Devastating price wars in business
In the recent past we experienced price wars across a few industries
like never before in Sri Lanka.
The hotel industry, supermarkets and credit card business are some of
the examples today. Business organizations use a wide range of tactics
to ward off competitors. Increasingly, price is the weapon of choice to
achieve short term goals.
Price wars can create economically devastating and psychologically
debilitating situations that take an extraordinary toll on an
individual, a business and industry profitability. No matter who wins,
the combatants all seem to end up worse off than before they joined the
battle. And yet, price wars are becoming increasingly common and
uncommonly fierce in the Sri Lankan market following global trends.
Most managers will be involved in a price war at some point in their
careers regardless of which industry they are in. Professionals too face
the same challenge in pricing given the multiple choices clients have.
Every price cut is potentially the first salvo and some discounts
routinely lead to retaliatory price cuts that then escalate into a
full-blown price war. That's why it's a good idea to consider other
options before starting a price war or responding to an aggressive price
move with a retaliatory one.
Generally, price wars start because somebody somewhere thinks prices
in a certain market are too high. Or someone is willing to buy market
share at the expense of current margins. Price wars are becoming more
common because managers tend to view a price change as an easy, quick
and reversible action.
When businesses don't trust or know one another very well, the
pricing battles can escalate very quickly. And whether they play out in
the physical or the virtual world, price wars have a similar set of
antecedents.
By understanding their causes and characteristics, managers can make
sensible decisions about when and how to fight a price war, when to flee
one - and even when to start one. It's important for managers to
understand why a price war is occurring - or may occur.
But it's also critical to recognize where to look for resources in
battle. It's important to carefully analyze customers, company,
competitors, and other players within and outside the industry that may
have an interest in how the price war plays out.
Good diagnoses involve analyzing four key areas. They are 'customer
issues' such as price sensitivity and the customer segments that may
emerge if prices change, 'company issues' such as a business's cost
structures, abilities and strategic positioning, 'competitor issues',
such as a rival's cost structures, abilities and strategic positioning
and 'contributor issues', or the other players in the industry whose
self-interest or profiles may affect the outcome of a price war.
An analysis of competitors - their cost structures, abilities and
strategic positioning - is equally valuable. Industrywide price
reductions may be appropriate under certain circumstances.
Short term results
But many unprofitable price wars happen because a company sees an
opportunity to increase market share or profits through lower prices,
while ignoring the fact that competitors will respond. Market research
may reveal that sales increase following a price cut justifies the
action, but this same research often simply ignores competitors' price
responses.
Businesses need to pay attention at the strategic level to the twin
questions of who will respond and how. Smart managers project how
competitors will set prices by carefully tracking historical patterns,
understanding which events have triggered price changes in the past and
by tracking the timing and magnitude of price responses.
They monitor public statements made by senior executives and
published in company reports. And they keep their eyes peeled for
activity in markets: competitors who acquire new technology, staff,
information system, or distribution channel, or form a new brand
alliance, will probably make some kind of price move that will affect
other players in the industry. This sophisticated environmental scanning
identifies possible adversaries and its implications.
In free markets, competition is the norm, not the exception and that
competition will limit your latitude for pricing. When competitors lower
prices or new competition enters at a lower price, many a novice
manager's gut reaction is to lower prices - but the cost of price
concessions may be higher than the cost of customer losses.
Experience will temper these beginner instincts over time, but there
must be easier and less costly ways to identify the proper reaction to
competitive price moves than the school of hard knocks. Examine the
relative price attractiveness to customers, not the absolute
attractiveness, because customers make tradeoffs between offers.
Examine the whole offer, not just the price, because, in aggregate,
customers will choose offers that deliver them more value after
comparing benefits and price. Companies can avoid a debilitating price
war altogether by using a set of alternative tactics. Pricing is the
easiest strategy and tactic but the hardest on the company's
bottom-line. |