The Art (and Science) of Winning a Price War: The Price War Strategy

Editor's Note: Take a look at our featured best practice, McKinsey Pricing Strategy Framework (142-slide PowerPoint presentation). Curated by McKinsey-trained Executives Unlocking Success with the Complete McKinsey Pricing Strategy Framework Business Toolkit In today's fiercely competitive business landscape, pricing strategy has emerged as one of the most potent weapons in a company's arsenal. How you price [read more]

Also, if you are interested in becoming an expert on Strategy Development, take a look at Flevy's Strategy Development Frameworks offering here. This is a curated collection of best practice frameworks based on the thought leadership of leading consulting firms, academics, and recognized subject matter experts. By learning and applying these concepts, you can you stay ahead of the curve. Full details here.

* * * *

“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.

1. 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.

2. 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.

Interested in gaining more understanding of Price War Strategy? You can learn more and download an editable PowerPoint about Price War Strategy here on the Flevy documents marketplace.

Do You Find Value in This Framework?

You can download in-depth presentations on this and hundreds of similar business frameworks from the FlevyPro Library. FlevyPro is trusted and utilized by 1000s of management consultants and corporate executives. Here’s what some have to say:

“My FlevyPro subscription provides me with the most popular frameworks and decks in demand in today’s market. They not only augment my existing consulting and coaching offerings and delivery, but also keep me abreast of the latest trends, inspire new products and service offerings for my practice, and educate me in a fraction of the time and money of other solutions. I strongly recommend FlevyPro to any consultant serious about success.”

– Bill Branson, Founder at Strategic Business Architects

“As a niche strategic consulting firm, Flevy and FlevyPro frameworks and documents are an on-going reference to help us structure our findings and recommendations to our clients as well as improve their clarity, strength, and visual power. For us, it is an invaluable resource to increase our impact and value.”

– David Coloma, Consulting Area Manager at Cynertia Consulting

“As a small business owner, the resource material available from FlevyPro has proven to be invaluable. The ability to search for material on demand based our project events and client requirements was great for me and proved very beneficial to my clients. Importantly, being able to easily edit and tailor the material for specific purposes helped us to make presentations, knowledge sharing, and toolkit development, which formed part of the overall program collateral. While FlevyPro contains resource material that any consultancy, project or delivery firm must have, it is an essential part of a small firm or independent consultant’s toolbox.”

– Michael Duff, Managing Director at Change Strategy (UK)

“FlevyPro has been a brilliant resource for me, as an independent growth consultant, to access a vast knowledge bank of presentations to support my work with clients. In terms of RoI, the value I received from the very first presentation I downloaded paid for my subscription many times over! The quality of the decks available allows me to punch way above my weight – it’s like having the resources of a Big 4 consultancy at your fingertips at a microscopic fraction of the overhead.”

– Roderick Cameron, Founding Partner at SGFE Ltd

“Several times a month, I browse FlevyPro for presentations relevant to the job challenge I have (I am a consultant). When the subject requires it, I explore further and buy from the Flevy Marketplace. On all occasions, I read them, analyze them. I take the most relevant and applicable ideas for my work; and, of course, all this translates to my and my clients’ benefits.”

– Omar Hernán Montes Parra, CEO at Quantum SFE

Want to Achieve Excellence in Strategy Development?

Gain the knowledge and develop the expertise to become an expert in Strategy Development. Our frameworks are based on the thought leadership of leading consulting firms, academics, and recognized subject matter experts. Click here for full details.

"Strategy without Tactics is the slowest route to victory. Tactics without Strategy is the noise before defeat." - Sun Tzu

For effective Strategy Development and Strategic Planning, we must master both Strategy and Tactics. Our frameworks cover all phases of Strategy, from Strategy Design and Formulation to Strategy Deployment and Execution; as well as all levels of Strategy, from Corporate Strategy to Business Strategy to "Tactical" Strategy. Many of these methodologies are authored by global strategy consulting firms and have been successfully implemented at their Fortune 100 client organizations.

These frameworks include Porter's Five Forces, BCG Growth-Share Matrix, Greiner's Growth Model, Capabilities-driven Strategy (CDS), Business Model Innovation (BMI), Value Chain Analysis (VCA), Endgame Niche Strategies, Value Patterns, Integrated Strategy Model for Value Creation, Scenario Planning, to name a few.

Learn about our Strategy Development Best Practice Frameworks here.