Let’s start from the beginning, with the question: what is a price war? A price war occurs when competing companies continuously lower their prices to undercut the competition. A price war may be used to increase short-term revenue, or it might be used as a long-term strategy to help a company gain market share. Either way, this conflict usually ends up with all companies engaged in a price-cutting game with no winners.
The Effect of Lowering Prices
Other sellers become agitated when a seller offers a product at a price that is lower than their sales price. The other sellers decide to slash their prices because they want to stay competitive. This allows customers to take advantage of purchasing products at deeply discounted prices. Instead of developing their branding, or establishing a relationship with these customers, both of these sellers have encouraged their buyers to flock to the seller with the lowest prices for their future purchases.
Strategies to Avoid Price Wars
There are several strategies that can be employed by business owners and sales reps to avoid a price war. These strategies include price matching, evaluating competitors, product re-branding, and creative advertising.
Matching prices creates an equal playing field with sellers competing for the same sale. Buyers are forced to make informed purchase decisions rather than purchase items based on the lowest price. Sales reps can avoid agitating other sellers by matching competitor prices, rather than undercutting them.
By evaluating competitors, business owners are able to identify weaknesses. They can increase the perceived value of their own products by offering an alternative to competitor product pricing. Larger companies can afford to reduce their prices and dominate the market. This forces smaller companies to concede the lower price and redefine their target segment.
One example of this in action is Siacoin. As prices became lower, and companies began talking about centralized cloud storage systems with disdain, Siacoin offered a solution to the problem. Siacoin marketed its technology as cryptocurrency. This platform allowed Siacoin to compete against a monopoly created by large companies like Google, Microsoft and Apple.
Customers receive greater benefits and businesses lose their profit margins when companies offer more for the same price. Businesses can avoid this type of escalation by reviewing their products for appropriateness and re-branding when necessary. Most companies believe that buyers purchase a product based on brand loyalty and past purchase history. The attractiveness of a product is based on the buyer’s familiarization with the product. Features or capabilities are considered to be less important. Businesses must avoid these competency traps by not developing products with obsolete technology. Consider the example of Orbis Software Ltd. The company decided that it was necessary to re-brand as Codeless Platforms after launching its Applications Platform. By re-branding, a company creates new interest in its product.
The value of a company’s product is eroded when there are too many companies offering the same prices and benefits. Businesses can avoid this type of proliferation by targeting or overwhelming threats. Google for example, suggested that Committed Use Discounts or CUD’s were more flexible than competitors. Amazon responded by announcing Amazon Web Service or AWS.
Businesses can also respond by developing multiple strategies like renegotiating contracts to reduce lock-in periods where customers are contractually bound. They can build in review points or write contracts that do not use defined resource costs. Create value through package deals that offer free items. Provide information or additional support. Include free services or reduced shipping prices. Attractive packaging and product galleries provide additional opportunities to attract new customers.
The Keys To Success
Customers want to buy products that offer features, support, and services that the other companies cannot offer. You will win a price war by improving your customer’s experience and fulfilling these needs.