5 Things to Know About Price Wars

A price war may attract customers but can also create financial hurt for all involved. Price wars can negatively affect profits and your net profit margin.

If you're engaged in a battle to give your customers products or services for the least amount of money possible, here are some strategies to consider before battling it out with your competitors. 

What Is a Price War?

Every business engages in price wars to some degree. But generally, a price war is when at least two businesses are paying careful attention to a competitor's prices and constantly trying to offer the cheaper price.

Lower prices may attract your competitor's customers, but if getting your prices lower and lower becomes your driving goal to the point that you’re hurting your own profits, it may be time to reevaluate.

What Can Trigger Price Wars?

Price wars can be triggered when two or more companies begin lowering prices to undercut the competition. One company might have a sale set for a specific amount of time, and that alone won’t necessarily start a price war. A company might lower prices on a certain service or product, and competitors may not react because they don’t feel threatened. If it's their main service or product, that might be a different story.

When a company does feel threatened and retaliates by lowering prices – and especially when the other company then drops their prices again – that's more likely starting a price war.

Any business, whether a luxury hotel or a fast-food chain selling $2 burgers, is susceptible to a price war. But some industries are more likely candidates:

• Retail. Retail companies, no matter what size or if they're brick-and-mortar or online only, are often selling the same products. A business can compete on factors such as good customer service, in-store experience, fast shipping, and so on. But a lower price tends to stand out.
• Airlines. Customers often want to get from point A to point B, and some aren’t picky about who they fly with. So airlines will sometimes engage in a price war.
• Hotels. If you can offer great quality and service for airlines and hotels – along with lower prices – you’ll likely attract more guests.
• Restaurants. The quality of food typically matters to customers, but so does price.
• Cars. The auto industry can be intensely competitive. For example, Tesla has been in a price war against other electric vehicle manufacturers in China.

"Instead of trying to beat everyone on price, we focused on being the most reliable service in the market. People value their time and peace of mind more than saving a few bucks.” —Bryan Clayton, CEO and co-founder, Greenpal

Strategies to Help in a Price War

There is no one-size-fits-all price war strategy because businesses and situations vary.

Here are some strategies to consider:

Compete on quality.

Bryan Clayton, CEO and co-founder of Greenpal, describes his company as “Uber for lawn care.” When he first launched it, he and his co-founders assumed the battle would be based mainly on price.

"We went all in, engaging in a fierce price war with local lawn care services and other online platforms,” Clayton says. “We had a single-minded focus: drive down the cost of lawn mowing services as much as possible. But this strategy backfired, big time.”

Customers noted they valued reliability even more than a cheaper price: they wanted their lawn care professional to show up when they were supposed to – and were willing to pay a bit more for this assurance. 

"Instead of trying to beat everyone on price, we focused on being the most reliable service in the market," Clayton says. “People value their time and peace of mind more than saving a few bucks.”

Stand out in some other way than the price.

Quality may be more important than price. A product differentiation strategy might help your business stand out from the crowd.

Focus on the customer.

Kristin Dillard is the president of team automotive group, a car dealership in Charlotte, North Carolina. According to Dillard, the company focuses on giving the customer what they want, rather than getting caught up in what price another dealer is selling cars for – or trying to steer the customer into the highest priced vehicle.

“Customers want to feel they've made the right decision," Dillard says. "Repeat business is the best outcome in the business world, which is why it's crucial to prioritize customer satisfaction."

Lower your prices strategically.

If you're going to compete in a price war, analyze the numbers closely so you’ll know exactly how much you stand to lose or gain from a price war. You also may want to lower prices on excess inventory or bundle services to offer better deals. 

Retreat.

If you're losing a price war, your profit margins can suffer. Instead of a price war, you may want to offer prices you can afford to sell your services and products for without taking a loss. You can find other creative ways to attract customers.

Pros and Cons of Price Wars

From a business owner's standpoint, there are pros and cons of a price war.

Pros:

• If you win the price war, maybe you’ll end up with more market share – and keep the customers who came to you as a result.
• A price war may create excitement among your customers. If they’re getting great quality for less, it could be good for your brand.

Cons:

• You could lose the price war – and even go out of business because your company stopped making enough money.
• Even if you win the price war, with reduced profit margins, you may feel like you’ve lost.
• Once your prices invariably go back up, which they may need to, customers may become upset.
• Healthy competition among brands is good: do you really want to see a competitor go out of business?

Who Benefits Most from Price Wars?

Customers typically benefit from price wars. Sometimes businesses gain a lot as well if they end up gaining new customers. It makes sense to compete on price if two businesses are selling the exact same shirt or the same brand of eggs, for example. The customer benefits since they’ll buy an identical product wherever they choose to go. 

The business will benefit if they get more customers coming to buy the shirt or eggs than their competitor – and especially if the customers then purchase other merchandise as well. The benefit can start to fade, however, if the business is selling a lot of merchandise or services with very narrow profit margins – or selling and not making a profit.

The Takeaway

Sometimes you may feel the need to try to compete in a price war with competitors. But there are strategies, such as lowering prices strategically, to consider before entering a price war.

 

A version of this article was originally published on April 17, 2017.

Images: Getty