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How To Survive A Price War

This article looks at prices wars and in particular, how to survive a price war if you find yourself being dragged into one by competitive rivalry by undifferentiated competitors or a particularly aggressive strategy by one competitor who may be differentiated but whose actions damage the entire market.

This is at the conflict end of the 5 levels of competition.

My Experience Of Price Wars

I have experienced a number of price wars while I was a senior manager in business and seen the effect of others since I’ve been a consultant/coach.

It’s a bloody business.

Each price war has been extremely damaging.

The big lesson I’ve learnt is that the best way to survive a price war is do you best to stop it from starting in the first place.

Unfortunately sometimes, competitors are so stupid and behave so irrationally that a price war is inevitable.

The prolonged financial crisis and recession is increasing pressure on businesses to keep sales high and owners and managers can feel forced into cutting prices to keep their businesses above the survival line.

Why Do Price Wars Start?

Price wars start because:

  • The market is declining and firms are fighting for a larger share of a smaller cake; or
  • One (or more) firms have very aggressive growth objectives
  • Price wars can even start by accident.

Aggressive competitors believe that they can make more money by:

  • Trying to force competitors out of business because they have major cost advantages or can withstand the losses for a longer period. Once competitors leave, the aggressor believes they will have a dominant position in the market which allows them to control prices.
  • They don’t understand how their own cost/volume/profit relationship works and may underestimate the cost of the product or service.T
  • They don’t realise that if they lower prices, their competitors are likely to find out what is happening and respond. All too often strategies are considered in isolation without thinking about how competitors will react.

Price Wars Can Start By Accident

Competitors’ actions are misunderstood.

Perhaps there is a temporary special offer from one competitor to turn slow moving stock into much needed cash which escalates into a series of tit-for-tat price reductions as the other competitors respond to what they perceive as an aggressive action.

Or fluctuations in market demand are not understood and firms think that competitors must be stealing their business. I have written an extensive review of the beer game and how systems thinking can help you interpret fluctuations in demand.

There is also the risk that price wars can start because of manipulation by buyers and fear based naivety of suppliers. A buyer gains by paying a lower price so an unscrupulous buyer can:

  • Exaggerate the offer from a competitor by outright lying – “Smith & Jones have offered us a price of £2.50 per unit when you are charging £3.30” (when their best price is actually £2.95)
  • Mislead by missing out key terms – “Smith & Jones have offered us a price of £2.95 when you are charging £3.30” (but they want us to order and take immediate delivery of 10,000 units – their price for the 1,000 units that you provide us with is £3.35)

There Is Usually No Winner In A Price War

There are often no winners in a price war.

A price war can destroy the profitability of an industry for many years hurting every single competitor. Many industries have found that it is much easier to cut prices than it is to increase them again afterwards.

Even customers may lose out if a product is treated as a price based commodity when there are really valuable differences in either the product or the service. As struggling competitors withdraw from the market, either voluntarily of through bankruptcy and liquidation, customers are left with less choice.

What You Can’t Do To Survive A Price War

You can’t reach an agreement with competitors to fix prices to particular customers.

Cartels are illegal in the European Union, the USA and many other countries.

What You Can Do To Survive A Price War

  • Emphasise the extra quality or service of your offering – don’t allow the customer to that the product or service is a commodity and  that all competitive products are equal so that price is all that matters
  • Remind the customer of the risks in taking a low cost option
  • Create a low cost, lower value alternative product of your own that gives extremely price conscious customers a chance to stay loyal to your business and brand.
  • Work together to take costs out of the transactions. Recognise the difference between saving the customer money and your cutting your prices.
  • Lower prices through a rebate scheme that rewards extra volume and not just promises of extra volume.
  • Re-align your price lists. Supermarkets have low prices on the staple products like bread but make their margin on the extras that people buy. Can you use loss leaders to keep customers who will buy premium priced items out of convenience.
  • Make it difficult to compare prices – e.g. mobile phone tariffs – although makes it difficult to win customers on price as well.

The Risks Of Buying From The Cheapest Competitor

Price is often used as an excuse for changing suppliers but it can be a disguise a service problem or general dissatisfaction with the customer supplier relationship.

Alternatively the customer may take for granted the customer service you provide and believe that is the industry norm when your service and dissatisfaction with that of your competitors wins you business elsewhere.

So make sure that the customer is aware of the risks of buying from a cheaper competitor:

  • What will the customer lose that he takes for granted from you?
  • What short cuts/cost savings must the competitor have made to sell at this price profitability? How will this impact on the customer?
  • Why is the competitor so desperate to get extra business? Is this a last desperate attempt to win enough volume to stave off financial collapse and if that happens, where will that leave the customer.

