Price wars in Covid 19 era | Sunday Observer

Price wars in Covid 19 era

6 September, 2020

Since business re-commenced operations after Covid-19 outbreak,  we have experienced price wars across a few industries like never before in Sri Lanka; the hotel industry, supermarkets and credit card business are a few glaring examples today.

Business organisations use a wide range of tactics to ward off competitors to increase shattered revenue due to Covid-19. Increasingly, price is the weapon of choice to achieve short term goals. Price wars can create economically devastating and psychologically debilitating situations that take an extraordinary toll on an individual, a business, and industry profitability.

No matter who wins, the combatants all seem to end up worse off than before they joined the battle. Yet, price wars are becoming increasingly common and uncommonly fierce in the Sri Lankan market following global trends.

Most managers will be involved in a price war at some point in their careers regardless of which industry they are in. Professionals too face the same challenge in pricing given the multiple choices their clients have. Every price cut is potentially the first salvo, and some discounts routinely lead to retaliatory price cuts that then escalate into a full-blown price war.

That’s why it’s a good idea to consider other options before starting a price war or responding to an aggressive price move with a retaliatory move. 

Common

Generally, price wars start because somebody somewhere thinks prices in a certain market are too high. Or someone is willing to buy market share at the expense of current margins. Price wars are becoming more common because managers view a price change as an easy, quick, and reversible action.

When businesses don’t trust or know one another very well, the pricing battles can escalate very quickly. And whether they play out in the physical or the virtual world, price wars have a similar set of antecedents.

By understanding their causes and characteristics, managers can make sensible decisions about when and how to fight a price war, when to flee one - and even when to start one. It’s important for managers to understand why a price war is occurring - or may occur.

But it’s also critical to recognise where to look for resources in battle. It’s important to carefully analyse your customers, company, competitors, and other players within and outside the industry that may have an interest in how the price war plays out.

Good diagnoses involve analysing four key areas. They are ‘customer issues’ such as price sensitivity and customer segments that may emerge if prices change; ‘company issues’ such as a business’ cost structures, abilities, and strategic positioning; ‘competitor issues’, such as a rival’s cost structures, abilities, and strategic positioning; and ‘contributor issues’, or the other players in the industry whose self-interest or profiles may affect the outcome of a price war.

An analysis of competitors - their cost structures, abilities, and strategic positioning - is equally valuable. Industrywide price reductions may be appropriate under certain circumstances. 

Pressure for short term results

But many unprofitable price wars take place because a company sees an opportunity to increase market share or profits through lower prices, while ignoring the fact that competitors will respond.

Market research may reveal that increases in sales following a price cut justify the action, but this same research often simply ignores competitors’ price responses. 

Businesses need to pay attention at the strategic level to the twin questions of who will respond and how. Smart managers project how competitors will set prices by carefully tracking historical patterns, understanding which events have triggered price changes in the past, and by tracking the timing and magnitude of price responses.

They monitor public statements made by senior executives and published in company reports. And they keep their eyes peeled for activity in markets: competitors who acquire a new technology, staff, information system, or distribution channel, or which form a new brand alliance, will probably make some kind of a price move that will affect other players in the industry. This sophisticated environmental scanning identifies possible adversaries and their likely implications. 

In free markets, competition is the norm, not the exception, and that competition will limit your latitude for pricing.  When competitors lower prices or new competition enters at a lower price, many a novice manager’s gut reaction is to lower prices — but the cost of price concessions may be higher than the cost of customer losses.

Experience will temper these beginner instincts over time, but there must be easier and less costly ways to identify the proper reaction to competitive price moves than the school of hard knocks. Examine the relative price attractiveness to customers, not the absolute attractiveness, because customers make tradeoffs between offers.

Examine the whole offer, not just the price, because, in aggregate, customers will choose offers that deliver them more value after comparing benefits and price. Companies can avoid a debilitating price war altogether by using a set of alternative tactics. Pricing is the easiest strategy and tactic but hardest on the company’s bottom-line. 

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