How to win a price war

Any economics student can tell you that price is a question of supply and demand. The market will support a certain price point and stabilize. This is not very useful when trying to determine the price of a new product. Pricing is a very confusing area of ​​marketing for many people. The reason is probably because price is one of the most misused and abused marketing tools. Traditionally, there are three ways to set the price of a product:

o Competitive parity: charge the same price or average price of the competition

o Standard margin: the same percentage of markup is always added to the cost of the products (that is, cost plus 50%)

o Zero-based pricing: receive a small margin per item with a high sales volume

The problem with these three methods is that they do not take into account the perceived value of the product by the customer. Suppose you sell hats. The hats cost you $ 10, so you decide to sell them for $ 15. What if the people who buy your hats only think they are worth $ 5? You are in big trouble. You can’t afford to sell hats for less than what it costs you to make, but if that’s the perceived value to your customers, you won’t sell any for $ 15. On the other hand, what if customers love your hats and really would they be willing to pay $ 20 per hat? You are fooling yourself with $ 5 per hat. So how do you know what people will pay? Do your research before you go on the market. Either hire a market research company or do it yourself if you are on a budget. If people are willing to pay less than their cost to produce the hats, you will be avoiding disaster by knowing this information in advance. If people are willing to pay more than their perception of a fair price, you may be even more successful than you imagined.

Price wars

Your price should be based on the perceived value to the customer. Price is a double-edged sword and many companies fall into the trap of competing on price. Price is NOT a competitive advantage by definition because the competition can easily and immediately copy it. Price wars with competition hurt everyone. Customers will be happy at first because they will get better deals, but will be disappointed in the long run when prices rise again or their favorite company closes. Price wars destroy the perceived value of the product in the market. Even if your company wins the price war by undermining the competition, customers will feel cheated when prices return to normal levels.

I went to McDonald’s to buy my 39 cent burger the other day, and to my dismay what had been 39 cents the previous six months is now suddenly 79 cents. I felt cheated, but if it hadn’t been 39 cents the week before when I bought them, I wouldn’t have felt that paying 79 cents was a big deal. Like millions and millions of other people, I have been going to McDonald’s since I was a kid. A few years ago they panicked and went into a price war with their competition. It was a mistake. By creating their own “value menu”, they began to look like everyone else. Now there is nothing special about going there because they are like their copycat competition. I just heard on the radio that McDonald’s is closing nearly 200 locations. The low price strategy doesn’t seem to be working.

Low price is not a valid competitive advantage, yet companies spend millions of dollars saying they are low price leaders. The low price has no distinguishing features, especially when everyone says the same thing. Companies are also telling their customers to buy based on price. So if your competition is priced lower, you should go to them. Let me repeat, companies are paying for advertising that tells their customers not to be loyal, but to buy at low prices! In addition to fomenting a price war and creating disloyalty, this violates Marketing Key 5: Build Relationships. By telling people that the lowest price is the best criterion for choosing a product, companies discourage customer loyalty based on reputation or quality of service. This practice is so prevalent that it is no wonder that many people are confused about the right place for price in a marketing plan. The good news is that after reading this, you now know more than your competition.

How to win a price war

The answer to how to win a price war is not to get into one in the first place. If you find yourself in this situation, look for a competitive advantage in addition to the price to promote, then differentiate and focus your marketing promotions on the advantage instead of the price.