The Idea in Brief
Price wars—retaliatory cuts in prices to win customers—can devastate managers, companies, even entire industries. Yet they’re increasingly common in electronic and traditional commerce. Witness the great price battle of 1999 in the long-distance phone industry: after the dust cleared, AT&T, MCI, and Sprint all saw their stock prices dip by as much as 5%.
To survive a price war unscathed, you need weapons other than price cuts. Emphasize your product’s quality, for example, or superior service. This article outlines both non-price and price tactics that let you walk away with the spoils of war.
The Idea in Practice
The best way to escape a damaging price war is not to jump into the fray at all. Getting pulled in can hurt your margins, teach customers to wait for the next price cut, and saddle you with a low-quality reputation. But if you have to respond—e.g., because a competitor is threatening your core business—try these tactics:
Non-price Tactics
- Reveal your cost advantage. Let competitors know that your costs are low. This signals to them that, if forced, you could drop your prices to a level others can’t match.
Example:
Sara Lee uses its low costs as an implicit threat, which discourages its competitors from considering a price duel.
- Focus on quality. By understanding your different customer segments’ price sensitivities, you can keep your prices respectable—and your customers from straying.
Example:
During the 1997 recession, Malaysian luxury hotels dropped their room rates—but then couldn’t afford to offer pricey accoutrements. The Ritz-Carlton sidestepped the price war and found low-cost ways to keep pampering guests. The result? The Ritz avoided damaging its reputation and earned an 18% gross operating profit.
- Alert customers to price-cut risks—especially low quality. Raising customers’ performance concerns makes them reconsider abandoning you for cheaper competitors.
Example:
Emphasizing that packages will “absolutely, positively” arrive on time, FedEx plays on customers’ fears when shipping time-sensitive documents. This has let FedEx accumulate formidable “brand equity”—and fiercely loyal customers.
Price Tactics
- Modify only certain prices. Discounting selectively lets you counter your competitor’s pricing ploy—without undo risk.
Example:
Discount carrier Sun Country Airlines challenged Northwest in its own Minneapolis-St. Paul hub. Rather than retaliating with across-the-board price cuts, Northwest discounted prices only on flights competing directly with Sun’s offerings. Northwest retained its overall fare structure, minimizing internal changes and fending off Sun.
- Introduce a “fighting brand”—one that competes only in customer segments challenged by competitors.
Example:
When Kao challenged the diskette market with a low-priced product, 3M launched a new brand of low-priced diskettes under the name “Highland.” 3M knew that slashing prices on its original brand might have diluted its quality image and profits—and stimulated further price cuts by Kao.
In the battle to capture the customer, companies use a wide range of tactics to ward off competitors. Increasingly, price is the weapon of choice—and frequently the skirmishing degenerates into a price war.
