By Jeff Robinson (Author of Price for Growth)
The Non-Obvious Realities of Price Wars and How to Minimize Their Damage in Your Markets
If you’ve ever been challenged with either the potential or reality of a price war, you’ll want to read this document. Contrary to popular belief, there is rarely a justification for participating in or helping to perpetuate a price war. It’s not necessary to lower prices to compete in a price war, and doing so doesn’t leave any party in a better place long term. Read this editorial, and you’ll discover new insights that will help you make easy decisions the next time you and your company are faced with the prospect of price-based competition that can devolve into a price war. In the end, this may be an incredible opportunity for you to elevate your leadership by addressing the problem head-on, which will lead to your facilitating executive alignment across the major functional leaders of your company.
Have you ever felt like your company was being drawn into a price war?
One of the worst experiences people in pricing may ever have to deal with in their career is the dreaded price war. It’s not difficult to understand why. The most simple reason is because it is an incredibly difficult challenge that seems to be a no-win situation with no great obvious options for how to deal with it. The effects of price wars are mostly permanent in terms of the damage they create. And the major stakeholders involved usually feel compelled to play, even though they know the outcome can’t be good.
But if you approach it with the right mentality, you will find there are ways to win, even if it requires a little bit of work and a little bit of pain. You can apply good strategies to come out on top. Read on to find out more.
For reference, a price war is a situation where multiple vendors are competing primarily “on price” to win or keep their customers—where it feels like the customers are focusing almost solely on price as their main decision factor to determine who they will buy from… where legitimate value differentiators that customers should care about seem to have completely faded into the distant background, and customers make all the conversations about price…
It happens more often than you might think, especially when sales teams are given price autonomy as a weapon in a competitive marketplace. And it’s even worse when sales teams feel their products and services have no real advantage over any of the other competing companies. When sales team fear they might be at a competitive disadvantage, and their only chance is to come in with a low price, then the stage is set. When a lower price is offered by any competing vendor, the price war has begun. Other competitors may feel pressured to follow suit and respond in kind, attempting to send a message that they will not allow others to “beat them on price.”
Savvy customers now have their own weapons to join in the action. All it takes is one abnormally low price-quote from one of the competing vendors, and they can use it to try to get their “real” preferred vendor, whoever that might be, to lower their price as well.
When the other competing vendors decide to match or undercut an abnormally low price-quote, the situation is only aggravated. At some point, all participating vendors have somehow mentally justified all these lower prices as justifiable, making it more likely they will be willing to quote those same low prices in the future. And customers will expect this because they’ve seen how low a certain vendor is willing to go, and you can bet this will be a data point that will be resurfaced in any future pricing discussions. Yet, even though multiple vendors lowered their prices, only one vendor ended up winning the business, and it’s extremely likely they won it at prices that were lower than they originally needed to be to secure the business.
Yes. Price wars are more common than you think. Price wars can happen at the micro level, customer by customer, or at the macro level where prices are used as competitive detonations across entire marketplaces. And even though most companies will concede that price wars are bad for them and their markets, it's amazing how many companies continue to participate in this behavior in hopes of winning or retaining customers they feel they might otherwise lose.
Price Wars Don’t Happen by Accident: They’re Predictable Results of Good Intentions
Most of the time, people who start and participate in price wars are just trying to do their jobs to the best of their ability, and most of the time they believe they are acting in the best interest of the company. But the reality is, as we shall soon see, price wars are incredibly damaging to all participants who engage in them.
When you have a situation where people are just doing their jobs and they end up causing price wars, it becomes increasingly clear that the price wars are ultimately the result of systemic processes and practices in the business that span across multiple functions, including sales, pricing, marketing, product, and even C-Level strategy. This means that fixing the root-cause problems that give rise to price wars will likely require cooperative participation from cross-functional leaders in ways that may go against their own personal self-interests—incentives, performance measurement criteria, established processes, decision authority, and personal plans to advance their own respective careers. Because of this reality, attempting to fix the internal root causes of price wars can be nearly impossible because of the intense politics involved. It often requires bringing in an outside consultant with a direct channel to the CEO in order to objectively approach the situation with no political agenda other than to help the whole company succeed.
