Business Success: The Price War

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Introduction

Price is among the weapons that are used by business organizations to ward off competition. Resorting to cutting the price to join the battle may be easy and quick action to take. However, such an action has its consequences on the profits of the company (wisegeek, 2010). This move can cause the company’s profits to become smaller and smaller and eventually the company can get itself incurring losses. Also, another negative consequence of this may be that the customer’s perception of the quality of the product may turn out to diminish. Therefore, in any business organization to respond to a price war, a very keen assessment of the potential moves to take should be carried out (Miltenburg, 2005).

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This paper is going to consider the moves those managers of small manufacturing are supposed to take in response to a rival company planning to introduce a similar product that this company offers to the market at a price that is lower for the company to maintain its profitability and even remain competitive on the market.

Fighting the price war

In a fight to win customers, the business organizations employ a broad range of tactics to ward off the business organization with which compete. On an increasing level, price is often chosen as the best weapon and this often results in a price war (Anonymous: How to fight a price war, 2010).

The goal of engaging in a price war is normally to create low-price appeal but this may result in a perpetual war that can bring about a decline in the companies’ profits (BNET Business dictionary, 2010). The price wars can bring about situations that are psychologically debilitating and economically devastating that take an unusual toll on a firm, individual or even industry profitability. Regardless of who emerges the winner, all the competitors seem to end up worse off than before they engaged in the fight.

Several managers of business organizations will have to engage in a price war at some point in their profession. Every reduction in price is prospectively the first round, and some discounts regularly cause retaliatory price cuts that in turn rise into a full-blown price war. For this reason, it is often wise to carry out keen consideration of other available options before engaging in a price war or making a response to an aggressive price move with the retaliatory price (Markovits, 2008).

A business organization can often evade a debilitating price war altogether by employing several alternative tactics. There is an arsenal of weapons that can be used apart from the price cuts that the managers who are faced with a potential price can consider for them to avoid unnecessary losses and remain competitive in the market.

Carry out diagnosis

In general terms, the starting point of the price wars is where a particular company or companies come up with a thought that the prices on the market are too high or in some cases a particular company or companies are willing to carry out the buying of the market share at the expense of the existing margins. The rising numbers of price wars in the current times are a result of the managers having a mind of looking at a change in price as an action that is easy, quick and one that can be reversed.

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In the case where there is no understanding (very well) of companies of each other or don’t trust one another, the price wars can crop up with speed. By a manager or managers having the understanding of the causes of the price wars and their characteristics, they can come up with decisions that are quite sensible and the best way to fight these wars as well as the right time to fight the wars. They will also be aware of the right time to run away from these wars as well as the right time to start such a war.

The initial step is diagnosis. This small manufacturing company should carry out a clear diagnosis of the intentions of the rival company that is intending to lower the price (.Anonymous: Avoiding price wars, N.d). For instance, the company may be having the intention to drive this company out of the market. The rival company may be lowering the prices at the local market but elsewhere it is maintaining high prices. In such a case, the managers need to take two basic moves. The first move is to call the customers in the competitor’s home market to make them aware of the fact that this rival company that is cutting the prices is offering special deals in another market. The second move is to call the local customers and request their support and ensure that there is pointing out that the customers would be facing a monopolist. That the lowering prices in the short run will lead to too long-run increases in the prices.

Effective diagnosis involves carrying out an analysis of four main areas in the operations theater. These areas include the customer issues like price sensitivity and the segments of the customers that may come up if the prices change, the issues of the company like the capabilities of the business, its cost structures, the strategic positioning, the contributor issues, or the rest of the players within the industry whose profiles or self-interest may affect the outcome of a price war. The business organizations that take their time to examine these four areas normally realized that they actually have very few different options at their disposal which include carrying out the diffusion of the conflict, fighting this conflict out on various fronts or retreating (Business encyclopedia, 2010).

Stop the war before it starts

Various ways do exist of stopping the price war before its start. Among these ways is to ensure the competitors get to understand the rationale behind the company’s pricing policies. The everyday low pricing, the policies of price matching, among other public statements may provide communication to the rival companies of the fact that the company’s intention is to fight the price by employing all the resources that are possible. However, most often such declarations about the prices that are low or about taking part in promotions are not strategies of low price at all. Such declarations are simply meant to inform the rival companies that your company has preference to engage in competition on other dimensions other than price. When these rival companies come to an agreement that such competitions will lead to the realization of more profitability than engaging in competition using the price, these companies will tend to go along (Holloway, 2003).

