— Enterprise —

Key Strategic Responses To Price Wars

Editorial Note

Price is the most potent weapon companies use to capture market share, mitigate competition or destroy a rival, out of the market

Price wars permeate all sections of the industry in a free market competition and extends to broad categories of products, either sold online or through brick-and-mortar entities. In a keenly contested market place, whether it’s a fast-paced world of knowledge products, internet appliances or commodities, price wars are a fact of life in business, and warrants strategies to start, retaliate and flee. Price is the most potent weapon companies use to capture market share, mitigate competition or destroy a rival, out of the market.

Though price wars can be economically devastating to the company, individual and the industry in general where industry profits are corroded at precipitating speeds, price wars are becoming increasingly common and fierce. A classic case is the airline price wars in the early 1990’s started by American Airlines, Northwest and other US carriers, where one price cut forced competitors further lower retaliatory cuts enabling record air travels, soaring topline revenues and astounding bottom-line losses. The cumulative losses for a financial year outweighed the overall industry profits generated from its inception! The following strategies could be considered as alternative tactics before a company decide to fight off competition with an eye-for-an-eye, tooth-for-a-tooth retaliatory price cuts.

Diagnosing the problem:

An astute and intelligent analysis of the competitor may reveal the underlying motives of the price cut. If a market leader perceives a threat from a smaller competitor whose business thrives on benchmarked products and services package based on global best practices, the market leader may want to drive it out of competition by reducing the price well below the smaller companies’ marginal costs. A retaliatory strategy definitely is not slashing the price to suffer debilitating losses but perhaps to inform the customers/distributors/channel partners in the leader’s home market that the company is offering a preferential price in a different market. Also, the smaller company can resort to the help of the customers/distributors/channel partners in its affected market to warn them the consequences in driving them out of the market. The smaller prices today will translate to much higher prices because the market leader will become a monopolist, once the smaller company cease to exist. The following areas are to be analyzed to formulate a coherent, lethal and rational retaliatory strategy:

• Customers- A thorough understanding of the customer sensitivities towards a price change and the possibility of new customer segments that can emerge which can be tapped.
• Own Company – what are the cost structures, scale, resources and capabilities and market positioning.
• Competitor- who are the competitors, their business cost structures, scale, capabilities and strategic positioning.
• Collaborators/Distributors/Contributors- Analyzing how the collaborators and contributors’ self-centered actions and collusions can greatly affect the revenues of the company. A classic case is when Motorola introduced budget priced mobile phones for emerging markets in China and Brazil, their distributors quickly colluded to create a “gray market” for these low-priced phones in the US market. Instead of shipping the low-cost versions to destinations in China and Brazil, Motorola distributors diverted them to the most profitable US and European markets that triggered a price war in these geographies. Frequently the products never even left the port.

Stop before it starts:

Sometimes it yields great results to reveal your company’s strategic intentions and cost structures to competition, just to intimidate them and dissuading from a price war. Sara Lee has the lowest variable costs in the industry but its price and product positioning is higher than competition. The brand has generated considerable brand equity and brand loyalty in its target segment and the competitors are aware of the lowest variable cost structures of Sara Lee. The company has achieved brand differentiation and premium at a higher price point and not taking advantage of its low-cost structures for a lower price positioning just to widen the customer segments and thereby suffer brand dilution through lower prices and consequently lower perception of quality.

Non-price actions:

Companies can fight price wars not by joining the band wagon of retaliatory cuts but also by preserving the status quo brand image by adding more value into the product through feature upgrades, increasing the perception of quality and also packaging the fringe benefits, after sales support and enhancing the service level agreements attractively. When the East Asian currency crisis that started in 1997, caused considerable economic turmoil in these Asian Tiger economies, Malaysia was hard hit through massive devaluation of the Ringgit and falling tourism due to instability, the hotel operators were forced to reduce the room rates even further to attract customers. But Ritz Carlton in Kuala Lumpur decided to preserve their up-market brand identity, association and positioning not by reducing the price of room rates but by increasing the luxury accoutrements. Guests were received with music, mimosas and could choose a model room. There was a dedicated technology center which run 24/7 to fix laptops and other electronic devices. There was a “bath menu” comprising of exquisite beverages and snacks served when the guests languished in the pools. Ritz Carlton was able to maintain the monthly gross operating profit without a single Ringgit in price cut even in the face of blighted macro-economic factors. Redesigning product and service portfolio for an enhanced customer experience and superior value addition is a powerful strategy to combat price-war.

