If we are faced with a drastic drop in prices by our competition, the first solution that will come to mind is to also lower our prices in the hope of maintaining at least our market share. At first glance it seems an effective measure to contain a drop in our sales, but an action like this is very likely to produce a further reduction in prices from our competition, thereby triggering a price war .
In marketing, we say that we are facing a price war when a competitor’s price reduction is followed by a further price reduction by another competitor, and later the first one lowers its prices again, producing new rounds of price reductions. .
Normally, companies are managed under market share and sales volume objectives , very few establish the maximization of their profits as a strategic priority. This fact produces an excessive obsession with the loss of market shares, causing continuous price drops among competitors, this being the main cause of price wars.
Possibly most companies that start or are involved in a price war are not aware of the necessary increase in their sales volumes to compensate for their price reduction. For example, if sales prices are reduced by 30%, it is necessary to sell 42.8% more, to achieve the same sales figures and what is even more striking, it would be necessary to sell 300% more, to maintain the same benefits (using an average gross margin of 40%) . If the reduction in prices cannot be compensated with the increase in the volume of sales required, it begins to directly affect the financial capacity of the company, in some cases causing a business disaster.
Faced with a drop in prices of our competition, we cannot fall into the mistake of making a hasty decision and we must evaluate the situation by analyzing two key aspects: the strategic position in which our competitor finds himself and the cost of our reaction. Once we have analyzed these two aspects, we will be in a position to take one of the four different alternatives to face a price war .
If the competitor who has started the price war is in a strategic position weaker than ours and the reaction via price is very expensive, a priori the most recommended would be not to react by lowering prices and focus on reinforcing marketing strategies of our product.
If the competitor who initiates the price war is in a weak competitive position and if an attack via price is also not costly for our company. An attack could sometimes be justified by price.
A classic case study in any business school is the one that occurred in Spain in the 90s, with Galerias Preciados and El Corte Ingles as protagonists. Finally and after several years Galerias Preciados did not endure the price war and a few months after closing it was absorbed by El Corte Ingles.
Contrary to the previous situations, if our competitor is in a stronger strategic position than ours and also, reacting would be costly for the company. Entering into a price war could mean the final closure of the company. In such a situation, the most recommended is to learn to live with it, adjusting the entire business strategy.
A clear example can be seen with the Swedish furniture and decoration sales company, IKEA. With its efficient business model, it is practically impossible to compete on price. The competing companies where IKEA has settled know this, therefore only those that have reinvented themselves survive, adjusting their entire business strategy.
If our competitor is in a strong strategic position and our reaction would not be costly, the only possible reaction to this scenario is an energetic defense. Otherwise we are in danger of being knocked out of the game. The only objective is to repel the attack in such a way that our competitor reconsiders his offensive, dismissing the price war as both parties will ultimately lose.
In the face of a price war, I recommend avoiding confrontation as much as possible, not focusing solely and exclusively on price-based competition strategies and trying to redirect them to healthier competitions such as product improvements, innovations, customer service, etc.