Communicate By Signalling To Competitors Within The Market

Collusion is illegal and the punishments are high.

But that doesn’t mean that there can’t be some kind of indirect communication with competitors – perhaps with the market in general via the trade press, through customers (although you have to be careful that the true message is passed on) and through trade associations.

It’s what business strategists call signalling – making clear what is happening in the market and what you are doing so that the competitors are better informed and not left to make up their own minds.

Some of this signalling is counter-intuitive but it has to be to fight the idea that “more sales equals more profit”.

If the market is in severe decline, like the housing and car markets at the moment in the UK, it makes it much easier for business owners to understand why their sales volumes are down by 30%.

The market leader needs to make sure that they are not caught up in a bravado exercise for their own public relations – the industry is down a long way but we are selling more. That kind of statement signals to competitors that their volume is being “stolen”.

The same education is needed to explain the impact of the Beer Game and how de-stocking along the supply change exaggerates the impact of demand changes at the other end.

And if you are having a sale to sell off excess stocks, signal the fact that the sale is limited in quantity and duration. It may cause competitors some short term pain but it won’t last long.

If there is a danger of a price war, the trade can be educated on the dangers of cutting price and the devastating effect on profit of just moving the purchase volumes around.

The aim of effective signalling is to stop the price war happening.

The Signals Of An Aggressive Competitor

Sometimes a competitor will signal an aggressive move. “It is our intention to grow market share to 40% and we will do whatever is necessary to get it there.”

This type of signal gives competitors a problem and a price war may be inevitable.

There are some key questions to ask?

  • Is the threat credible? Does the competitor have the financial muscle to back up the intention?
  • Will the expansion stop at 40% or will it then be 50%, then 60%…?

You need to reach a decision.

In fact it’s the classic survival decision of fight or flight.

If you are going to have to fight, it  may be better to fight the battle early.

What will it take to stop the competitor and is the fight worthwhile or should the business withdraw from the market?

It is better to withdraw early than suffer huge losses and being forced out.

Disciplining The Aggressor In A Price War

Some price wars are fought in public and in full view of all the market participants.

The market trader selling vegetables knows when his competitor has cut prices and can react immediately. The other party sees the reaction and has a choice of cutting price again, matching the price or increasing the price hoping the competitor will follow again.

Other price wars are in private.

The first the incumbent supplier may know that an aggressor is taking action is when the orders stop or a phone call comes in asking for a new competitive quote.

The choice is to match the lower price or to hold. Keep the business at a lower price, then your competitor has not gained but you have lost profit – and the customer may now be very marginal.

But do you leave it there, or should you try to rap the competitor across the knuckles?

It’s another signalling issue.

If you know the industry well, you can go to your competitors customers – not all of them but enough to get the point across – and either

  • Submit a lower price yourself and threaten the established competitor’s volume.
  • Discover the prices offered by your competitor and make their customers aware that the firm is aggressively offering new customers deals which may be far better than given to existing customers.

It’s one thing to try to increase profit by getting extra profit by winning your competitors customers on price but it is another to see the profit on the established business damaged.

What Are Your Thoughts On Price Wars?

Have you found yourself caught in a price war?

What happened and how did you get out of it? Which of the tactics to survive a price war mentioned above do you think could have helped you?

Let me know by leaving a comment?

in 3 – Your Strategic Positioning, Business Problems And Mistakes

How to Price Your Platypus by David Abbott

The full title of this book by David Abbott is

How to Price Your Platypus: Using an Understanding of Customer Psychology to Maximise Prices

In my review posted on Amazon.co.uk, I gave the book a 4 Stars rating. This means it is Good to Very Good.

Here is my book review.

A plain talking, practical guide to pricing

Pricing is a major lever for improving profitability by adjusting margins and sales volumes but there are many factors to consider.

That’s why simple but sub-optimal pricing techniques like cost plus (standard markup) and charging the same as your competitors are often chosen even if it means leaving profit on the table.

This book goes into plenty of the issues but does it in an easy-to-read, plain-talking way that guides you through practical techniques for setting your prices.

Inevitably this means there are compromises made and the scope of the book is wide. There’s a big difference between setting your own prices and forcing potential customers to make the buy or don’t buy decision… or where prices are “negotiated” with a powerful buyer like the supermarkets.

I recommend this to business owners. Marketing consultants will need something more substantial.

You can buy the book from Amazon.co.uk or Amazon.com


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in 3 – Your Strategic Positioning, 5 – Lead Conversion, Best Business Books

Why Your Customers Suck by Jon McCulloch

In my review of

Why Your Customers Suck by Jon McCulloch

posted on Amazon.co.uk, I gave the book Three Stars.This means it is Worthwhile.

