Meissner Research Group

Like every good rule, there’s always an exception. As previously noted, price wars are truly one-sided affairs. Your and your competitors’ prices falls due to a rush to gain market share, and in turn, the only victor is the customers who learn how to finagle every last penny out of your and your competitors’ remaining profits. But there is one time when using competitive pricing and having the lowest prices all the time actually works. This is called cost leadership.

Cost leaders are simply those companies who can set price based on their placement within the market share. They generally enter new markets by targeting the most price-sensitive customers, literally making their price their greatest attribute. By making their products cheaply and efficiently, cost leaders normally produce only the most basic of options, essentially a lower value option than what the larger (and greater market share holder) companies can make for the same price. By lowering the quality of their products, the cost leader can lower their costs while still maintaining their profits. This is how they can control the price during a price war.

The greatest market shareholders tend to have the advantage with everything but price, as a cost leader can come in and take away profits. Being a cost leader is an enviable position, because they can decide when to wage the price war and effectively win by drawing away customers from the market share leader. If your company already has a large market share, be wary of trying to act like a cost leader. With an already established brand, you can damage your reputation by creating products of questionable quality.

On the other hand, if your company is poised with low production costs, then perhaps you could be the cost leader. To do so, focus on your production costs versus overall return. If there’s a wide enough gap that you could drop your price below your competitors and still maintain a healthy profit – essentially the previously mentioned penetration pricing strategy – then you can become the cost leader. By doing so, your company is likely to not only gain profit but also gain market share and customers from your larger competitive who simply can’t match your price without losing profits.

Remember, price wars are a risky move for any company, but if your company’s profit and loss statements suggest you could become the cost leader, than perhaps it is time to try.

There are three basic pricing strategies: skimming, neutral, and penetration. These pricing strategies represent the three ways in which a pricing manager or executive could look at pricing. Knowing these strategies and teaching them to your sales staff, and letting them know which one they should be using, allows for a unity within the company and a defined, company-wide pricing policy.

1. Skimming Strategy

   Skimming is the process of setting high prices based on value. Instead of basing your prices on your competition, a skimming price comes from within the company and the (financial) value your product represents to your customer. This strategy can be employed in emerging markets, where certain customers will always want the newest, most advanced product available. It also works well in a mature market, where customers have already realized the value of your product and are willing to pay for what they see as a worthwhile investment. Surprisingly, skimming also works in declining markets, as your diehard customers are willing to pay big bucks for what they see as an older but superior product with a dwindling supply.

2. Neutral Strategy

   In a neutral strategy, the prices are set by the general market, with your prices just at your competitors’ prices. The major benefit of a neutral pricing strategy is that it works in all four periods in the lifecycle. The major drawback is that your company is not maximizing its profits by basing price only on the market. Since the strategy is based on the market and not on your product, your company, or the value of either, you’re also not going to gain market share. Essentially, neutral pricing is the safe way to the play the pricing game.

3. Penetration Strategy

   A penetration strategy is the price war; this strategy goes for the deepest price cuts, driving at every moment to have your price be the lowest on the market. Penetration strategies only work in one of the four lifecycle periods: growth. During growth, your sales are continuing to expand, as your customers want the newest product but still a product that has already tested by others in the emerging period. This is when your average customer buys a product and when the sales numbers will be the biggest. A penetration strategy works here, and only here, because you’re attracting customers to a new but proven product with cheap productions. You’re developing relationships with new customers willing to try the new product but who will only come for a lower price.

   Penetration strategies fail in the other lifecycle periods by leaving possible profits in the hands of the customers. In an emerging market, your product is brand new and customers who want it first should (and will) pay for that right. In a mature market, a price war will simply start the process of endless and useless competition, destroying your profit margin. In a declining market, only those who still must have your product will purchase it, and just like in an emerging period, they should (and will) pay for that right.

Knowing which pricing strategy works best for your company is an essential tool for any pricing manager and can only be found by recognizing the lifecycle of your products. If your entire sales force is on the same page in recognizing product lifecycles and utilizing pricing strategies, your company will likely see greater returns.

In a price war, where competitors with similar products, designs, and incentives compete for customers by having the lowest price, the only person that wins is the customer. Always.

When allowing your sales staff to use price as their main tool to meet quotas for the month, week, or even year, you, as the executive, are actually making it harder for them to achieve the company’s goals. When competing on price alone, your customers will quickly realize that all they have to do is signify that some other company’s pricing is just a little bit better, and your prices will fall.

Don’t think this affects your bottom line? Not only will your profit shrink, there’s a good chance that if your sales team doesn’t have a bottom price range, the customers will manage to convince them that the only way to get the sale (which salesmen see as their one, main priority) is to dip below cost. Customer loyalty and all those other things the customer will promise your salespeople once that below cost sale happens will disappear the moment your competitor decides it is going to keep the war going.

So, playing the price war is a lose-lose situation for you, your brand, and your sales team, because your sales numbers may go up but your revenues will go down. You might even have happy customers – happy customers that will happily jump ship to your competitor with a lower price. Essentially, price wars are a no win situation, especially if you want to be at the top of your field.

Customers, especially in this recession era, have become very savvy at the pricing game. To them, only one thing matters in a market where everything else is equal: price. By choosing not to play their game, by pricing your products on value, your company can still win. While your competitors are eating away at their profits, focus your company on figuring out how to make your products different and worthwhile and showcase that value to the customers.

By pricing on your products’ value, your customers will realize the differences between you and your competitors. If you succeed in showing your customers a reason to pay just a little bit more, you can also create customer loyalty with a superior product. So instead of allowing your salespeople to empty warehouses below price, tell the rest of your company to create products and promotions that customers can actually see tangible value in. And avoid that price war altogether.