Diagnosing, Exiting, and Recovering from Price Wars
In order to recover from involvement in price wars, companies need to apply a clear focus to the specific pricing strategies that are needed to maximize the company’s long-term profit growth and not deviate from them. Discipline on these strategies is critical at all times before, during, and after the temptation to enter a price war. Whenever that temptation surfaces, success is dependent on two imperative actions:
First, companies must quickly and efficiently exit from participation in any price war to minimize the havoc that would otherwise be unleashed on their long-term profit strategies. This exit must be immediate and definitive. There will be no time for reflection or debate on this topic because, in price wars, the situation only gets worse over time. Price wars are metastatic cancers that progress in only one direction, and they need to be stopped in their tracks. (Stay tuned for the explanation of why below.)
Second, companies must immediately replace the prior pricing practices that got them into the price war with pricing strategies focused on strengthening existing customer relationships with the company’s most strategically important customers, while simultaneously not worrying about the opportunistic shoppers and bottom feeders that will have little impact on the company’s long-term profit growth. These replacement strategies will help insulate the company from the perceived need to participate in future price wars because of how they will be engineering customer relationships to mostly take price off the table through integrity-based pricing policies and improved customer experiences.
Achieving this is dependent on enabling analytical visibility of the customer-loyalty segment each customer belongs to. (We’ll talk about what this is and why it’s so important below.) In short, companies need an easy way to identify which customers are more likely to be more important for enabling future profit growth.
The Politics of Price Wars
Cross functional problems require cross functional solutions, driven and endorsed by cross-functional leaders. The leadership required to defeat the temptation to participate in a price war must come from a cohesive strategy, driven by pricing, supported by the CEO, and facilitated by an independent consultant with no hidden political agenda. Although Pricing leadership is the logical starting point to diagnose the situation and drive the implementation of a solution, it will be successful only when the CEO is involved, and the politics are mitigated. This is why an unbiased third party who has a deep understanding of the best practices and typical issues is ideal to play the role of objective facilitator and referee, thereby enabling faster time to action, alignment, and desired results.
Who Wins in a Price War? Ultimately Nobody.
Price wars are terrible for competing suppliers because the “spiral-down pricing” results in lower price expectations among customers and lower margins for everyone. The longer it goes on, the longer prices keep going lower and lower until there is no margin left in the business—for anybody! With lower price benchmarks, customers come to expect lower and lower prices, and it’s very difficult to get prices back to an acceptable level, even if the participants in the price war were to decide to stop fighting. In most markets, new lower price expectations can’t be undone once they’ve entered the minds of their customers. They’re generally there for good.
What most people don’t realize is that price wars can ultimately result in bad news for the customers as well. When providers are forced to lower their prices, whether they end up winning or losing, either way their margins will be pinched. They are going to be pressure to look for ways to salvage margins, in any way possible. This might result in layoffs, quality short cuts, reduced service, cheaper products and services on the back end, delays, limited availability, and many other potential problems that can start to collect under the surface. All of this can be bad for customers.
In today’s global marketplace, it is common to see some company come up with a short-term cost advantage (often from sourcing products from cheaper countries) and with this cost advantage, they try to buy their way into a market with extremely low prices. But what most customers may not realize is that these companies are not competing on an “apples-to-apples” basis. There are reasons why they have a cost advantage, and most of the time they cannot deliver the same level of service, support, reputation, confidence, etc. Most low-cost advantages are not very durable—most of the time, other vendors can quickly duplicate the “advantages” responsible for the low costs. If one company can source lower cost products from another country, what’s to keep all the competitors from eventually doing the same? The only real durable cost advantages occur within (1) the very few companies who have a secret innovation edge OR (2) dominant market share leaders who enjoy economies of scale. That’s why market share growth and leadership are so important in the first place.
