How to fight aPrice War.docx
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How to fight aPrice War.docx
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HowtofightaPriceWar
HowtoFightaPriceWar
ByAkshayR.Rao,MarkE.BergenandScottDavis
INTHEBATTLETOCAPTURETHECUSTOMERcompaniesuseawiderangeoftacticstowardoffcompetitors.Increasingly,priceistheweaponofchoice–andfrequentlytheskirmishingdegeneratesintoapricewar.
Creatinglowpriceappealisoftenthegoal,buttheresultofoneretaliatorypriceslashingafteranotherisoftenaprecipitousdeclineinindustryprofits.Lookattheairlinepricewarsof1992.WhenAmericanAirlines,NorthwestAirlines,andotherU.S.carrierswenttoe-to-toeinmatchingandexceedingoneanother’sreducedfares,theresultwasrecordvolumesofairtravel-andrecordlosses.Someestimatessuggestthattheoveralllossessufferedbytheindustrythatyearexceedthecombinedprofitsfortheentireindustryfromitsinception.
Pricewarscancreateeconomicallydevastatingandpsychologicallydebilitatingsituationsthattakeanextraordinarytollonanindividual,acompany,andindustryprofitability.Nomatterwhowins,thecombatantsallseemtoendupworseoffthanbeforetheyjoinedthebattle.Andyet,pricewarsarebecomingincreasinglycommonanduncommonlyfierce.Considerthefollowingtwoexamples:
∙InJuly1999,Sprintannouncedanighttimelong-distancerateof5centsperminute.InAugust1999,MCImatchedSprint’soff-peakrate.Laterthatmonth,AT&Tacknowledgedthatrevenuefromitsconsumerlong-distancebusinesswasfalling,andthecompanycutitslong-distanceratesto7centsperminuteallday,everyday,foramonthlyfeeof$5.95.AT&T’sstockdropped4.7%thedayoftheannouncement.MCI’sstockpricedropped2.5%;Sprint’sfell3.8%.
∙E-Tradeandotherelectronicbrokersarechangingthecompetitiveterrainoffinancialserviceswiththeirextraordinarilylow-pricedbrokerageservices.Theprevailingpricefordiscounttradeshasfallenfrom$30to$15to$8inthepastfewyears.
Thereisalittledoubt,inthefirstexample,thatthemajorplayersinthelong-distancephonebusinessareinapricewar.Pricereductionsper-secondbilling,andfreecallsaretheprincipalweaponstheplayersbringtothecompetitivearena.Thereislittletalkfromanyofthecarriersaboutservice,quality,brandequity,andothernonpricefactorsthatmightaddvaluetoaproductorservice.Virtuallyeverycompetitivemoveisbasedonprice,andeverycountermeasureisaretaliatorypricecut.
AkshayR.RaoisanassociateprofessorandcoordinatorofthedoctoralprograminthedepartmentofmarketingattheUniversityofMinnesota’sCarlsonSchoolofManagementinMinneapolis.Mark,E.BergenisanassociateprofessorofmarketingattheCarlsonSchool.ScottDavisisprincipalandfounderofStrategicMarketingDecisions,aconsultancyinSacramento,California.
Todiscussthisarticle,joinHBR’sauthorsandreadersintheHBRForumatwww.hbr.org/forum.
Pricewarsarebecomingmorecommonbecausemanagerstendtoviewapricechangeasaneasy,quick,andreversibleaction
Inthesecondexample,thecompetitivesituationissubtlydifferent–andyetstillverymuchapricewar.E-Trade’ssuccessdemonstrateshowtheemergenceoftheInternethasfundamentallychangedthecostofdoingbusiness.Consequently,evenbusinessessuchasCharlesSchwab,whichusedtocompeteprimarilyonlow-priceappeal,arechantinga“quality”mantra.Meanwhile,MerrillLynchandAmericanExpresshaverecognizedthattheemergenceoftheInternetwillaffectpricingandarechangingtheirpricestructurestoincludefreeonlinetradesforhigh-endcustomers.Thesecompaniesappeartobeengagedinmorefocusedpricingbattles,unlikethe“globalized”pricewarinthelong-distancephonemarket.
Mostmanagerswillbeinvolvedinapricewaratsomepointintheircareers.Everypricecutispotentiallythefirstsalvo,andsomediscountsroutinelyleadtoretaliatorypricecutsthatthenescalateintoafull-blownpricewar.That’swhyit’sagoodideatoconsiderotheroptionsbeforestartingapricewarorrespondingtoanaggressivepricemovewitharetaliatoryone.Often,companiescanavoidadebilitatingpricewaraltogetherbyusingasetofalternativetactics.Ourgoalistodescribeanarsenalofweaponsotherthanpricecutsthatmanagerswhoareengagedinorcontemplatingapricewarmayalsowanttoconsider.
TakeInventory
Generally,pricewarsstartbecausesomebodysomewherethinkspricesinacertainmarketaretoohigh.Orsomeoneiswillingtobuymarketshareattheexpenseofcurrentmargins.Pricewarsarebecomingmorecommonbecausemanagerstendtoviewapricechangeasaneasy,quick,andreversibleaction.Whenbusinessdonottrustorknowoneanotherverywell,thepricingbattlescanescalateveryquickly.Andwhethertheyplayoutinthephysicalorthevirtualworld,pricewarshaveasimilarsetofantecedents.Byunderstandingtheircausesandcharacteristics,managerscanmakesensibledecisionsaboutwhenandhowtofightapricewar,whentofleeone-andevenwhentostartone.