Here is my book review.

You have bad customers because of your bad decisions

This is a book mainly about pricing and positioning.

If you’re not familiar with the phrase positioning, it means your place in the market. [continue reading…]

in Other Business Books

Pricing Strategies for Winners by Steve Prescott

The full title of this book by Steve Prescott is

Pricing Strategies for Winners: The ultimate guide to pricing strategies and how to never sell cheap again“.

In my review at Amazon.co.uk, I gave the book a Four Stars rating. This means I consider it to be good to very good.

Here is my book review.

A great reminder that you can charge high prices if you commit to delivering high quality and great service

This book focuses on premium pricing. This means being the, or one of the highest priced suppliers in your market.

If you look at any market, you’ll see different businesses charging different prices. Cars, hotels and even something as everyday as bread have the same pattern. There’s a range of products from low price, low quality (low value) products through to high price, high quality (high value) product and service combinations. [continue reading…]

in Best Business Books

In my review of the book

Resisting Pricing Pressure in Recession & Recovery

by Rupert M Hart posted on Amazon.co.uk, I gave it Three Stars.

Here is my review.

An important topic but the book could be better

Pricing policy is often made without much thought at the best of times. It becomes critical in a recession when volumes are down, customers are very price conscious and want reductions and competitors are a hair trigger away from starting a price war. [continue reading…]

in Other Business Books

The Price is Great by Alejandro Mijares Ortiz

In my review of the book

The Price is Great by Alejandro Mijares Ortiz

posted on Amazon.co.uk, I gave it 2 Stars.

Here is my review.

The price may be great but the book isn’t

Hiding in this book are some good points that summarise research on how we respond to prices. Even though it’s short, it would be worthwhile and rated at 3 stars. Add in more research and examples and the rating can go up to 4 stars.

However it’s very hard to absorb the ideas because of the way the book is written. It is impossible to recommend even as a Kindle Unlimited download. The price of the physical book is ridiculous.

Note to the author. Get yourself a good editor who will be cruel to be kind. Sentences are badly constructed, paragraphs are too long and there are spelling mistakes. It will be a painful process but you’ll finish with a much better book.




in Other Business Books

Perfect Pricing in One Simple Lesson by Cynthia Kocialski

The full title of this book by Cynthia Kocialski is

Perfect Pricing in One Simple Lesson: Find Your Pricing Edge, Attract More Customers, and Earn More Profit“.

In my review ,on Amazon.co.uk, I gave this book a rating of Four Stars. This means I think it is good.

Here is my book review.

A nice guide to the important issue of pricing

The key importance of pricing is often overlooked by business owners who find themselves guessing a suitable price and hoping for the best.

A change on prices up or down is often the main cause of changes in profits. Perhaps counter intuitively an increase in prices offset by a small reduction in volume is often more profitable than slashing prices to sell more. [continue reading…]

in Best Business Books

The full title of this book by Lawrence Steinmetz and William Brooks is

How to Sell at Margins Higher Than Your Competitors: Winning Every Sale at Full Price, Rate, or Fee“.

In my review at Amazon.co.uk, I gave the book a rating of FIVE stars. This means I think it is excellent.

Here is my book review.

Packed with great tips and advice on how to withstand pricing pressure from buyers

The content in this book is fantastic for anyone in business who comes under pricing pressure, either directly from customers or from sales people who have limited selling skills beyond offering discounts.

I tell my coaching clients that price is where your strategy hits the road and is truly tested. To increase sales, you need to offer better value than competitors but it’s so much nicer when those customers believe your product or service is worth more. [continue reading…]

in 5 – Lead Conversion, Best Business Books

More Gross Profit by Bob Oros

The full title of this book by Bob Oros is

More Gross Profit: Increase Your Gross Profit On Every Sale Starting Right Now

In my review posted on Amazon.co.uk, I gave it 3 Stars.

Here is my review.

A book of sales tips that include how to resist price pressure

I’m a believer in the old maxim “turnover is vanity but profit is sanity” so I welcome books that focus on profit or margin growth.

However this proved to be a disappointment because it wasn’t the book I was expecting from its title. [continue reading…]

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How to Influence Buying Criteria by David J. Pannell

The full title of this book by David J. Pannell is

How to Influence Buying Criteria and open doors to More Business, Better Margins in Less Time

In my review posted on Amazon.co.uk, I gave it 3 Stars.

Here is my review.

Worth reading if price versus value is a consistent problem

This book looks at the issue where customers focus on price when there are clear differences in value between competing products. The challenge for the sales person (this book is sales rather than marketing focused) is to open up the conversation. [continue reading…]

in Other Business Books