Another option is ensuring that the rival companies get to know that your companies costs are low. This is an option that offers an effective warning to the competitors about the prospective outcomes of a price war. Therefore, sometimes it is of great benefit for the company to reveal its cost advantage. In essence, a company that has relatively low variable costs takes joy in enviable advantage in this war because the rival companies are not in a position to sustain a price that is below their own variable costs in the long run. However, if the company is a low-cost company, it is supposed to carefully make the consideration of its strategic positions before it set up or joins a price war. Temptations may arise to cut the price where there are low costs but engaging in doing this may lead to the diminishing of the perception of the customers about the quality and this may start up a price war that is not profitable (Rao, Bergen, and Davis, 2000).

Responding with non-price actions

Occasionally, there is a revelation from the analysis of the market that the various customer segments show different levels of sensitivity to price as well as quality. Knowing the basis for particular price sensitivities of the customers allows the managers to respond in a most creative way to a price cut of a competitor without engaging in the prices of the company itself. For instance, a company may be in a position to put much focus on quality instead of on price. The way a company can evade a price war is to warn its customers to risk and especially the risk of quality that is poor.

Using selective pricing actions

There can be letting of those companies that engage in price wars to selectively reduce the rates for just those segments of the population that are subjected to competitive threat by using the options that are complex like the quantity discounts, and a multiple-part pricing, among others. Among the common and classic tactics is to carry out the changing of the choices of the customers or carry out the reframing of the price war in the minds of the customers. Bergen, Davis, and Rao (N.d), give an example of the MacDonald Company as one of the companies that carried out this successfully when it encountered Taco Bell’s “59-cent taco strategy” in the 1980s. By this company carrying out bundling of fries, burgers, and drink, into “value meals” the company avoided the war from burgers versus tacos to “lunch versus lunch”. In the same manner, the managers who are smart utilize the quantity discount programs or loyalty programs to protect themselves from price wars. These managers evade across-the-board cuts in prices and they hold to a minimal level the price reductions to those areas in which they can be defenseless. In this manner, the managers can carry out the localization of a price war to a limited theater operation; bringing down the level of opportunities for the war to fall into other markets. Thus, another selective pricing tactic might be to carry out the modification of only particular prices (Anonymous, Management in an economic crisis, 2010).

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Business organizations may opt to reduce prices in particular channels. Possibly the one greatest price cuts driver and the consequent price wars are excess capacities. Being tempted to carry out the revival of the plants that are idle through the stimulation of demand by use of the lower prices is often not resistible. However, those managers that are smart make the consideration of other options first. For example, the business organizations in the industry of packaged goods on a frequent basis sell off-brand or private-label versions of their own national brands at the prices that are low, making sure that any battle in price will not cause damage to the brand equity of the nation brands (Sethuraman, Srinivasan and Kim, 1999).

By getting involved in “stealth marketing” which is also known as undercover marketing, by carrying out the selling of inexpensive functionally alike alternatives through the brand names that are not related or the markets that are foreign may still set up a price war. If the customers realize that the private-label product quality is comparable to the branded option, then there will be a need for the branded option price to come down (Anonymous: Stealth marketing, 2009). In several instances, the best option may be to leave plant capacity idle. This is for the reason that the effort to carry out the reviving of the idle plant may bring in price competition that is margin-destroying. As a matter of fact, the idle capacity can be utilized as a weapon, a business organization in turn exert the plausible threat of being in a position to overflow the market with the products that might be cheaper in case the rival commences cutting its prices.

Fight it out

Even if there might be a strong feeling that engaging in retaliatory price cuts is supposed to be carried out as a last resort, there is recognition that in some cases it is quite impossible to evade a price war. Precisely, there comes a time when a company must take part in a preventative strike and trigger a price war or make a response to the rival company’s discount with a price cut that is matching or one that is much deeper. Taking an example, there might be a case where there is the threatening of the core business of the company and here a retaliatory price cut can be employed to send off a signal that your company has the intentions to fight hard and long. In the same manner, we might have a case where there is the identification of customers that are sensitive to price. So in this case, if the company has a cost advantage, or when the company has adequate resources, or when the company can achieve the economies of scale by carrying out the expansion of the market, or even where there is a possibility of eliminating the competitor for the reason of the barriers to entry into the market, then in any of such cases your company engaging in using price as a tool for competition might be the best option.

