by Freddy Tran Nager, Founder of Atomic Tango + Price Pacifist; photo by Artem Beliaikin on Unsplash…
Imagine you’re selling lemonade from your friendly neighborhood stand when — BAM! — you’re torpedoed by a rival who cuts his price in half. That inglorious bastard! Here you two had settled upon a comfy price point — legally, of course, with no collusion — and he had to upset the balance…
Now if you retaliate by cutting your price below his, he simply sneers and does you one better. It’s like watching fighters compete to see who can beat themselves up the quickest. Ultimately both sides lose. One goes out of business, the other goes on life-support.
Welcome to the world of price wars, the business equivalent of mutually assured destruction. It’s death by a million price cuts: undermining your brand while denying yourself profits. Yet we’re seeing price wars proliferate as businesses scramble for all the sales they can get. When there’s no organic market growth, companies try to steal market share, and the unimaginative resort to price cuts, even in luxury markets.
The problem: only four kinds of companies can win a price war mostly unscathed…
- Those with really deep pockets.
- Those with multiple sources of revenue, so their discounts hurt only one product.
- Those structured to have the lowest operating costs.
- Those who base their brand identity on low pricing.
Only one company seems to have all four attributes: Walmart. Want to engage in a pricing war with them? Wait, let me get my blindfold — I can’t bear to watch.
But sometimes you have no choice. How should you respond if a competitor launches a price war against you?
Prepare For Price Wars Far In Advance
Before hostilities break out, anticipate the worst. That runt competitor — or the one not even in your industry — might start feeling aggressive and/or desperate. So here’s what you should do:
- Create Switching Costs: Make switching to a cheaper product undesirable for your customers. For example, some companies enact loyalty programs (like frequent flier miles). Major MBA programs don’t allow credit transfers to other schools. And for computer users, switching might entail buying new software and peripherals, or even learning a new operating system.
- Think Different Already: Hundreds of marketing experts — including Jack Trout, Al Ries, Guy Kawasaki, and Adam Morgan — have shouted “differentiate, differentiate, differentiate!” for decades. Yet we still see rampant copycat behavior, mostly perpetrated by MBA’s who worship spreadsheets and “best practices.” By emphasizing non-price differentiation — like service, image, design, and quality — you can turn a price war into a comparison of apples and oranges. Or Apples and PC’s. Right now, Microsoft is launching a pricing attack on Apple, but Apple users are laughing it off. A low price will not entice them back to a PC. If anything, Microsoft’s price-based attack is reinforcing the position of Macs as high-end products, which may drive PC users to explore Apple.
- Team Up: As mentioned in another post (“Marketing During a Recession Part 4: Come Together Right Now”), partnering with another company is a great way to differentiate. Collaborating with a complementary company or charity not only distinguishes you from your competitors, it introduces you to their customer base in the friendliest possible way, and can strengthen your brand through association.
- Diversify: If your competitor has only one product, build your product portfolio. You can then live off your other products and until the competitor burns out. You can even scare him off by lowering your price to cost on that one product. Established companies with large portfolios or simply big bank accounts often react that way when a tiny startup tries to “steal market share” with penetration prices.
Retaliate To Pricing Attacks In Full Force
So despite all your preparation, some kamikaze pricing manager decides to hit you anyway. Here are alternatives to joining him in self-immolation:
- Launch an Ad War: So your attacker has cut his profits to the bone? Before too many customers gravitate to his lower price, strike back with a salvo of creative advertising — which your cash-strapped competitor might now have trouble matching. This works particularly well in markets driven by image. Sure it’s expensive, but in contrast to a price war, creative advertising will boost your image. And if your assailant joins you in the ad war, both of you can win: as I described in “Rules of Competition: The Magic Number is 2,” an ad war draws additional attention to your product category, and it cuts other competitors out of the picture.
- Hit Close to Home: Nothing will shiver the timbers of your competitor more than you going after his home market. So go ahead and lower your prices — but only in his backyard. This isolates any damage to your brand, and tells him you mean business. If you can afford it, throw in some ads as well.
- Offer a Twofer: Offer your customers a 2-for-1 deal (or 3-for-2 or some other such combo), rather than, say, lowering your price by 50%. This loads up customers with more of your product, so that they won’t shop for it again in a while. It also clears out inventory and convinces stores to give you more shelf space.
- Surrender: Yes, really. Give up. No, it’s not cowardice — it could be a great business move. Determine if this market is really worth fighting over, particularly now that he’s turned a profitable product into a commodity. If the market is flat or shrinking, then simply say “you win” with a big toothy grin, and devote your time and energy to pursuing a more profitable category. Intel did that with memory chips, ceding that market to lower-cost Asian manufacturers, and moving onto profitable processors.
Smart companies continuously invest their profits into developing higher-end products to launch as soon as — or even before — their other products become commodities. They are the own fiercest competitors. The leading electronics firms do this, abandoning commodified products like CD players to back-alley sweatshops in Shenzhen.
One additional benefit of surrendering is that you’ve now burdened your competitor with a bunch of price-centric customers who he taught to be cheapskates. Your brand gets the halo of being a cutting edge innovator, while he falls into the oozing muck crawling with other low-equity bottom feeders. (“Oh, hi, Dell, funny seeing you here…”) Ironically, by launching a price war, he alerted you that it was time to move on while he wound up paying the ultimate price.
• Cows and Dogs in a Bear Market: Applying the BCG Matrix to Marketing
• Marketing During a Recession, Part 1: Pricing
• Saks and the City: How to Lower Your Standards for Fun and Profit
Every time I read your posts, I found how much you are right, and … almost nobody (businesses) applies these rules ! In fact, there are no strategies in price wars. Many, act as in Pavlov’s theory: It’s crisis? Ok, let’s cut our prices! I saw it in Romania from the beginning of the crisis. Even if in Romania the crisis were far away, local business were quick to starts cutting prices – as a measure of ‘preparing for crisis’. Now, more than 150,000 companies got out of business!
And, for the majority, marketing is still an expense not an investment!
Greetings from Romania!
[…] it simply costs too much to change brands. I cited a few of these switching costs in my article “How to Win a Price War” […]