Imagine you are the owner of a furniture store, and you see that one of your competitors is selling a leather chair with a 20% discount. Since you have the same chair in stock, you decide to copy their strategy. Naturally, you and your competitor continue to reduce the price until one of the two win. But in the long run, nobody prevails because none of you is making any profit at all. This whole situation is called price war.
A price war occurs when a company continuously lowers the prices of its products to be the lowest price in the market. It begins with one company dropping the price below the market value, forcing the competition to do the same. Why do price wars happen? Well, there are three main reasons for this:
Entering a new market
Bankruptcy
Same product, but no differences
The first one occurs when a new company enters a new market, and to gain new followers, they lower the prices of their products. Of course, the other companies don't want to lose their customers, so they do the same thing. The second one happens when companies are near bankruptcy. Since they need liquidity to survive, they prefer to sell products at low prices, instead of not selling anything. The last one is one of the most common causes and happens when two different companies sell commodities. Considering that the product does not have a differential factor, the price is what separates them.
Thankfully, there are ways to prevent your company from entering a price war, and we are going to tell you how you can avoid it.
1- Have a lot of information about your competitors
Knowing everything about your competitors is great for your business because it gives your company many advantages. One example is when a new company enters a new market. To obtain a portion of the market share, they implement penetration pricing (lowering prices on products when entering a new market).
By conducting pricing research, you can understand if your company can keep the same prices for a short or long time. And even better: Know if you can beat the new competitor in your sector. By having this data, you prevent cutting prices on your products and entering a price war.
2- Evaluate the actions of your competitors
You cannot jump into operations and trends like a headless chicken. You need to keep a cool head and analyze which are going to be your next steps. If you see that one of your competitors is selling one product cheaply, you need to examine this and decide your action. If you misinterpret a price cut of your competition, your company will automatically respond with a price cut that will destroy your profits for the entire year.
3- Quick to respond
Everyone has competition, no matter if they are a gigantic company or a small one. Any pricing decision that your competitors make, and affects your company, must be answered quickly. If you take too long to long to respond, your competitor benefits from this. You must be willing to react to aggressive pricing moves consistently and instantly if you want to minimize price competition and be the leading company in your sector.
Overall, price wars are bad for all the parties involved. Profit margins will become crushed, and consumers eventually grow tired of these frequent price changes. In the beginning, buyers like saving money on the products they purchase, but if they see that a company is lowering its prices constantly, they will view your products and company as low value.
Conclusion
The PriceTweakers software helps you with all of these and much more! Whether you are a small or large company, we make sure you are always aware of your competitors, such as price changes with our pricing software. We ensure you that you can boost your sales and get more insight into your business. Wanna know more information? Contact us.