For the rest of the players in any market, lower prices mean lower margins, and that puts pressure on companies to cut costs; and these cost cuts result in diminished service quality and a degraded customer experience. There’s no free lunch. Eventually it is survival of the fittest, and the fittest in this sense are the rapid innovators and the market share leaders with a true cost advantage.
When competitors start going out of business, customers slowly have less and less options for serving their needs. Eventually prices will tend to rebound because companies can’t afford to lose money forever, and customers will eventually end up paying more. The survivors of price wars are those vendors who can thrive on a low-cost structure, and that may or may not include a good customer service experience for their customers.
A Dissenting Viewpoint: Customers Just Want the Lowest Price?
I’ve had discussions with many who disagree with the notion that price wars are bad for customers. Their main argument is that customers don’t care about the long-term, and price wars can help customers get lower prices today and maybe tomorrow. Therefore, customers benefit from price wars.
I would certainly concede that there are many customers with this attitude. But I would argue that these types of customers will always have low-price options if that is what they are looking for. Certainly, I would agree that, all else equal, customers would prefer a lower price. But consider this. Data suggests that typically more than 70% of customers in most industries concede they are not currently purchasing from vendors with the lowest price, meaning they freely admit they are paying higher prices than they have to … for something… for some kind of benefit. Combine that insight with other data that shows that incumbent vendors tend to win RFPs nearly 80% of the time, despite the fact that incumbent vendors seldom quote the lowest prices among all RFP respondents. It would seem that, from just these two data points, most customers value aspects of their purchase relationships to be more important than simply getting the lowest price. It seems more likely, based on observations of actual customer purchase behavior, that the fraction of customers seeking only the lowest price is quite small. And these customers would be the minority with the propensity to constantly shop and switch their purchases to vendors with the lowest prices.
The large majority care about product, service, and transaction features that come with higher priced vendors, despite their comments about seeking to buy from the lowest priced vendor.
The implication of this is that if price wars were to force higher priced vendors to lower their prices, and at the same time reduce the associated service features they previously offered, many customers would be made worse off because they would have to buy a lower class of service than they were buying previously. For this reason, I would argue that most customers prefer something more than the minimum cost product with reduced service features, and therefore that price wars that essentially force customers to lower-priced purchase options are not great for most customers even in the short term. An analogy, if the “mother-of-all-price-wars” took place in the auto industry and forced all competitors to reduce their offerings to $5,000 Yugos (or their 2021 branded equivalents), and customers could no longer buy Lexus, Mercedes, BMW, Tesla, Ferrari, or even the Ford Taurus, … then customers would definitely be made worse off. This is ultimately what happens with any price war over the long term.
What About Dominant Market Share Leaders? Can They Benefit from a Price War?
Most experienced pricing consultants will advise companies to avoid competing in a price war. They realize how much it can damage long-term margin results. From a strategic perspective, very few companies can stand to benefit from a price war—only those companies that are so large that they have a systemic cost advantage that will allow them to survive longer than their other smaller competitors. But even then, the benefits are questionable, and they typically don’t show up until several years after the event when their economics start to equalize. And even large companies can lose a lot of money in the process.
But in some cases, it could be argued that a dominant market share leader has so much at stake, which is dependent on their ability to maintain their position of leadership, that they might be strategically better off to force a price war that only they can win than to allow a challenger to outrun their market share leadership position, even if it costs them lots of profits and pain during the price war to accomplish it. But I wouldn’t call that winning. I would call that minimizing their losses. This type of strategy can be incredibly painful and risky, and there is no guarantee that such a company would come out on top in the end. So, I would be hesitant to ever recommend such a strategy.