Selective pricing:

Managers can resort to selective price cuts in channels and segments that are more vulnerable to price war than adopting an across the board reduction. Companies can creatively introduce multiple part pricing, quantity discounts, time-of-use pricing, price bundling and loyalty programs for those segments under threat, thus localizing the area of operation and preventing a spillover of the price war into other geographical markets. When Northwest airlines perceived a threat from its competitor Sun Country airlines with less infrastructure and resources, Northwest reduced the price to one sector; Minneapolis to Boston round trip to match Sun Country’s fares. As this was the most profitable sector for Sun Country airlines disrupting the market share of North West, it was able to fend competition through this single “fighter flight” and avoid an all-out price war that could have resulted in system wide slashing of fares. This was a highly successful strategy of selective price modification. A company can also change customer choicesas an alternative tactic in the event of a price war. McDonald’s offered value meals by bundling fries, burgers and drinks to combat Taco Bell’s 59 cent strategy and therefore reframed competition from Tacos versus Burgers to “lunch versus lunch”.

Fighter Brands and Mixed Bundle:

A company can also introduce a fighter brand with design-to-value features to fight a price war. this will preserve the brand image of the national brand that has great brand loyalty. Burger King introduced “Big King” as its discount product to fight “Big Mac” of McDonalds with a compelling advertising tagline, “like a Big Mac, only it has more beef than bread”. Big King had 75% more beef than Big Mac but offered at half the price. Sales rose 10% in its introductory pilots for Big King which was perceived as a better and cheaper alternative to the Big Mac, targeting the price-sensitive customers. Thus, the fighter brand helped Burger King to fight competition without discounting its Big Mac equivalent, the signature Whopper, whose loyal patrons continued paying a premium price for it.

Companies can also resort to offering a mixed bundle where instead of reducing prices to match competitor, a discounted bundle that includes the main product plus another product the competitor cannot offer. Brick-and-mortar electronics retailers fight online platform companies in the B2C segment by offering free deliveries, removal of old appliances, financing and service plans. Offering quantity discounts for a larger size or contract, price promotions, two-part pricing, introducing loyalty programs are other methods to retain the existing customer base defecting to low-cost price warriors.   

 Disengage:

Sometimes it’s better to recede some market share than to engage in full blown price war and to suffer substantial losses, monetary as well as goodwill. 3M and Dupont focus on innovations at their core strategy and competency, but when the videotape (invented by 3M) market was dominated by high-volume, low-price and low margin suppliers, 3M decided to abandon that business in the mid 1990’s. Similarly, Intel diversified into processor chips and became a world leader and an iconic brand when it stopped manufacturing its DRAM chips due to intense competition from Taiwanese manufacturers.

Conclusion:

Price wars in business as with any other physical wars fought with weapons does inflict substantial losses to the parties engaging, participating and propagating them. Companies should resist the temptation to drop prices to match competitors’ when they reduce prices. If the market leader has a superior product, integrated marketing communications have to be intelligently crafted to convey the value of product/service comparatively against low priced competitors. Designing iconic products like Apple and Bang & Olufsen, constantly innovating in the tradition of 3M and Gillette, branding a community in the form of Harley Davidson, Lego, Airbnb and Red Bull, selling experiences like Starbucks, Four Seasons and Nordstrom are time-tested strategies to fend off low-cost rivals. Only when all other pricing strategies fail to generate sales and revenues, should the company slash prices to match competition as the last resort. But as long as free market economic systems, competition and efficiency are the rule of the game, price wars will continue to be a fact to be lived with. As in the words of the great philosopher Plato “Only the dead have seen the end of the war”.