How to Fight a Price War

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How to Fight a Price War

• HDCS 4393/4394 InternshipDr. Shirley Ezell

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Introduction

• Price wars are often described as the battle to
  win the customer.
• Creating low prices can degenerate into the loss
  of profit. Check out the airline story .
• Most managers will be in a price war during their
  careers. However, one should consider other
  options before starting a price war or
  responding. Learn alternative tactics.

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What are Alternative Tactics?

• A. Take Inventory Price wars start because
  somebody thinks prices in a market are too high.
• B. Managers may view a price change as an
  easy,quick and reversible action.
• C. By understanding price war causes and
  characteristics, manager can make sensible
  decisions about when how to fight one.

4
First Step Diagnosis

• Check out the case of the small commodities
  supplier.
  - What did he do?
  
  - What is the diagnosis?
  - What two
  things did the manager do?

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First Step Diagnosis

• Intelligent analysis leading to accurate
  diagnosis emphasizes understanding the
  opportunities for pricing actions based on
  current market trends and responding to
  competitors resources. One looks to see why a
  prices war is occurring and where to look for
  resources to do battle.

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Stop the War Before it StartsThere are several
ways to stop a price war before it starts.

• Reveal your strategic intentions and
  capabilities Offer to match competitors prices,
  offer everyday low pricing, or reveal your cost
  advantage.
• Compete on Quality Increase your product
  differentiation by adding features or build
  greater awareness of existing features and
  benefits. Try to emphasize the performance tasks
  in low-priced options and co-opt contributors.
  Form strategic partnerships by offering exclusive
  deals with suppliers, resellers, or providers of
  related services.
• Check out the Sara Lee strategy.

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What Can We Learn from Other Companies?

• Check out the Winn-Dixie/ Big Star lessons.
• Ritz Carlton lessons.

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What are your Price Responses?

• Use complex price actions. How?
  
• Offer bundled prices two-part pricing, quantity
  discounts, price promotions, or loyalty programs
  for products.
• Introduce new products introduce brands that
  compete in customer segments that are being
  challenged by your competitors.
• Start simple price actions adjust the products
  regular price in response to a competitors price
  change or another potential entry into the
  market.

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What else Should you Think about Before Joining a
Price War?

• What do you know about your customers and their
  price sensitivity? Some consumers are more
  sensitive to quality than price. Some industrial
  buyers are willing to pay more for on-time
  delivery or consistent quality for their own
  profitability. Businesses that adopt a
  one-size-fits-all approach to pricing need to
  rethink this approach.

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What else Should you Think about Before Joining a
Price War? (Cont.)

• Analyze your competitors cost structure,
  capabilities, and strategic positioning. Remember
  many unprofitable price wars happen because a
  company sees an opportunity to increase market
  share or profits through lower prices, only to
  find out that competitors will respond.
• You need to pay attention to who will respond and
  how. Use environmental scanning to identify
  company adversaries and their likely mode of
  operation.

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What do you Know about Contributors,
Collaborators, and Other Interested Parties?

• A. You need to monitor other players in the
  industry who may affect price war outcomes (i.e.
  suppliers, distributors, providers of
  complementary goods and services, customers,
  government agencies).
• B. Contributors may help reduce price competition
  by enhancing the products value (see Intel
  examples).
• C. What can we learn from McDonaldss,Taco Bell
  and 3M?

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What are the Lessons we can Learn?

• What can we expect during fighting it out and
  retreat?
• And what can we learn from its never too early
  to prepare?