The Justifiable Quest for Growth: It’s Important, But Price Alone Won’t Suffice
Most companies realize the strategic importance of market share dominance and maximum sales growth to achieve the premium “star” position in their respective markets. Most companies know about the many lopsided advantages enjoyed by high-growth, market-share-leading companies, including recruiting and retention advantages, economies of scale, cost advantages, brand recognition and marketing advantages, internal advancement opportunities for employees … the list goes on and on. High revenue growth and market share leadership are extremely important, and companies that make this strategic objective a top priority typically outperform those who do not. This has been well documented with the rise of companies like Amazon, Apple, Google, Dominos Pizza, Netflix, and other fast-rising market leaders, especially when you compare them to their next nearest challengers. Consider the fates of Barnes & Noble, RIM (Blackberry), Yahoo!, Pizza Hut, and Blockbuster. Market share dominance in fast growing markets is undeniably the most important measure of strategic success, in terms of a company’s valuation and future profitability.
It is a valiant aspiration to win the market share war, but it should be accomplished with strategically planned innovations across all the major factors that affect the customer value equation and the customer value experience. Unfortunately, some companies resort to low-price strategies as the dominant vehicle for attracting and retaining customers. This is what leads to the dreaded price war. When multiple market competitors decide to use nothing more than low price as their primary strategy to grow and protect their own market share, this is a price war by definition. When price is the dominant weapon being used, companies soon realize that this weapon is incredibly imprecise in the damage it inflicts. It doesn’t just hurt the other competitors. Using price as a weapon hurts those who use it just as much as it hurts those it is being used against.
The Fear of Losing Customers: The Main Justification for Overly Aggressive Pricing
It’s understandable why people feel the need to price lower than where they believe the competition is pricing. It usually boils down to one fear: the fear of losing customers, either new or existing. Either (1) they are competing to win a new customer and they are afraid that if they don’t lower their price, they will lose and someone else will win, or (2) they feel like they are at risk of losing an existing customer relationship because a competitor has come in with a lower price, and if they don’t match or undercut the competitor’s price, their existing customer will stop buying from them and switch to the competitor.
It’s typically one of the two reasons, either offensive or defensive. And it’s important to distinguish between the two, because it’s typically not both, and competing for new customers is very different than competing for existing customers, especially when we are talking about the strategic and loyal customers that most companies really care about and depend on for their future profit growth.
Two Important Realities Regarding Your Customers
There are two important realities that should be considered:
New customers are typically much more price sensitive than existing customers, and…
Some customers will always be price sensitive and therefore are much less valuable than customers who want to find a good supplier and settle into a stable, recurring purchase relationship. Some customers have a greater propensity to be loyal than others.
It’s important to identify the difference between customers who have the propensity to be long-term loyal customers and the customers who have the propensity to be long-term opportunistic shoppers.
One of the worst things a company can do is ruin their core strategic customer relationships by chasing inherently disloyal customers with abnormally low prices. This happens when you allow an artificially low “price expectation” to leak into your existing customers’ minds.
Price Wars Really Aren’t Necessary
Most of the time, companies don’t actually have to fight price wars (by lowering their prices) because the customers they really care about aren’t the ones most likely to leave. Unfortunately, most of the time companies don’t get far enough to realize this. Instead, they see a very price-sensitive opportunistic customer threaten to leave if they don’t get a lower price, and they either jump to match price to keep the customer from leaving, or they don’t and they see the customer go to another vendor. Either way, when this happens, it reinforces their fear that all customers are about to defect, and so they become more committed to prevent any further losses by matching or beating price quotes from the competition. But if you step back and look at the situation objectively, when you see a customer leave because you refused to cave with a lower price, all you really learned was that one of your most disloyal customers might buy from someone else if they are offered a lower price.
As a pricing leader, you deserve better. You deserve better analysis and more thoughtful conclusions. But your sales reps don’t typically think in terms of customer loyalty segments. And they typically don’t understand the difference in strategic value between a high-inertia loyal customer vs. an unprofitable bottom feeder who provides almost no strategic value to the organization.
In order to succeed, the entire organization needs to understand that all natural customer loyalty segments don’t respond to low-price offers from the competition in the same way. And all customers don’t have the same strategic value to the future profit growth of the organization.
