Nobody Wins a Price War
Price wars are the nuclear option of the marketplace: Nobody wins.
When two companies are hell-bent on hacking away at each other through discounts and markdowns, one usually lands in bankruptcy while the survivor limps into an uncertain future. It’s almost always just a race to the bottom. Nonetheless, there are certain scenarios that could make it easier for your business to survive a price war. Your best bet is to avoid price wars altogether, but if you find yourself headed toward one — you should know that there are only a few types of companies that are likely to come out on top:
Big Money Companies
The company with the biggest bank account clearly has the advantage in a price war. While the competition is worried about how to pay their bills, these companies can live off their reserves until the price war is over and they once again raise prices to normal levels.
Other price war survivors are companies that offer a wide range of products or services. If a price war erupts over a specific product, the impact is not nearly as dangerous as it would be if the company only had a single product offering. The bad news is that when a larger company decides to create a price war, they often slash prices across the board.
Some companies are built to be lean and mean in the marketplace. By intentionally structuring themselves to as a low-cost, no-frills alternative, these companies position themselves to survive price wars because they are inherently more capable of absorbing price reductions than the competition.
Unfortunately, most small businesses don’t fall into any of these three categories. But even though they lack the money, diversity and cost-efficiency of larger competitors, small businesses have a unique ability to squeeze into a fourth category of price war survivors:
Small businesses are very adept at identifying and exploiting gaps in the marketplace. For most small businesses, the implementation of non-price differentiation strategies is enough to help them survive a price war. This might mean leveraging your ability to provide personalized service or deciding to specialize in a specific market segment. Anticipate the needs of the marketplace and do whatever is necessary to survive until the price war ends and peace is once again restored to the marketplace.
And remember that not all price wars involve actually lowering prices. When a company sets out to aggressively out-advertise it’s competitors – sometimes with continuous, expensive promotions – a de facto price war is at hand. Although actual prices have not be reduced, the cost to the companies in trying to keep pace with aggressive competitor advertising has a similar effect on profitability as in a traditional price war. And in the end, advertising wars have the same negative effect of reducing company (and industry) profit while the battle rages on.
So, rather than get pulled in to a struggle you can seldom win, it is always much better to focus on differentiating your products and services from those of your competitors. Align your branding strategy to match customer expectations, and you will find yourself less likely to be in the position where you must always react to your competitor’s actions.
For more information or to discuss your particular needs in this area with an
expert business coach, please contact me to schedule a complimentary initial
telephone consultation where we’ll provide a customized
12-point growth plan for your business.
Breakout Consulting, LLC
Dearborn, MI ∙ San Diego, CA