WHEN YOUR competitors in business drastically reduce their prices, the obvious temptation will be to reduce the prices of your business services or commodities, too. However, this practice can quickly result in a price war which is not healthy for any business, not to mention illegal if you lower your prices to the point where you’re losing money temporarily in order to drive your competitor out of business (“price gouging”). For most customers, the prices are good news, especially in the short term. For the owners of the business, it is bad news unless there is the deliberate intention to reduce expenses.
Price wars may create a disaster for businesses. For example, it is estimated that the losses that were incurred because of the 1992 war prices by the US airlines were far much greater the total profits that had been made by the industry since it began the business!
The price wars are also not of great benefit to the customer in the long run because they finally force the small businesses out of the market. Once these small businesses are eliminated from the market because of the price wars, the large companies will once again increase their prices in most cases to a higher rate than that which existed before the start of the price war.
No business would wish to be in a market characterized by price wars. It is highly advised and recommended that the businesses should let the free market interaction of the supply and demand determine the prices of goods and services. You should also avoid entering into an agreement with your business competitors to set the prices at higher levels. This is wrong; it may be against the law and is not competitive. Also, there will always be someone in your industry who will choose to resist the strategic alliance and sell at lower prices.
Winning a price war is not very easy because most of the customers will tend to purchase the services or products that are sold at lower prices. Failure to adjust the prices may lead to the loss of all or a great portion of your customers. The following are some of the steps that you need to take in the event of price wars.
Focus more on quality and better service
In some instances, the price wars are characterized by the decrease in the quality of the products. The customers may not be aware of this because they tend to think that it is just the earlier product that is now being sold at lower prices. Instead of lowering the prices of your services and products the way your rivals have done, you can focus more on offering products or services of better quality. With time, the customers will come to learn of the poor quality of the cheap services and products and some may prefer to pay more for your better quality products and services.
Alert the customers about the better quality of your products and services
Most businesses that wage price wars focus on the price only instead of the quality of the services and products. When a price war is waged, you should respond by informing the customers on how your products and services are better in terms of quality and utility as compared to the others that are sold at lower prices.