In the business world, the prices of commodities often change. This usually stems from the unstable market forces as a result of the recent recession slump. The increasing pressure to keep sales high forces business owners to slash their prices in an effort to recoup their losses. This is what instigates price wars.
Price wars generally start as firms are fighting for a larger market share in a declining market. Some firms become so desperate that they initiate aggressive growth strategies. These firms believe that by driving their competitors out of business, they will be able to assert themselves in a dominant position in the market and dictate the prices. In theory, this is one way to get a larger piece of the market pie however, more often than not, they forget to think about how their competitors will respond. There are generally two actions you can take: to respond or to ignore it. The best way to survive a price war is to avoid it; however, there are times when you have to take certain measures to defend your business. So how exactly can you do this?
1. Make an extensive market research
Before initiating any action, you have to know why your competitors slashed their prices. It’s possible that they have an excess supply of that product and they want to get rid of it quickly or its costs may have gone up. The price changes could only be temporary so it may be unwise to unwise to lower your prices now only to increase it back up after a while. Read up on the industry news and competitor press releases.
2. Minimize your expenditures
When you engage in a price war with your competitors, you’re choosing to lower your profit margin. The important thing to note here is that you can lower your prices if you can lower your costs. For example, you have a gasoline station business and you’ll be engaging into a price war with a competitor across the street . You can bargain with your suppliers for lower prices on their products since you’ll be engaging into a price war. You can provide them with proofs like pictures of the prices of your competitors presented in the market. Through this, your suppliers will know and be compelled that a price war is necessary or else volume will be affected.
Obviously, if your expenditures, which includes the costs of your products, remain the same, then cutting prices is definitely not the wise move. However, if you can lower your costs and increase your sales volume, then by all means start a price war. The price per unit may be lower but so is the cost per unit. Your overall gross margin will at least stay the same or end up higher.
3. Fight backwards
This means that you should try to avoiding competing head on. Try to segment your customers. Let’s say you have a retail clothing store that sells handbags, shoes, clothes, etc. Your competitor right across your store is offering big discounts on handbags alone. Feel free to lower your prices but not across the board. Just the handbags you think are in direct competition with your competitor.
4. Give more without spending more
“Quality over quantity” is a business quote that one must never forget. Ensuring that your product has more “bang for the buck” will keep your customers coming back. For example, you have a Computer parts Shop. You can offer warranty extensions to your customers. Through this, you can entice more customers to avail of your products without directly spending more. Of course, you need to make sure that your products are really of quality that your customers doesn’t really need to avail of the warranty service. Consumers always appreciate getting more value out of their money than getting something cheap but lacks quality.
5. Move your prices around
Re-aligning your price lists is another effective way of competing in price wars. If you’re a car dealer and your competitor has slashed prices on its sub-compact sedan, you can do the same. Just recuperate your margin loss in the extra accessories that can be added to the car. As long as you sell it well enough, consumers will always be enticed to add those extra features that makes their car truly unique from the rest.
Price wars are never good for anybody. There are no winners…only survivors or losers. The ensuing war will probably destroy the profitability of the entire market causing unrest with consumers. Before engaging, make sure that you’re ready to face the consequences, good and/or bad.
About the Author:
Jessica Francisco is a cheerful 25-year-old with an odd sense of fun. The least of her broad range of hobbies include swimming, hiking and listening to the music of Michael Jackson. Jessica is also one of the editors of Luke Roxas a renowned Real-Estate Business Tycoon in the Philippines.