Wednesday, November 16, 2011

Beating the competition and price wars.

As I went through the reading material I asked myself what would I do if I were a company and a competitor just started offering the same product or service for a lower price. That would definitely be worrying and would hurt my profits and and sales. What would be my strategy then ? Interestingly, the first thought that came to my mind was that I would reduce my price as well. This would start a price war with my new competitor which would go on , probably depending on how far my competitor would take it.
As i mulled over my strategy to reduce prices I became more unsure if this would be the right thing to do. Firstly I would be playing in the hands of my competitor by reducing prices as and when my competitor did .Also the competition in such a price war would shift the focus from who provides better service and value to customers , to who has better financial backing and how far can one go. Moreover while the benefits from the price war will only be temporary ,it would negatively affect the industry as a whole thereby reducing the profitability and revenue averages for the entire industry. Reducing prices did not suddenly seem such a good Idea and I began to wonder how else would I compete with my competitor and yet maintain my profit margins. The solution interestingly lies in thinking like a consumer. The consumer buys the cheaper product because he thinks that it provides him with greater value for his money. So the objective should be to convince the consumer that even though your product is slightly expensive it holds greater value
So the next obvious question is how do you add greater value to your product ? To start with , make sure the customer differentiates your product from the less expensive one and is sure that the quality you offer is not offered anywhere else. This is primarily what Apple does. Recently when several other companies came out with their version of the smartphone they priced it much lower than the iPhone. However apple did not slash its prices but increased the value of their product by adding to it features which other similar products did not have. Apple could have reduced its prices too but then they would have to compromise on their products superior quality thus destroying the “consumer differentiation” advantage that they had. The consumer –producer relationship does not end with just selling the product and this also provides an excellent opportunity to differentiate yourself from your competitors. Dell did this by providing superior customer service .Customers value a hassle free experience and will pay more for that if required. Apart from improving the customer service the key also lies in figuring out what is difficult to use in your competitors product or the the rough patches in their customer service model , and ensuring that your model is superior in these areas. Another way to add more value to your product is to provide additional services along with the sale .For instance GE along with the sale of their MRI machines also provide consulting and training .This assures the customer that your product will satisfy there need without any problem and that it warrants the extra price that they will have to pay for it.

Thus there are several ways to compete with a competitor without getting into the price war. The luxury hotel and hospitality industry got into a price war in the late 1990’s. They slashed their rates and the industry average went really low. The companies involved realized the damage only when they figured that the quality of service they were providing had declined significantly. Moreover they were now also competing with medium budget hotels as the consumers could no longer differentiate between the two in terms of service provided. In other words they had lost their niche as a result of the price war. Thus the industry always suffers in a price war and in some cases ,like the hotel and hospitality industry ,the consumer also suffers as the quality of service offered declines.However a price war at times may be inevitable which would then require companies to fine tune their operations and change their strategies. How would you do to deal with a competitor if they introduced a product which is similar to yours and also less expensive.How far would you go in a price war?

Kailash Pande

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