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I will talk now about the third use case for compare the price models, the price wars.
A price war is a vicious circle in four acts.
It starts with Player A lowers his price to win share;
and no surprise, he does win share.
However, then Player B lowest price to better compete and -
and win some of the lost share back.
And at the end of it, the market shares return pretty much to their original levels
and nobody is really better off.
In fact, everyone is worse off, because the margins in the industry now have come down
as the price "water level" was lowered.
Sometimes, though, price wars can help you to realize a competitive advantage.
And here is a good question for you;
if you see yourself as a winner of a price war, would you end it early?
They are typically a couple of goals with price wars
and they go back to three likely drivers.
Often it's about winning share, weaken the competitors.
And I would say this has to do with muscle-flexing.
The second case is where someone enters a new market,
but their product is not really that convincing;
so they have to lower the price in order to get into the value surplus area and suddenly,
you broke off a price war.
And sometimes companies are just very much in need for additional volume or for cash.
So if you need to sell off your overstock to improve liquidity
or to acquire more volume in the market to fill your factory capacity,
these are - it reeks a little bit of desperation.
Oftentimes I get called to clients who say we have a big price war on our hands, help us.
But before you really go to war, I urge you to check
what's really going on and what kind of response does this warrant.
Here are a few examples of what I hear.
The competition started lowering the prices, but is that actually so?
It matters a lot, who started it - because if - if your client started it first,
then having a competitive response is actually just normal.
Second scenario; the competition attacks our market share.
And here you should look for - is this really a price war that is here to stay or are
- are there some temporary aspects to it?
For example, the competitor might just have extra stock on hands
or try to fill his factory temporarily.
Thirdly; we are caught up in a big price war.
Check whether it is truly a price war across the market and how bad it really is.
Sometimes you'll find it's actually in a fairly narrow part of the market or even local -
in the local market and there is no immediate threat of an increasing scope.
And lastly, there's a new player who prices very aggressively.
And here again, check how much of the market is really affected.
Sometimes you'll find it's a small part and there's a limited global threat.
Once it's clear, though, that you're in a price war, what are you actually going to do?
There are two types of responses you can choose; non-price moves and price moves.
The first non-price move is not responding.
Yes, that is actually an option.
And it makes the most sense when your initial compare the
price move was unintentional or you believe it's temporary
or you think lowering the price as a response would just make things worse
and lead to a total escalation.
The second one is sending a message.
And it's a message/threat, because you basically tell the competitor -
and you can do this even preemptively - to say whatever you do,
I will be able to match or undercut your prices.
And therefore, what the market hears is there's no point in lowering our prices
to win share because you will be following them.
Now, be prepared, though, to follow through on this threat;
because once you lose credibility in the market, it's clear that you're bluffing.
The third non-price option is changing the value perception.
And here you're trying to take the customer's attention away
from a pure price point comparison and bring in value aspects of your offering.
You would, for example, say well, the competitor is -
is able to lower their prices by so much because the product is really inferior.
They lose - they're using not as good as materials, it's shoddily put together,
it's not performing as well as ours.
We, however, do much better on all of these things and therefore,
we are allowed to have a premium.
Once you tried the non-price moves but there was no point or you did -
didn't get very far, you have to play the war.
And there you can differentiate between price moves that are fairly surgical -
meaning very targeted and in a very thoughtful way -
or you go to a broader price retaliation.
If you retaliate, I would only do it in - in three, kind of, scenarios.
Either you have a structural competitive advantage
and you are pretty certain you come out as a winner;
the second one is you actually see the chance to end the war;
or the third one is in markets with very high cross elasticity, where you just will lose,
with certainty, so much market share that you're probably put out of business
where you have to respond.
So a quick summary on the price war.
Price wars usually don't make a lot of sense.
However, they happen all the time, so you better be prepared because I'm certain,
within your career, you will face it at least once.
Respond, if you can, with non-price moves - and these were no response at all,
signaling and addressing the value perception.
Price moves are clearly the less-preferred options and there,
try first surgical or subtle price moves and if subtle won't do,
go to war but move quickly and unambiguously.
And lastly, don't forget to monitor your competition closely after each move,
because you have to confirm did your move actually have the intended effect
and what did the competitor do as a response to your move?
Jean Manuel IzaretSenior Partner and Managing Director, Leader of BCG’s Global Pricing Practice
Ronald T. WilcoxNewMarket Corporation Professor of Business Administration & Senior Associate Dean for Degree Programs
Thomas KohlerAssociate Director, Pricing
