Are Price Wars Winnable?

Mihir Kittur, Co-founder and Chief Innovation Officer, Ugam,

Price Intelligence, Dynamic pricing, Price WarsRetailers, as well as the analysts and journalists who cover them, are extremely fond of combat metaphors.

Describing a 2014 discounting frenzy on high-end shampoo brands, The Wall Street Journal declared there was a "Big Hair War" between Procter & Gamble and Unilever over follicles in the United States and Western Europe. The Journal also reported that P&G is now in Target’s “cross hairs” for making it cheaper for mega-rival to ship Pampers diapers and Bounty paper towels. Insiders say that the giant retailer has retaliated by devoting less endcap space to P&G brands.

Is all this battleground talk a bit melodramatic? Perhaps. But the fight for market share is endless and relentless – and it pays to fully understand whom you are fighting for and against in order to build and protect your competitive edge.

Take a crack at our trivia question above. Did you guess the right answer? This mystery e-commerce company had originally considered naming itself, but the founding CEO’s friends advised that it “sounded a bit sinister.”  Yet, there was something about this word that deeply appealed to him -- enough to convince him to keep the URL for pure nostalgia.

It’s understandable why. The world of retail is not for the meek. At a time when consumers have more choices than ever, you can’t afford to sit on the sidelines while your competitors play the price-changing game.

The American obsession with shopping for deals can easily tempt retailers to chase customers at any cost, launching price wars that ultimately are not in their best long-term interest.

As the MIT Sloan Management Review noted, there are usually no winners in a price war: “The losers are often forced out of business, and the survivors have been known to suffer a long-term squeeze in profitability.”
“Price wars begin when competitors aggressively and repeatedly set prices below established levels. In some cases, companies that initiate price wars engage in self-destructive behavior, which leads to downward pricing spirals that alter industry structures,” wrote Patrick Reinmoeller.
“In studying price wars that took place between 1980 and 2013 in industries including airlines, telecoms and financial services, I saw that price wars were invariably linked with serious drops in financial performance. Indeed, when price wars erupted, most companies found themselves in commodity traps: Profits narrowed considerably, and weak competitors had difficulty staying in business.
”In a war of attrition, both sides come out badly beaten and worse off than when they started.

There’s another way for prices to go, of course. And that’s up.
Selectively raising prices, if handled the right way, will not lead to customer insurrection.

We promise.

Think about your own consumer experience. When you are cruising down the supermarket aisles, you’ll likely find either Coke or Pepsi products on sale for 99 cents for a 2-liter bottle. Stop at a convenience store at midnight and you’ll happily fork over $1.50 for a 16-ounce bottle. That same bottle will cost $4 at a ballgame or concert. At the movies, your 32-ounce fountain drink is $6 in a souvenir plastic cup.

If you’re a devoted soda drinker, you know the price of thirst varies based on where you are, the availability (or lack) of competition, and whether you are willing to wait for either of those factors to change. You won’t stop drinking soda because those are the universal rules of the game.

Even if you’re not in the beverage business, these same pricing principles apply to your customers. If you’re just getting started, we have some great news. Most of the retail world is still playing catch-up with the next generation of Pricing Intelligence.

To help you get ahead of the curve, download a complimentary copy of Ugam’s new eBook, “Pricing Intelligence 2.0: The Essential Guide to Price Intelligence and Dynamic Pricing,” for retailers and brands interested in the latest pricing strategies and technology.

Click here for your complimentary copy of Chapters 1 and 2 now!

The Author:
Mihir Kittur is a Co-founder and Chief Innovation Officer at Ugam. He oversees sales, marketing and innovation and works with leading retailers and brands with insights and analytics solutions around their category decisions to improve business performance.


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