Thefirststep,then,isdiagnosis.Considerasmallcommoditiessupplierthatsuddenlyfoundthatitslargestcompetitorhadslashedpricestoalevelwellbelowthesmallcompany’scosts.Oneoptionthesmallercompanyconsideredwastoloweritspriceinatit-for-tatmove.Butthatpricewouldhavebeenbelowthesupplier’smarginalcost;itwouldhavesuffereddebilitatinglosses.Fortunately,afewphonecallsrevealedthatitsadversarywasattemptingtodrivethesupplieroutofthelocalmarketbyunderpricingitsproductslocallybutmaintaininghighpriceselsewhere.Thesuppliercorrectlydiagnosedthepricingmoveaspredatoryandelectedtodotwothings.First,themanagercalledcustomersinthecompetitor’shomemarkettoletthemknowthattheprice-cutterwasofferingspecialdealsinanothermarket.Second,hecalledlocalcustomersandaskedthemfortheirsupport,pointingoutthatifthesmallersupplierwasdrivenoffthemarket,itscustomerswouldbefacingamonopolist.Theshort-termpricecutswouldturnintolong-termpricehikes.Thesupplieridentifiedsolutionsthateschewedfurtherpricecutsandthusavertedapricewar.
Intelligentanalysisthatleadstoaccuratediagnosisismorethanhalfthecure.Theprocessemphasizesunderstandingtheopportunitiesforpricingactionsbasedoncurrentmarkettrendsandrespondingtocompetitors’actionsbasedontheplayersandtheirresources.Notonlyisitnecessarytounderstandwhyapricewarisoccurringormayoccur,italsoiscriticaltorecognizewheretolookfortheresourcestodobattle.
Gooddiagnosesinvolveanalyzingfourkeyareasinthetheaterofoperations.Theyarecustomerissuessuchaspricesensitivityandthecustomersegmentsthatmayemergeifpriceschange;companyissuessuchasabusiness’scoststructures,capabilities,andstrategicpositioning;competitorissues,suchasarival’scoststructures,capabilities,andstrategicpositioning;andcontributorissues,ortheotherplayersintheindustrywhoseself-interestorprofilesmayaffecttheoutcomeofapricewar.(Foramoredetailedexplanationofsuchanalyses,seethesidebar“AnalyzingtheBattleground.”)
Companiesthatstepbackandexaminethosefourareascarefullyoftenfindthattheyactuallyhavequiteafewdifferentoptions-includingdefusingtheconflict,fightingitoutonseveralfronts,orretreating.We’lllookatsomeofthosestrategiesandhowcompanieshavedeployedthemsuccessfully.
StoptheWarBeforeItStarts
Thereareseveralwaystostopapricewarbeforeitstarts.Oneistomakesureyourcompetitorsunderstandtherationalebehindyourpricingpolicies.Inotherwords,revealyourstrategicintentions.Pricematchingpolicies,everydaylowpricing,andotherpublicstatementsmaycommunicatetocompetitorsthatyouintendtofightapricewarusingallpossibleresources.Butfrequentlythesedeclarationsaboutlowprices,oraboutnotengaginginpricepromotions,aren’tlow-pricestrategiesatall.Suchannouncementsaresimplyawaytotellcompetitorsthatyouprefertocompeteondimensionsotherthanprice.Whenyourcompetitorsagreethatsuchcompetitionwillbemoreprofitablethancompetingonprice,they’lltendtogoalong.ThatispreciselywhathappenedwhenWinn-DixiefollowedtheBigStarsupermarketchaininNorthCarolinaandannouncedthatit,too,wouldmeetorbeatmutualrivalFoodLion’sprices.Aftertwoyears,thenumberofequipricedproductsamong79commonlypurchasedbranditemsatthesupermarketshadmorethandoubled.Further,theoverallmarketpricelevelhadincreasedfortheseproducts.Whathappened?
Thestoresstoppedcompetingonprice.Infact,thedatasuggestthatFoodLionraiseditspricesafteritscompetitorsannouncedtheywouldmatchFoodLion’sprices.
Tactic
Example
NonpriceResponses
Revealyourstrategicintentionsandcapabilities
Offertomatchcompetitors'prices,offereverydaylowpricing,orrevealyourcostadvantage
Competeonquality
Increaseproductdifferentiationbyaddingfeaturestoaproduct,orbuildawarenessofexistingfeaturesandtheirbenefits.Emphasizetheperformancerisksinlow-pricedoptions.
Co-optcontributors
Formstrategicpartnershipsbyofferingcooperativeorexclusivedealswithsuppliers,resellers,orprovidersofrelatedservices
PriceResponses
Usecomplexpriceactions
Offerbundledprices,two-partpricing,quantitydiscounts,pricepromotions,orloyaltyprogramsforproducts
Introducenewproducts
Introduceflankingbrandsthatcompeteincustomersegmentsthatarebeingchallengedbycompetitors
Deploysimplepriceactions
Adjusttheproduct'sregularpriceinresponsetoacompetitor'spricechangeoranotherpotentialentryin
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