The Five Major Loyalty Profiles
Let’s review the five different loyalty profiles found in most companies:
Price sensitive bottom-feeders: These are customers who always by from the lowest price supplier, and most value-focused companies have either found a way to serve them with a very low-cost product/service line or decided not to try to sell to them because of the risk of destroying the value proposition to other customers. These customers should typically represent less than 10% of total revenues because they contribute very little in long-term profit contribution. (Note: if this group represents much more than 10% of your business, that’s probably a big part of the problem. You should double check and re-evaluate that.)
Opportunistic buyers: These are customers who recognize value and are constantly on the lookout for a good deal that has high value for a relatively attractive price. These customers typically make up less than 20% of revenues and less than 10% of profits, and they typically demand a higher cost to serve as they don’t display much loyalty.
Light inertia repeat-buyers: These are customers who have formed habits out of buying from you and would prefer not to buy from another vendor as long as their current buying relationship is not disrupted. Most won’t switch for a lower price as long as their existing vendor is in the competitive “ballpark.” These customers can make up 20-50% of a company’s profits and revenues, perhaps more or less depending on the company’s strategy for driving loyal purchase behavior.
Heavy inertial repeat-buyers: These are customers who have built up very entrenched buyer inertia over several years, including systems or processes dependent on the products or services they buy from you. They are very unlikely to switch, especially in the short term, even if there is a significant price difference from other competitors. This is because their buyer inertia has created what would be very high switching costs they would have to incur to move to another vendor. They may become angry at a price increase or a refusal to discount, but they are more likely to spend their time trying to talk or bluff you into giving them price relief, perhaps even opening up a bid process, in an attempt to get you to lower your price, but they are not likely to leave as long as they see you trying to make an attempt to be fair to them. You may have seen studies that show that 80-85% of open bids and RFPs are won by the incumbent vendor. This is why. They don’t want to leave because it would be very disruptive to their business. These customers typically account for a large percentage of your company’s profits (60%+) due to large volume and healthy margins.
Die-hard captive customers: These customers depend on your products and services to such a degree that they are willing to pay significant price premiums if necessary to keep the relationship intact. Their reasons for buying from you go far beyond the economics of any single transaction because they have developed their own company processes around your products and services. Your company has become an extension of their own value chain, and they will not leave over price unless there is an unreasonable situation that requires them to strategically change an important part of their own business. Often these customers feel they literally have no other acceptable alternative to serve their needs. These customers typically represent 5-10% of a company’s business.
When a company refuses to participate in a price war, there’s no guarantee that their customers are going to leave. But if customers do leave, the first customers to go are likely to be the unprofitable bottom feeders, followed closely by the opportunistic customers. Fortunately, these customers are typically recognized as having minimal strategic importance with respect to the future profits of the business. They are the least loyal, and so they cannot be counted on to pay profitable prices either now or in the future. They should be seen as “filler” customers, who are more expensive to acquire and maintain and higher risk to leave.
In order to understand the strategic impact of their decisions, companies need to have sufficient analytical visibility to determine which loyalty segments each of their customers fall, so they know how to interpret what’s going on. If a company is losing business from bottom feeders and opportunistic shoppers, that’s really not the worst thing in the world. Losing disloyal customers is not near as bad as losing your loyal, heavy-inertia repeat customers.
When Loyal Customers Leave: Red Flag WARNING!
If you are losing heavy-inertia repeat customers, something is wrong. I recommend you call a company-wide time-out in order to understand why it’s happening. Heavy-inertia customers typically don’t leave due to price, despite what they might threaten to do. Heavy-inertia customers are defined by their entrenched buying habits and the switching costs they have built up through their historical loyalty. Even if they ever were to become serious about leaving due to price, they would more than likely give you a generous opportunity to fix any pricing issues, so they wouldn’t have to bear the switching costs of leaving. As long as your price is in the competitive “ballpark,” it’s not worth it for them to leave.
