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The Art (and Science) of Winning a Price War: The Price War Strategy
Featured Best Practice on Pricing Strategy
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“To win one hundred victories in one hundred battles is not the acme of skill. To subdue the enemy without fighting is the acme of skill.” Sun Tzu, The Art of War
Many companies are competing on the basis of low prices. Yet, Price Wars represent a fundamentally different dynamic than simply trying to get an edge on price. These begin when competitors aggressively and repeatedly set prices below-established levels. In some cases, companies that initiate price wars engage in self-destructive behavior which can lead to downward pricing spirals. For this reason, companies are advised never to adopt a Price War Pricing Strategy.
Whenever Price Wars erupt, companies find themselves in commodity traps. Profits narrowed considerably and weak competitors had difficulty staying in business. It has been a common view that the way to winning a Price War is to have a superior cost structure. However, further studies showed that this is not the only way to gain the upper hand. Under the right circumstances, it is possible for a company to win a Price War by leveraging a specific set of strategic capabilities.
Winning a Price War is possible and even the weakest company can succeed.
Are You in a Price War?
A Price War is a commercial competition characterized by the repeated cutting of prices below those of competitors. Price Wars begin when competitors start to aggressively and repeatedly set prices below the established levels. Are you in the middle of a Price War or caught in the middle of it? Are you winning or losing?
There are usually no winners in a Price War but it is possible for a company to win a Price War. Companies just need to have the ability to read the business context and how things are changing. They must have the skills to analyze market data to be able to identify trends and opportunities. Following the principles of Lean Management will help implement organizational changes across the value chain.
Winning a Price War: The 5 Rules of Engagement
Price Wars can be won. Companies just need to know and establish the 5 Rules of Engagement when entering a Price War.
Winning the Price War is a matter of strategy. There are 5 Rules of Engagement companies must master to gain the upper hand in a Price War without the need of destroying your competitors. Let us take a look at the first 2 Rules of Engagement.
- Prepare for Battle. When competition is intense and you are losing market share to discounters, you need to prepare your company for a Price War. The challenge here is to be a supermarket for everyone. What is the best thing to do here? Prepare yourself.
- Pick the Battle. Picking the battle means strategically selecting your battlefield. With a market share that has fallen, the company needs to find a way to cut the price differential with the competitor. What is the challenge here? The challenge here is to be mid-priced, as well as be service-oriented rather than being positioned as a retailer with the lowest prices. Having the lowest prices may not always be the best position to take but you can still win the Price War by taking the best course of action.
The other 3 Rules of Engagement are Choosing Your Enemy, Staying under the Enemy Radar, and Aligning Revenues with Cost Structure. As you take on each rule, there are appropriate courses of action to take. Taking the appropriate action or strategy spells a big difference.
Are Price Wars Here to Stay?
There will always be Price Wars and Price Wars will always occur for a reason. Price Wars happen when new or existing market players engage in pricing strategies so that they can gain product acceptance and leadership.
However, while Price Wars may be beneficial to buyers due to lower prices, it can be a disadvantage for companies involved as lower prices reduce profit margins and threaten survival. The difference between winning and losing is in the strategy: The Price War Strategy.
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About Joseph RobinsonJoseph Robinson is the Vice President of Strategy at Flevy. Flevy is the marketplace for best practices in business management. Learn how the Fortune 100 and global consulting firms do it. Improve the growth and efficiency of your organization by leveraging Flevy's library of best practice methodologies and templates. The documents at Flevy (https://flevy.com) are of the same caliber as those produced by top-tier management consulting firms, like McKinsey, BCG, Bain, and Accenture. Most were developed by seasoned executives and consultants with 20+ years of experience. Flevy covers 200+ management topics, ranging from Digital Transformation to Growth Strategy to Lean Management. You can peruse a full list of management topics available on Flevy here. Prior to Flevy, Joseph worked as an Associate at BCG and holds an MBA from the Sloan School of Management at MIT. You can connect with Joseph on LinkedIn here.
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