A price war is quite a ride. You have to have substantial resources behind you and it takes some fortitude to hang in there. For many businesses, the most sensible approach is to do nothing. Eventually competitors that are not profitable because they are selling product below its cost will be forced out of the market.
In the bricks-and-mortar world, the lowest price strategy is never a good idea for a smaller business. The simple truth is it is that lowest price providers are the domain of large companies with deep pockets and big wallets.
Even low overhead concerns are going to struggle without size to their advantage. For service businesses, it can be even harder since it is unlikely that they can bill a full 40 hours per person per week.
The Internet, however, does provide a smaller business with greater opportunity to be a low cost provider although the Internet presents its own unique set of marketing challenges.
10 TIPS TO AVOID A PRICE WAR.
To avoid a price war you must be prudent about pricing and do your homework. As annoyed as sales teams might become with you, don’t just knee-jerk react to the situation by dropping your prices.
- SEND THE PURE PRICE-BUYER SOMEWHERE ELSE. Price buyers deplete your energy. They want the world for a fraction of the price that it is really worth. They tend to be more demanding of your time than anyone else and they are disloyal to your business. It is better to concentrate your efforts on retaining buyers that pay a fair price and let others deal with those that scrape the bottom of your profitability barrel.
- GET PROOF OF THE PROBLEM. Rumour isn’t proof. You must get evidence from your sales teams or customers that competition is, in fact, reducing its price. So many businesses disguise true pricing burying extra fees and charges so make sure you see the whole deal (including the fine print) in writing.
- HAVE A STORY TO TELL THAT ISN’T ABOUT PRICING. Sounds a bit silly, right? But you’d be amazed how many businesses try to compete on price alone – and bargain-hunters are likely to put pressure on sales if pricing is topical. There are branding, superior design, bundling, value-adds and a myriad of other strategies and techniques you can use to sell on value, not price.
- CHARGE A NUISANCE FEE. This is one of my favourites for anyone in the service industry that is being pestered by someone who doesn’t want to pay them a fair price. If they are going to annoy you, make them pay for the privilege. Double your quote. If they go ahead, they will pay for the time-wasting that will inevitably follow.
- IN TOUGH SELLING ENVIRONMENTS, SALES TEAMS EMBELLISH. I love sales teams, don’t get me wrong, but those finding it tough to meet targets may embellish the size of the pricing problem because they want to close deals to secure their bonuses.
- LOOK TO ESTABLISH A PATTERN. If competitive price reduction is occurring, look to establish a widespread pattern of it. Preferential pricing may be offered by competitors to secure one or two strategically important customers and it’s akin to commercial suicide to reduce pricing across your whole customer base in response to it.
- ESTABLISH THAT PRICING IS THE PROBLEM. You need to establish that competitive pricing the primary reason you are losing market share. It may be an entirely different product attribute that is causing the problem.
- ESTABLISH THAT COMPETITORS ARE DELIVERING. You need to determine whether competitive products are in fact being delivered. It’s one thing for pricing to be offered, it’s another for orders to be fulfilled.The impact that reducing pricing has on your own gross profit margin is happening to your competitor. If a competitor is undertaking prolific price reduction, it normally indicates severe financial pain. They may not survive long enough for you to react. Don’t just leap on the gravy-train and head right out of business with them.
- DIFFERENTIATE THROUGH NON-PRICE FACTORS. For example, product positioning, features or functionality, quality and other attributes including after-sales support (warranties, help and so on).
- CREATE A SECOND BRAND. Launch a low-price brand to protect existing brands and to compete head-on with low cost competitors.
When you reduce your price, margin is not the only problem a marketer has to face. Most brands are not budget brands. Heavy discounting can impact adversely on how brands are perceived by customers, and this is especially true for those brands positioned as luxurious.
The key to responding to pricing pressure is to apply and test various pricing techniques at the marketer’s disposal. Getting creative about how pricing is deployed might still ultimately affect margin, but it does afford the marketer a much greater opportunity to keep hard-won positive brand perceptions alive.
Check out more of my posts on pricing strategy.