If you start losing heavy-inertia customers, you should be very concerned because this means you have a strategic vulnerability that is likely not price related at all. It could be related to service failures, a bad customer experience, or a major misunderstanding. You need to find out what it is. It may be nothing your company did wrong. It could be that the customer’s needs have changed. It could be a disruptive innovation by a competitor that changes the strategic value equation of your own offering. Whatever it is, you need to find out what’s happening as quickly as possible because if you have a broader strategic vulnerability, your most treasured customer relationships are at risk. You will need to act fast and involve the CEO and top functional executives to address the issue successfully before it’s too late.
A strategic vulnerability is not just a pricing issue. It’s an all-hands-on-deck, CEO-level strategy issue. Pricing leaders should be driving the strategic awareness of the problem because they are the ones that know which customers are in which loyalty segments, and they can explain what it means when high-inertia customers are starting to leave. While this may happen in conjunction with a price war, it is probably not happening BECAUSE of the price war, at least not exclusively the price war. And when this happens, the appropriate response is NOT to lower the price as the remedy. A much larger strategic-level remedy is required, and CEO-level customer communication might be required to help customers get the belief that the company is serious about any needed changes.
Trying to solve a product or service issue with a lower price is like treating a broken leg with a flu shot. It may give the illusion of doing something, but it’s actually not solving the problem, and in fact, it’s probably making things worse. This is when you need to be talking to and listening to your customers to understand what is going on. Just lowering the price doesn’t help you get the knowledge you need, so it actually takes you further away from being able to solve the problem. It puts another low-price benchmark out in the market that can make matters worse while your company really needs to be understanding and addressing the real strategic problems lurking beneath the surface.
The Fight to Acquire New Customers: A Price War is Still Not Necessary
Sometimes, price wars are caused in competition for new customers, when companies lower general price levels to entice new customers to buy… However, this is also not necessary, and it’s almost always a bad idea. Most will agree that it makes no sense to lower the price to existing customers in order to win new customers. But that’s exactly what happens when companies lower their prices across the board for the purpose of acquiring new customers, even if they don’t make those price concessions available to existing customers. The reason is because people talk, and the lower prices eventually leak over into the rest of the market where existing customers will start to demand access them, as well.
The good news that companies don’t have to do this to incentivize new customer acquisitions. There are numerous ways to entice new customers to try out a relationship or even completely switch from another supplier without putting prices in jeopardy. New customer acquisition incentives can, instead, take the form of non-price financial benefits, such as back-end rebates, front-end shopping credits, and/or 100%+ satisfaction guarantees, just to name a few. Using these types of incentives allows you to make doing business with you more attractive without touching actual product and service prices, which means you can continue to maintain price integrity and fulfill your promise of fairness to your customers.
This is a far more intelligent and targeted approach, and it allows prices to stay intact while new customer trials and conversions are incentivized through more creative means than simply lowering prices. The best way to ensure that customer acquisition strategies don’t result in price wars is to keep pricing strategies under the control of one single pricing strategy team, who can orchestrate a cross-functional communication and messaging strategy to achieve the end goal.
Taking Price Off The Table in Sales Discussions
There are numerous examples of companies who have successfully taken price off the table, simply by removing it as a negotiation variable. When price is not up for discussion, customers will eventually stop trying to discuss it. When customers see that you have fair, rational, transparent, and trustworthy prices, they will realize that you have more pricing power than other companies. They will see that you have command over your prices and your differentiating product and service features that make doing business with you more valuable than doing business with your competition. They will begin to understand that even if your prices may be slightly higher than others, they will save more money and headaches by purchasing from you rather than from “fly-by-night” competitors that can’t deliver a cost-saving customer experience.
