May 17, 2009

How to Win a Price War (Hint: Don’t)

by Freddy J. Nager, Founder of Atomic Tango LLC + Price Pacifist

“War, huh, yeah
What is it good for
Absolutely nothing
Uh-huh
War, huh, yeah
What is it good for
Absolutely nothing
Say it again, y’all
…”
— Edwin Starr, “War”

Imagine you’re minding your own business, selling lemonade from your friendly neighborhood stand, when — BAM! — you’re torpedoed by a rival who cuts his lemonade price in half. That bastard! Here you two had settled upon a comfy price point — legally, of course, with no collusion whatsoever — and he had to upset the balance…

Now if you retaliate by cutting your lemonade prices below his, he simply sneers and does you one better. It’s like watching two ultimate fighters compete to see who can beat himself up the quickest. Ultimately both sides lose. One goes out of business, and the other is so seriously damaged he has to go on life-support.

Welcome to the world of price wars, the business equivalent of mutually assured destruction. It’s death by a million price cuts — undermining your brand while denying yourself profits at the same time. And yet, we’re seeing a lot of price wars these days as businesses scramble for all the sales they can get. When there’s no organic market growth, companies try to steal market share from each other, and the unimaginative resort to price cuts, even in luxury markets.

Here’s the problem: only four kinds of companies can win a price war mostly unscathed…

  1. Those who have really deep pockets.
  2. Those who sell multiple products or have other sources of revenue, so their discounts only hurt one product.
  3. Those who are fundamentally structured to have the lowest operating costs in the market.
  4. Those who base their brand identity on low pricing.

Only one company comes to mind that has all four attributes: Wal-Mart. Want to engage in a pricing war with Wal-Mart? Wait, let me get my blindfold first — I can’t bear to watch.

But sometimes you have no choice. What do you do if a competitor launches a price war against you?

Prepare

Before hostilities ever break out, anticipate the worst. That runt competitor you feel comfortable ignoring now — or the one who’s not even in your industry — might be feeling a little aggressive and/or desperate. So while you’re still rolling in the money, here’s what you should do:

Create Switching Costs: Make the idea of switching to a cheaper product undesirable for your customers. For example, some companies enact loyalty programs (like frequent flier miles) to retain customers. Major MBA programs don’t allow you to transfer credits to another school. And for computer users, switching might entail buying new software and peripherals, or even learning a new operating system.

Think Different Already: Make your product very different from the competition. Hundreds of marketing experts and executives — including Jack Trout, Al Ries, Guy Kawasaki, Seth Godin, Adam Morgan, and Marty Neumeier — have been saying “differentiate, differentiate, differentiate!” for decades. Yet we still see rampant copycat behavior in all industries, mostly perpetrated by MBA’s and engineers who were taught to worship spreadsheets and “best practices” instead of creativity.

By emphasizing your non-price differentiation — like service, image, design, and particularly quality — you can turn a price war into a comparison of apples and oranges. Or Apples and PC’s. Right now, Microsoft is launching a full-scale pricing attack on Apple, but current and prospective Apple users are laughing it off. A low price will not entice them back to using a PC. If anything, Microsoft’s price-based attack is reinforcing the position of Macs as high-end products.

Team Up: As I mentioned in an earlier post (“Marketing During a Recession Part 4: Come Together Right Now”), a great way to differentiate is to collaborate with another company. No, not with your competitors. That’s illegal. Rather, form an exclusive alliance with a complementary company or charity. This not only distinguishes you from your competitors, it also extends your reach to a new customer base, and it can strengthen your brand through association. So let’s say you form an alliance with a Boston terrier-rescue society, to whom you donate a portion of your revenue. This helps justify a higher price and retain customers who are mad about terriers.

Diversify: Build your product portfolio so that a price-based attack only hits one product. You can then live off the earnings of your other products and ignore the pricing attack until the competitor tires out. If your attacker has only one product, you can even lower your price on that one product below cost and scare him off. Established companies with large portfolios or simply big bank accounts often react that way when a tiny startup tries to “steal market share” with penetration prices.

