Online merchants are vulnerable to price wars from overeager competitors who want to gain market share and get sales at any cost. Dave Leonard faced this problem with his aftermarket car parts business, so he created a solution and is now CEO of Advanced Pricing Logic, a price-optimization solution for mid-market retailers.
In today’s guest column, Leonard explains what drives retailers to engage in price wars and how online merchants should react to avoid eroding gross margins.
Star Wars wasn’t the only force out this holiday season. Price wars were alive and well as retailers raced to make their goals – but many fell short, learning the hard way that the race to the bottom isn’t always the best way to beat the competition.
As witnessed this past holiday season, in highly competitive environments, price wars occur from time-to-time. If you have not experienced a price war lately, consider yourself lucky. At best, a price war is just around the corner again. It starts with the desire of an organization to expand market share, which to no surprise is often the ultimate goal of growing companies. But sadly, it often takes a grave toll on profit margins. The thinking goes something like this:
“If we pencil in a growth curve of “xxx” percent, then the additional volume should make up for the loss in profits. And boy, it will hurt company xyz.”
That is both the justification and the rationale when a company starts a price war, and in time, profits do plummet. In retail and distribution, processing greater unit volume doesn’t always equal greater profits. In some cases, more units may afford a cheaper rate of expense from a supplier, but the expense to process additional units of product weigh heavily on narrower margins.
The million-dollar question is: if your competitors are willing to cut the price, how should you respond?
Pricing battles can escalate quickly. Before reacting, take a deep breath, and understand both the causes and consequences, and what your participation should look like.
The first step is to diagnose. When a competitor makes an aggressive price move, they attack. Often, a price war begins because one party suddenly obtains new valuable insight that was previously unknown to them or finds suppliers that lowered their cost. This suggests a cost-plus pricing mentality in your competitor, which in turn suggests that they don’t fully grasp or ignore the importance of value-based pricing.
Usually, it is no more complicated than an enterprise wanting to capture more market share. The competitor’s strategy might be more complex, but the goal is to end the price war quickly if possible and preserve your own profitability.
Publicize your intentions
At any rate, you must attempt to avoid a downward price spiral, so it is important to quickly signal your pricing intentions in public. By doing so, you are making your intentions clear so that the competitor understands that their moves will unlikely achieve the desired result, and are certain to be met with resistance.
End the war before it begins
You must in-fact reveal your strategic intentions to your competitors ahead of time. Price-matching and other public statements (in your policies, marketing and advertising) will signal to your competitors that you will not tolerate a price war, and intend to fight using all resources at your disposal.
Make sure that your competitors understand the rationale behind your pricing policies. This should go a long way to preventing a price war.
But if a price war is imminent, the weapon of choice is to compete on differentiation. You know it’s costing your competitor dearly to lower their prices. Now, you need to add features to your offerings that give added value, but often cost little to implement. Define the differences in the quality of your service, packaging and customer experience.
Even if a product is identical, highlight features in your marketing that set you apart. For example, if you can guarantee in stock at the time of ordering – say so! Can your competitor guarantee that? Possibly, but they may fail to mention it.
Another powerful tactic is to offer rebates and rewards to loyal customers. Smaller companies often don’t have marketing budget and firepower – while larger companies tend to react more slowly. Size them up and take advantage!
Understand that there is a serious downside to lowering prices. Companies are wiser to stress their service, quality, and commitment to customers first, before going on about price. When the focus is on the brand, competitive prices are a bonus.
Letting a competitor know your strategic intentions and capabilities is a powerful signal. In reality, if you are using price optimization, you’ll pay less attention to competitors’ moves – and focus on your customers. After all, they keep you in business.
In many markets, product pricing varies wildly, and it is rarely the lowest price that matters – so long as the key players are all within percentage points of each other.
If you must respond by changing price, recalibrate offerings so that products often purchased together are bundled together for a discounted price. Find related products that offer higher margins, and bundle them with items that offer lower margins. Plan ahead of time, and then put into practice more complex pricing offers with discounts on volume, price promotions, and loyalty programs that are not easily duplicated by competitors.
Last, adjust pricing on products that have the highest movement to match the competition – but, resist lowering prices below the competition. By price matching, this lets them know that it is pointless to continue, and you are not interested in fighting, you’re simply matching whatever lower price they create. And next time, before falling into the price war trap, consider these simple steps and the pricing force will be with you.
You can learn more about pricing strategies in the white papers available on the AdvancedPricingLogic.com website.