Arguments for and against price wars

Getting pulled in can hurt your margins, teach customers to wait for the next price cut, and saddle you with a low-quality reputation.

Famous price wars

When analyzing your competition, carefully determine who they are, how price fits with their strategic position, how they make pricing decisions, and what their capabilities and resources are. One option the smaller company considered was to lower its price in a tit-for-tat move. Virtually every competitive move is based on price, and every countermeasure is a retaliatory price cut. However, a problem with this approach is that it may take some time for consumers to realize any difference in quality. However, such product differentiation can result in significantly higher overhead costs for production. If simple retaliatory price cuts are the chosen means of defense in a price war, implement them quickly and unambiguously so competitors will know that their sales gains will be short-lived. By Eric Fontinelle Updated Aug 30, In tough economic times, price becomes a much larger factor in purchasing decisions. But if you have to respond—e. Focus on quality. Businesses that adopt a one-size-fits-all approach to pricing do so at their peril. The common knowledge about this low cost deters price cutting from competitors. Process optimization : merchants may incline to lower prices rather than shut down or reduce output if they wish to maintain the economy of scale. However, such extreme price cuts are definitely bad for the industry.

However, this also needs to be done tactfully. Try now!

what is a price war pdf

Has the competitor decided upon a long-term price reduction? What Causes Price Wars Price wars most often strike industries where there is both heavy competition and several comparable products.

Perception and Branding In some cases, little possibility of quality differentiation exists between two products.

Price war strategy

Increasingly, price is the weapon of choice—and frequently the skirmishing degenerates into a price war. The Ritz-Carlton chose to steer clear of the fray. Instead, they can justify the higher price because they have a better product. In this market, price cuts appear to be the only way to compete. In exchange-traded funds, the first shot came from a smaller competitor, the brokerage firm Charles Schwab , which was the first to offer no transaction fees when buying or selling a variety of the firm's ETFs. First, a pattern of price cutting may teach customers to anticipate lower prices; more patient customers will defer their purchases until the next price cut. Conversely, price wars may often be started by a company from an entirely different industry, with a radically different technology, whose cost advantages give it enough leverage to enter your market and steal your share. High exit barriers. Making sure that your competitors know that your costs are low is another option—one that effectively warns them about the potential consequences of a price war. But indirect competitors that satisfy customer needs through the use of different technologies and that have completely different cost structures are perhaps the most dangerous. For instance, if consumers no longer see a clothing brand as fashionable, the manufacturer may not be able to continue charging high prices for its products. What Causes Price Wars Price wars most often strike industries where there is both heavy competition and several comparable products.

Distributors were diverting products bound for China and Brazil to the profitable U. But the evidence to back up that assumption is mixed.

price wars advantages and disadvantages

The variety of titles it offers, the extensive product information it provides, and its reputation for rapid and reliable shipping make Amazon an easy choice for consumers who want convenience and low prices.

First, a pattern of price cutting may teach customers to anticipate lower prices; more patient customers will defer their purchases until the next price cut. In other words, integration can lead to a cost structure with a higher fixed-cost component and a lower variable-cost component.

What happened? They may be knowingly choosing the existing design over other products with different designs specifically because it appeals to their tastes. On the one hand, the Web offers an easy way to search and compare prices.

when to start a price war

Hence, if the losses are small, then the company should simply retreat.

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Advantages & Disadvantages of Non