Attracting customers is a never-ending battle, especially when your market is chock-full of competition. Businesses use a variety of tactics to ward off said competitors, including price wars. Learn what is a price war and how to win one if you find yourself in combat with another business.
What is a price war?
The term “price war” probably sounds intimidating. But, it’s a very common strategy in the business world. And if you ever find yourself in the middle of a price war (or starting one), you need to know how to fight back.
A price war occurs when two or more rival companies lower prices of comparable goods or services in an attempt to gain customers and increase market share. Price wars are common in industries that have heavy competition and several comparable products.
Businesses may use a price war to:
- Increase revenue
- Take customers from competitors
- Gain market share
To better understand this strategy, here’s a price war example. Say Company A and Company B both sell similar tables. Company A decides to lower its price on the table. Then, Company B notices and also lowers the price on its table. Company A and Company B begin to go back and forth reducing pricing to try to beat out each other. And thus, a price war is born.
In short, a price war consists of one competitor lowering its price, other businesses lowering their prices to match, and rounds (sometimes multiple) of price reductions.
Price wars are typically won by businesses with the widest profit margins and best cost structure (aka those who can afford to fight), making it hard for small businesses to win. But, that doesn’t mean small businesses don’t have a fighting chance when it comes to a price war. Sometimes, strategy trumps cost advantage.
Pros and cons of price wars
Like with anything in business, there are advantages as well as disadvantages when it comes to price wars. Before you head into the battlefield, weigh the pros and cons.
Pros of a price war:
- Provides better deals to customers
- Attracts new customers
- Helps retain customers
- Potentially increases profits
- Can help your business grow
Cons of a price war:
- Requires lots of time and research
- Is expensive (if you really want to beat out the competition)
- Hurts your business if you lose (and even sometimes if you “win”)
- Can cause you to lose customers
- Decreases profit margins in the short-term
- Can be long-standing
How to win a price war: 4 strategies
If you find yourself in the middle of a price war or are thinking about being in one, you need to know how to win a price war. To be victorious, take a stab at the following strategies.
1. Research, research, research
Before getting involved in any type of price war, narrow down why the war started in the first place. Just because your competitor lowered their prices doesn’t mean you should instantly drop your prices, too.
Do your research to find out why your competitor reduced their prices. Maybe they’re just trying to raise cash or get rid of inventory. Take a look at the current market, too. Consider and investigate all possibilities before making any moves.
If you determine the price reduction is due to a price war, consider the ramifications before joining the battle. Ask yourself the following questions:
- Is it worth it to join the price war?
- How will it affect my business?
- Will I lose/gain customers?
- What does the current market look like?
2. Add value
Winning a price war doesn’t always boil down to lowering your price until you can’t anymore. Sometimes, all you have to do to win is offer customers additional value instead of decreasing your prices.
To add value to your offerings, you can:
- Give away a free item to each customer who comes into the store
Offer a free gift with a purchase
- Utilize bundle pricing (e.g., buy a computer and mouse together for just $350)
- Give customers additional rewards points when they shop during a certain time period
When it comes to adding value, don’t be afraid to get creative. The more value your customers see in your products or services, the more likely they will be to buy from you instead of your competitors. And, the more you will set yourself apart from the competition.
3. Advertise your offerings
Marketing is the name of the game. Without marketing and advertising, customers wouldn’t know what products or services you offer, how much they cost, and who has the best deals and value.
To win a price war, you have to get the word out about your business. And sometimes, it pays off more to advertise than to continually lower your price to match competitors’ pricing.
Instead of reducing your prices to keep up with the war, consider advertising your offerings via social media, your business website, direct mail, and email marketing.
4. Build up your brand’s reputation
Sometimes, all it takes is a good brand reputation to beat out your competitors and get customers flying through your doors.
To win a price war, consider focusing on your brand and message. Instead of trying to get customers to spend less on your products or services, build up your business’s brand and reputation. Do a SWOT analysis to find out what strengths, weaknesses, opportunities, and threats you and your competitors have.
Focus on values your business offers that your competitors don’t have. Maybe your customer service is superior to your competitors. Or, maybe you offer a more personalized experience. You get the picture. Point out what makes your business superior to others and roll with it.
Sure, customers benefit from price wars, and many of them enjoy a good deal. But the truth is, nothing beats a good experience and being able to trust the brand they’re buying from.
Avoiding a price war
In most cases, avoiding a price war altogether may be your best bet. As you can tell, price wars can be tricky. And if you don’t win the war, you could lose customers to your competition, miss out on profits, and hurt your business in the long run.
If you want to avoid a price war, think about taking advantage of the following pricing strategies instead:
- Cost-plus pricing
- High-low pricing
- Bundle pricing
- Value-based pricing
- Combination of pricing strategies
To remain competitive without entering a price war, do your homework to get more insight into your customers and what they truly need and want. You can:
- Conduct a target market analysis
- Address problems customers are facing
- Brand your products or services effectively
- Offer high-quality products or services
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