Competition in the market is a natural process inherent in the market economy. However, sometimes, competition turns into a price war, deliberately planned and accidental. And then, other laws come into play that can either squeeze someone’s business out of the market or strengthen it. Learn about the causes, results, and effective strategies that can be applied to avoid these wars. This will help you adequately prepare for the most unexpected events and emerge victorious from fierce competition in the market.
What Kind of Market Competition Can Be Called a Price War
Market competition varies in intensity and degree of involvement of each market player. A price war is its most intense form, which is expressed in a series of mutual price reductions for goods/services. It occurs when, following the initiator of the war, other companies also reduce their prices. At the same time, the initiator does not stop but continues to dump prices even more.
The Role of the Manufacturer in Preventing a Price War
This situation often arises when the brand manufacturer does not act as an arbitrator requiring retailers to comply with the MSRP (Manufacturer’s Suggested Retail Price). Or it may formally require retailers to follow this policy but not monitor their compliance.
To avoid such wars, which can lead to serious losses, many companies use pricing intelligence software. It allows them to quickly detect companies violating the MSRP policy. By notifying their vendor partner about such facts of ignoring the rules of fair competition, they can try to stop the price war instead of getting involved in it.
Reasons for Price Wars
The market environment is highly dynamic and, therefore, can lead to the quick accumulation of contradictions between market participants. If these conflict situations are not resolved through negotiations or independent maneuvering by each of the parties, the result may be a price war. Here are some of the most common reasons that can push companies to such mutually undermining actions.
Stopping New Players from Entering the Market
Companies that dominate the market can start price wars against new challengers. Having solid resources and a stable customer base, they can take such a risky step.
 In this case, new players lose the opportunity to gain a foothold in the market due to the inability to attract customers and make sufficient profits.
Regaining Market Share
If companies occupying a certain market niche have not taken any measures at the stage of new players’ emergence, they may lose a certain market share. In this case, they may decide to start a price war in an attempt to restore their market share and squeeze out competitors.
Lack of a Stable Customer Base
Many companies care about maintaining customer loyalty, but not all of them succeed in this task. If customers are price-sensitive, budget savings are more important to them than brand loyalty. In this case, they will use the services of other companies or buy goods from other retailers. Therefore, a price war becomes a way to attract unstable customers.
Trading Interchangeable Products
If the products in the market are not differentiated enough, consumers do not care which one to buy. In this case, price cuts can also be perceived by some companies as a way to attract consumers.
Underestimating Competitors
A price war can be the result of one of the market players’ mistaken belief that other companies will not be able to punish it for its price cut. The initiator hopes to get a significant profit from a unilateral price reduction. Instead of this, it receives retaliatory actions from competitors, which turn into mutual losses for the companies.
Results of Price Wars for Different Market Participants
Price wars affect not only retailers but also manufacturers and suppliers of products:
- Retailers lose profit margins, which may cause their businesses to go bankrupt. Despite the increase in sales, business profitability decreases, and therefore, exiting the market may become the only rational decision for the losing party. Also, consumers get used to low prices, and after their increase, they may be reluctant to buy this type of product.
- Brands experience a worsening in their market reputation because their products are sold at a low price. Also, retailers reduce demand for their products due to low profit margins.
- Suppliers are also forced to lower their profit margins because, otherwise, retailers refuse to take their products.
How to Avoid a Price War
A price war is mutually destructive, so getting involved in it carries risks for all parties. To win in such a situation, it is important to know how to avoid escalation of the conflict.
- Product bundling. When a company bundles multiple products into a single sales package, a direct price war becomes impossible. This way, you not only escape the price war but also increase the transaction value.
- Differentiating prices to retain price-sensitive customers. You can segment your target audience and offer different prices depending on the sensitivity of the consumer segment to money spent on your products/services.
- Offering exclusive products. The desire to avoid a price war may push you to diversify your assortment and offer more unique products.
- Using pricing intelligence software to monitor your competitors and identify their strengths and weaknesses. With this software, you will track the prices and the range of products of your competitors. This will allow you to shift your offers toward products that your competitors do not have.
The Bottom Line
Engaging in price wars is no less a fatal mistake than initiating it. A company can lose significant profits as a result of such fierce competition. But the worst option is a forced exit from the market. Moreover, if the regulator finds signs of unfair competition in the company’s actions, it may be held liable in accordance with the law. Therefore, businesses must take preventive measures to avoid getting involved in price wars. Modern IT solutions allow you to monitor the market situation and identify the threat of a price war. This way, you will have time to avoid its escalation and preserve the health of your business.