It’s important to recognize that maximizing overall long-term profits must necessarily traverse multiple time horizons. Customers who are not profitable today may have the potential to become profitable in the future, and customers that are not loyal today, might have the potential to become loyal in the future. Are you still in customer acquisition mode with a particular customer, or have they had ample time to prove their propensity to always be a disloyal opportunistic shopper? If you are still in customer acquisition mode with a particular customer, it is fully understandable that you may need to continue making an investment in customer acquisition incentives to get the customer to develop sufficiently entrenched buying habits with you before you write them off as “disloyal.” This is why it’s ultimately important to understand what customer attributes are more likely to drive loyal customer behavior over time (I have a whole section on this in my book, Price for Growth: A Revolutionary Step-By-Step Approach to Massively Increase the Value of Your Company by Leveraging Focused Pricing Strategies)
Strategic Bottom-Feeders? If it is somehow determined that some bottom-feeders or opportunistic customers are actually strategically important to your business, first answer the question “why?” While I would argue many reasons why they are likely NOT strategically important to your business, I have seen legitimate companies who strategically target the price-sensitive bottom feeders because they believe they are in a unique position to own that niche. If this describes your company, you have to start with the answer regarding “why” this segment is strategically important to your business. If and when you can answer that question with confidence, then there are still things you can do to compete without starting a debilitating price war. Start by investigating if there are perhaps some creative non-price selling points you can use to increase their desire to do business with you vs. a competitor, even at slightly higher prices. If this can’t be achieved. See if you can “buy” the business in a way that contractually “locks them up,” so you can stem the losses and take their business “off the street.” Recognize that if it is strategically important to keep them as customer, you may have to invest in incentives for them to continue as your customer for a while, during which time you can work on increasing their buyer inertia and reinforcing future switching costs. Any further discounts should be seen as an investment with a realistic future payback. Otherwise, if there is no future return on these “low-margin” investments, perhaps they may not be strategically important after all. This is important to get figured out.
There are best practices approaches for this, and there is really no reason not to employ them.
If you find yourself in the middle of a price war, there are multiple things you can do to reduce the negative effects of what has already occurred and attempt to end your part in it. More importantly, this is a good opportunity to evaluate your business to understand whether or not you may have a strategic blind spot outside of the “price arena” which may be causing your customers to behave unnaturally. There’s no simple cookie-cutter answer that works all the time, but it’s important to be aware of the major considerations that will work and apply for most companies in most industries. Here are some recommendations you can use to plan your own strategy for dealing with destructive price competition. You should adapt them to your own industry. One caution: don’t dismiss any of these just because they don’t seem feasible on the surface. Instead, think about how they might be adapted to be more applicable to your business. Experience has shown most companies can find ways to implement and benefit from each of the following recommendations, even if it requires a slight adaptation:
Immediately resolve to not participate in a price war. Stop any practice of lowering price to compete in a price war (at least for a couple of months to see how it is affecting your customer relationships). Give your customers time to react to you having more price integrity. This will help you better understand the consequences of refusing to compete on price, and it will allow you to gauge your “non-price mitigation” effectiveness.
Make your main customer loyalty profiles visible. Analyze which customers are leaving due to price. If you are losing only the disloyal customers who are not strategically important to your overall business success, then don’t worry too much about them. Help other executives in the company realize what’s happening and why it makes sense not to go after these customers with lower prices. Executive alignment is critical for ending participation in price wars and executing on alternative acquisition and retention strategies.
Address any strategic vulnerabilities. If you find your high-inertia loyal customers are leaving you (whether or not there appears to be a price war), dig in deeper to understand what is really going on. High-inertia customers don’t leave due to price. This is an indication of a clear strategic vulnerability you must address that may be much deeper than price. Find out if there are service failures, unmet needs, poor customer experiences, changing customer needs or unchallenged competitive innovations that are responsible for customers moving away from you. Raise awareness to the CEO-level executives in the company, so a CEO-level decision can be made about how to address this strategic vulnerability across all customer touchpoints and functions in the organization.
Get better at communicating your value differentiators. Make sure you understand and communicate your value differentiators to your customers in terms that are meaningful to them, focusing on what they care about. Create a communication strategy to get the message out via marketing, sales, customer service, and potentially C-level visits and calls to your most strategic customers. Remind them what it’s like to have poor service, delayed shipments, mistakes in order fulfillment, billing errors, an unknowledgeable service staff … all the things that your company provides that low-price competitors cannot match. Help customers understand how all these things save the customer money in the long run.
