. Is this an isolated incident, or is there a longer-term pattern? Oftentimes, a company reacts due to anecdotal or isolated field information when, in fact, the best response would be no price cut at all.
- Leverage market niches. Identify product, market or channel niches that may be too narrow or specialized for competitors but where you have the capability to excel. You will in essence be removing yourself from the fray, which will give you the opportunity to price your offerings as you deem appropriate.
Engaging in price wars can be detrimental to all parties involved. The more we talk about price, the more the customer focuses on price and the harder it is to communicate real economic benefits. Instead, emphasize value. Be thoughtful and deliberate in your messaging and your pricing. This value-based approach will drive profitability not only within your own organization but throughout your entire industry.
Contact our pricing consultants for more information about pricing strategies and price wars.