What is a price war?
A price war is when one supplier (usually) believes they can secure more market share by lowering their price. “If we cut our prices, we can drive up our sales volume,” these companies’ leaders say. The war happens when competitors lower their prices in an effort not to cede market share. This creates a chain reaction that often leads the entire market to lower prices. It also creates a “race to the bottom” mentality where buyers expect lower prices because they fail to distinguish between providers.
There are known outcomes from participating in a price war, few of which are positive:
- The incredible shrinking profit margin: Every transaction has become increasingly transparent – and this transparency is the enemy of profit margins. It’s hard to maintain big profit margins if your customers are constantly able to research and compare your prices with competitors, and generally whittle away at your selling prices.
- “Temporary” price cuts tend to become “permanent:” If you try to compete on price in the short run, customers are going to be reluctant to go back to paying higher prices in the future – many companies find that it is often difficult to raise prices once customers get used to paying a lower price.
- You will never be the best in the world at “low prices:” In the entire world, you’re never going to be the lowest-price option. There will always be someone who is willing to go lower on price. We are all competing in a global market and lower-priced talent in lower-wage countries. If price is the only selling point, none of us are going to survive for long.
How to Avoid a Price War
There are companies that don’t participate in price wars. These companies hold the line on pricing and manage to keep customers. How do they do it? They remind their customers of the value they provide. Even in industries like metals, where prices are quoted universally each day, a supplier can differentiate based on their performance, whether that be consistently delivering on time, accurately, damage free, etc. The key is to remind your customers of your competitive advantages.
Price War Winners and Losers
In a price war, the first winner is the customer, at least in the short term. In the long term, the customer may also wind up being the loser.
In the short term the customer gets what they perceive to be a commoditized product at lower prices. Because suppliers can often be poor at communicating their value, customers can often be surprised to learn that the product/service they viewed as a commodity, is in fact differentiated by value. And, in choosing a low cost provider, they have surrendered much of the value they relied upon.
In the end, the biggest loser in a price war is the supplier who has not done a good job of tracking and communicating their value. These companies likely have to lower their prices to keep business, and because this puts a drain on profit margins, they are often forced to cut costs as well. This further pushes the supplier down the price trap, which ultimately can be a race to the bottom.
Don’t try to compete on price; it’s ultimately a loser’s game. Instead, find out what you do better than anyone else – your unique competitive advantage. Then measure, improve, and communicate your competitive advantages.