Adapt your pricing strategies for the evolving digital commerce world. Move toward non-negotiated pricing that features price integrity, rationality, transparency, and trustworthiness. Implement “zero-exception” pricing. Help customers understand why fair and transparent pricing is good for them, as they now don’t need to worry about negotiating an acceptable price, as all customers will automatically receive the prices they qualify for, based on the standardized pricing model.
Develop appropriate customer acquisition incentives. Create innovative awareness, trial, and onboarding incentives for new customers that don’t result in price erosion and downward price pressure for all customers. Utilize standardized incentives that are more powerful and strategically impactful than sales-negotiated discounts … incentives that don’t degrade customer price expectations. These can include incentives such as free first-time buyer credits, purchase-growth driven rebates, 100%+ satisfaction guarantees, and other mechanisms that give new customers an incentive to try out the service long enough to develop their own buyer inertia, but without lowering their long-term price expectations.
Develop effective retention strategies and incentives. Consider implementing deferred reward loyalty programs that require the customers to maintain consistent purchase volumes for a short vesting period in order to receive the incentive benefits. These types of programs won’t fix long-term customer satisfaction issues, but they will help prevent customers from being distracted by low price offers from competitors during a price war.
Don’t give up on market share growth and dominance. Find innovative ways to grow faster than your competitors. Keep market share growth and leadership as important priorities for the business at all times. This will allow your business to acquire economies of scale cost advantages over time, enabling you to weather any future price wars.
Get expert help to augment your existing capabilities fast. Find someone who knows what they’re doing to help you move faster and apply another set of eyes to the problem. They can help you discover and validate priorities that need to be communicated across all functional executive leaders to more quickly achieve alignment on the path forward. They can also help you save time and avoid important elements you might miss by being so close to the problem. Most importantly they can help cut through any political agenda by connecting the strategy imperatives for each functional leader.
Use this as an opportunity to show leadership. Despite all the confident personalities you find at the executive level, the reality is most executives are normal people with lots of responsibility, and they’re looking for answers and easier ways to delegate responsibilities that will move the company forward. This is an opportunity for you to show leadership, provide important insight, get people aligned, and demonstrate both expected and achieved results from the combined efforts.
Price wars are horrible experiences, and it’s best to try to avoid them. The good news is that most companies can survive a price war just fine without having to lower their prices to the level of their desperate competitors. This is because most good companies have already developed high-inertia customer relationships that are less likely to be threatened by low price offers from competitors. With a little innovation on front end incentive structures for new customers, companies can still provide sufficient incentives for new customers to create their own buyer inertia on their way to regular repeat buyer status. Price wars can be conquered, while at the same time allowing high-growth market leaders to maintain and even accelerate their growth rates in pursuit of the “Star” position in their respective markets.
If you are challenged with the temptation to participate in price wars in your industry, you may have the opportunity to leverage this experience to bring about lasting change for both your company and, perhaps, even your entire industry. Because of the magnitude of what is at stake, this is an excellent opportunity to provide memorable leadership across the top functional executives of your organization. With good communication and the ability to focus down on the issues, you can make an incredible impact by leading your company where they need to go.
Good luck for the journey!
About the Author: Jeff Robinson brings the perspective of two-decades of executive leadership and pricing expertise. Through his teams, he's worked with hundreds of companies across industries to help them improve their pricing practices and results. He has designed, marketed, and implemented pricing solutions used by hundreds of companies, whose combined revenues total more than one trillion dollars. Having earned a bachelor’s degree in economics, combined with an MBA in marketing and finance, he has brought new perspectives to the world of pricing, often challenging prevailing notions or widely accepted strategies. Combining his formal education with over 20 years’ experience, he has recently authored the book, Price for Growth, A Step-by-Step Approach to Massively Impact the Value of Your Company by Leveraging Focused Pricing Strategies. Today, he is leading the development of a new company, Revolution Pricing, focused on helping companies create and select appropriate pricing strategies for maximizing the value of their own companies.