However, several long-run implications do exist of competing on price. For instance, according to Mankiw (2008), a trend of cutting the price may inform the customers to stay in anticipation of lower prices and this will result in those customers that may have high level of patience to carry out the deferment of their purchases until the time another price cut will come. More so, a company that engages in the price-cutting sets up a reputation for being regarded as a company that is low-priced and this may result in the doubt about the quality as well as the image of other products under the umbrella brand and on the quality of the products that will be brought to the market in time to come. Also, the cuts in the prices have repercussions for other participants within the market whose self-centeredness may be injured by the reduced prices.

If the chosen means of the defense in a price war is simple retaliatory price cuts, this should be implemented with speed and unambiguously so that the rivals get to know that their gains of sales from price cuts may cause the competitors to carry out price cuts in time to come.

Retreat

According to Anonymous (Avoiding a price war, 2010), some business organizations come up with a decision not to fight a price war and instead give up some market share rather than engaging in a long battle that might turn out to be costly. Bergen, Davis, and Rao (N.d) give examples of companies that have carried out this and yet remained competitive in the market. They give an illustration about the 3M and DuPont which are companies that put their focus on developing innovations as part of their core strategy and these companies have always been willing to give up market share instead of engaging in price wars that would turn have turned out to be unprofitable. Bergen, Davis, and Rao (N.d) point out that the 3M Company is proud of the fact that in the coming five years, 40 percent of the revenues of this company will come from the products that will be new. In the instances where the company has retreated from the price wars instead of fighting, it has seemingly come out ahead.

Conclusion

In conclusion, it is recommended that the small manufacturing company should not rush into engaging in a price war without considering other options. For instance, the company should carry out a diagnosis of the intentions of the rival company that is seeking to lower the price of the product that this small company is currently offering to the market to be able to take appropriate measures such as informing its customers about having a monopoly in the market.

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More so, the company should make it known to its rival(s) about the intention of having its price policies in place. This may be as a result of the low costs and by the rival company engaging in price war can cause injury to itself and therefore there is need for this rival company to employ other ways to compete on the market other than price. However, the company having low costs and willing to engage in price wars should be a move that has to be employed after having several considerations and among these considerations is the customers’ perception of the quality of its product.

More so, the company may as well use other means to engage in competition other than the price competition. Such means may involve the use of the quality of the product to win the competition. Another move that can be carried out by this company may be deciding to engage in price competition in the case where the company carries a clear analysis of this rival company that intends to cut the price and seeing the possibility of the company encouraging the barriers to entry or reentry in the long run. However, such a move should be taken with a lot of caution since this can build in the customers’ mind an idea that there will be still further price cuts in the price and as a result such customers can postpone making the purchase and this will bring down the level of the company’s sales. So this seems not to be a very good option.

In case the company has idle capacity, the idle capacity can be utilized as a weapon, this company may, in turn, exert the plausible threat of being in a position to overflow the market with the products that might be cheaper in this case where the rival company is willing to commence cutting its prices.

Reference List

Anonymous, (2010) Avoiding a price war [Online]. Small business information. Web.

Anonymous, (2010) How to fight a price war [Online]. SlideShare Inc. Web.

Anonymous, (2010) Management in an economic crisis [Online]. Global Trade Media. Web.

Anonymous, (2009) stealth marketing [Online]. Optimum7.com. Web.

Anonymous, (N.d) Avoiding price wars [Online]. Vedpuriswar. Web.

Bergen M. E., Davis S., and Rao A. R., (N.d) How to fight a price war [Online]. University of Minnesota. Web.

BNET Business dictionary, (2010) Price war [Online]. BNET. Web.

Business encyclopedia, (2010) Pricing [Online]. BNET. Web.

Holloway S., (2003) Straight and level: practical airline economics. 2nd Edition. Ashgate Publishing, Ltd.

Mankiw N., G., (2008) Principles of Economics. 5th Edition. Cengage Learning.

Markovits R.S., (2008) Truth or economics: on the definition, prediction, and relevance of economic efficiency. Yale University Press.

Miltenburg J., (2005) Manufacturing strategy: how to formulate and implement a winning plan. Productivity Press.

Rao R. A., Bergen M. E., and Davis S., (2000) How to fight a price war: Analyzing the battle ground [Online]. Harvard Business School. Web.

Sethuraman R., Srinivasan V., and Kim D., (1999) Asymmetric and neighborhood cross-price effects: some empirical generations. Marketing science. Vol. 18, Issue 1. [Online]. Web.

wisegeek, (2010) what is a price war? [Online]. Conjecture corporation. Web.

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