A price war is quite a ride.
Gotta say, it takes some guts to hang in there.
For many businesses, the most sensible approach to a price war is to do absolutely nothing.
You have to have substantial resources behind you just to survive the carnage.
Eventually competitors that are not profitable because they are selling product below its cost will be forced out of the market.
(That’s when prices hike right up again.)
In the bricks-and-mortar world, the lowest price strategy is never a good idea for a smaller business.
The simple truth is it is that lowest price providers are the domain of large companies with deep pockets and big wallets.
Even low overhead concerns are going to struggle without size to their advantage.
For service businesses, it can be even harder since it is unlikely that they can bill a full 40 hours per person per week.
The Internet, however, does provide a smaller business with greater opportunity to be a low cost provider although the Internet presents its own unique set of marketing challenges.
On the Internet, too, there is no escaping the need to build a brand.
TIPS TO AVOID A PRICE WAR.
To avoid a price war you must be prudent about pricing and do your homework. As annoyed as sales teams might become with you, don’t just knee-jerk react to the situation by dropping your prices.
Let The Pure Price-Buyer Go Elsewhere.
Ok, these are the most miserable buyers of all. They deplete your energy. They want the world for a fraction of the price that it is really worth. They tend to be demanding of your time and disloyal to your business. It is better to concentrate your efforts on retaining buyers that are happy to pay a fair price for a value-for-money offer rather than the lowest possible price they can scrape from the bottom of your profitability barrel.
Get Proof Of The Problem.
Get proof from your sales teams or customers that competition is, in fact, reducing its price. Bargain-hunters are likely to put pressure on sales if pricing is topical. And sales teams finding it tough to meet targets may embellish the size of the pricing problem because they want to close deals to secure their bonuses.
So at Telstra, I asked for details of competitive offers in their entirety, in writing, and especially the fine print. This is because prices can be manipulated to appear lower than they really are. For example, the fine print often contains the hidden charges or contract termination fees that make a deal unattractive. A good business analyst will help the marketer to take apart competitive offers enabling proper comparison of both sets of pricing.
Look To Establish A Pattern.
If competitive price reduction is occurring, look to establish a widespread pattern of it. Preferential pricing may be offered by competitors to secure one or two strategically important customers and it’s akin to commercial suicide to reduce pricing across your whole customer base in response to it.
Establish That Pricing Is, In Fact, The Problem.
You need to establish that competitive pricing the primary reason you are losing market share. It may be an entirely different product attribute that is causing the problem.
Establish That Competitors Are Actually Delivering.
Of course, it’s all very well to offer a sharp price, it’s another to actually deliver the goods. So pricing is half the equation, and fulfilment is the other half.
The impact that reducing pricing has on your own gross profit margin is happening to your competitor. If a competitor is undertaking prolific price reduction, it normally indicates severe financial pain. They may not survive long enough for you to react. Don’t just leap on the gravy-train and head right out of business with them.
Differentiate Through Non-Price Factors.
For example, product positioning, features or functionality, quality and other attributes include after-sales support (warranties, help and so on).
Create A Second Brand.
Launch a low-price brand to protect existing brands and to compete head-on with low cost competitors.
Final Thought.
When you reduce your price, margin is not the only problem a marketer has to face.
Most brands are not budget brands. Heavy discounting can impact adversely on how brands are perceived by customers, and this is especially true for those brands positioned as luxurious. Make sure you do your sums and calculate the gross profit margin first and spend time considering the longer-term impacts. Reducing price is much easier than increasing it.
If you have to respond, test various pricing techniques at your disposal. Getting creative about how pricing is deployed might still ultimately affect margin, but it does offer you a much greater opportunity to keep hard-won positive brand perceptions alive.
RELATED POSTS:
When to Drop Prices or check out How to Make Prices Hard to Compare