Respond

Let’s say that even with all your preparation, some kamikaze pricing manager decides to hit you anyway. Here are some alternatives to joining him in pricing self-immolation:

Launch an Ad War: So your attacker has cut his profits to the bone? Don’t wait: before too many customers gravitate to the lower price, strike back with a salvo of creative advertising — which your cash-strapped competitor might now have trouble matching. This works particularly well in markets driven by image. Sure it’s expensive, but unlike a price war, creative advertising will boost your image. And if your assailant joins you in the ad war, there are additional benefits for both of you: as I described in “Rules of Competition: The Magic Number is 2,” an ad war draws additional attention to your product category, and it cuts other competitors completely out of the picture.

Hit Close to Home: Your competitor’s home, that is. Nothing will shiver the timbers of your competitor more than seeing you go after his home market. So go ahead and lower your prices — but only in his backyard. This isolates any damage to your brand, and tells him you mean business. If you can afford it, throw in some ads as well.

Offer a Twofer: Offer your customers a 2-for-1 deal (or 3-for-2 or some other such combo), rather than, say, lowering your prices by 50%. This loads up customers with more of your product, so that they won’t be back shopping for a while. It’s also a good way to clear out inventory and convince stores to give you more display space.

Surrender: Yes, really. Give it up. No, it’s not cowardice — it could actually be a great business move. If your competitor launches a price war, analyze the situation and determine if this market is really worth the fight, particularly now that he has knocked the profit out of it and turned a perfectly good product into a commodity. If you think there’s still value in it — and you’re well prepared — then go ahead and fight. But if the market is flat or shrinking, and you determine it’s not worth fighting over, then simply throw up your hands, tell him “you win” with a big toothy grin, and devote your time and energy to pursuing a more profitable product category.

A smart company continuously uses its high profits to develop better products to launch as soon as — or even before — any of its other products becomes a commodity. The leading electronics firms do this all the time, abandoning commoditized products like CD players to some back-alley sweatshops in Shenzhen. During the ’80s, Intel did this when low-priced competitors entered the memory chip market: Intel simply abandoned the entire industry so it could focus on more sophisticated — and infinitely more profitable — processors.

One added benefit to surrendering is that you’ve now burdened your competitor with a bunch of price-centric customers that he taught to be cheapskates. Your brand gets the halo of being a cutting edge innovator, while he falls into the oozing muck crawling with other low-equity bottom feeders. (“Oh, hi, Dell, funny seeing you here…”) Ironically, by launching a price war, he did you a favor by alerting you that it was time to move on — while he wound up paying the ultimate price.

Update 3/8/10: Oops. Don’t look now, but even Walmart is starting to lose ground in its continuous price war against the world. Target and dollar stores are giving Walmart a taste of their own medicine.

Related Articles:
•    “Cows and Dogs in a Bear Market: Applying the BCG Matrix to Marketing”
•    “Marketing During a Recession, Part 1: Pricing”
•    “Saks and the City: How to Lower Your Standards for Fun and Profit”

Shameless plug: Need consultation on competitive pricing and other marketing strategies? Contact Atomic Tango

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Freddy is the Founder & Creative Strategist of Atomic Tango. He also teaches at the University of Southern California (go Trojans!), shoots pool somewhat adequately, and herds cats. Freddy received his BA from Harvard and his MBA from USC.

2 Responses

  1. Hi Freddy,

    Every time I read your posts, I found how much you are right, and … almost nobody (businesses) applies these rules ! In fact, there are no strategies in price wars. Many, act as in Pavlov’s theory: It’s crisis? Ok, let’s cut our prices! I saw it in Romania from the beginning of the crisis. Even if in Romania the crisis were far away, local business were quick to starts cutting prices – as a measure of ‘preparing for crisis’. Now, more than 150,000 companies got out of business!
    And, for the majority, marketing is still an expense not an investment!

    Greetings from Romania!

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