Price Wars: What to Do If Your Competitors Reduce the Price
What do you say to people who tell you they have no competitors?
Every business has competition, no matter how innovative it might be. Google had competition (AltaVista, Excite), Facebook had competition (MySpace, Orkut) and even mighty Apple had competition (HP, IBM) when they started out.
And where there is competition, there are price wars.
How exactly do you deal with a price war? Should you double down and match your competitor’s reduced prices? Or should you take the high road and slowly watch your competitor steal your business?
In this post, we’re going to show you how to win when competitors drop their prices.
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Step #1: Don’t engage in a price war
The history of business is filled with the corpses of companies that lost price wars. Before you drop prices to beat your competitors, ask yourself three questions:
- How much cash do you have in reserve, and how much cash can you raise (and at what rates) if necessary?
- Are there any efficiency gains you can exploit to offset lower prices (such as a more streamlined supply chain or lowering manufacturing costs)?
- How much estimated cash reserves do your competitors have? Do they have access to cheap funding sources (such as a
It can be tempting to simply lower prices until you match or beat your competitors. In the
The first step, therefore, is to not even engage in a price war until it is absolutely necessary.
The next step is to take concrete steps to combat lower competitor prices.
Step #2: Use these strategies to battle lower prices
There are plenty of ways to fight off a price war that don’t involve lowering your prices. Let’s take a look at some of these strategies.
Figure out whether price reductions even impact your business
Ask yourself, does your competitor really serve the same customers as you?
Depending on your product, customers, or industry, price reductions might not be as important to your target audience.
There’s also a good chance most of your customers won’t even know about your competitor’s lower prices.
Finally, if you have very loyal customers (measured through Net Promoter Score and %age of returning customers), they might stick with you even if your competitors offer lower prices.
The first strategy, therefore, is to figure out whether lower prices impact your business.
There are four ways to do this:
A. Calculate your Net Promoter Score (NPS) to figure out customer loyalty
Have you ever liked a company so much that you wrote a review about it or told your friends how awesome it was?
Net Promoter Score is a survey system that’s designed to measure such customer satisfaction and loyalty. Developed by Bain, this system gives a simple but highly accurate measure of your business’ referral or
The basic question asked in a NPS surveys is this:
How likely are you to recommend our organisation to a friend or colleague?
Customers are then asked to score this likelihood on a scale of
- Detractors,i.e. customers who are unlikely to recommend your company to anyone (and might do the opposite instead).
- Passives, i.e. customers who are ambiguous about your business — they neither love nor hate it.
- Promoters, i.e. loyal customers who will actively recommend your company to friends and family, and thus help you grow.
In some surveys, customers are also asked a one sentence reason for their choice.
Your Net Promoter Score can then be calculated with a simple formula:
NPS = (% of Promoters) — (% of Detractors)
A high NPS score is a strong indicator of customer loyalty and satisfaction. Among tablet computers, for instance, Apple has a NPS of 66, showing high customer satisfaction.
For example, suppose you sent out a customer survey and received 100 responses:
- 10 responses were in the
- 20 responses were in the
- 70 responses were in the
When you calculate the percentages for each group, you get 10%, 20% and 70% respectively.
To finish up, subtract 10% (Detractors) from 70% (Promoters), which equals 60%. Since NPS is always mentioned as an integer, your score would be simply 60.
B. Interview your customers
The best way to understand your customers is to pick up the phone and talk to them.
Make sure this interview doesn’t feel like as an interview at all. Instead, it should feel like a conversation.
The idea here is to ask your customers how they would feel if you raise prices on some of your products and how aware they are of your competitors pricing. You are essentially borrowing a B2B sales tactic to understand your customers’ Price Tolerance Ratio.
These conversations can often yield powerful insights that go beyond price changes. For example, Groove, a customer service tool, did
C. Audit internal marketing materials
Work out how often you have emphasized price in your marketing.
For example, if most of your marketing campaign is focused on how affordable your products are, you might not be able to get away with inflated prices (compared to the competition).
Audit all your recent marketing campaigns and make note of their messaging. This should include:
- Digital ad copy (AdWords, Facebook ads, etc.)
- Landing page copy
- Print, radio and television ads
- Ad creatives
If you see an overwhelming focus on affordability instead of product features or benefits, you’ll have to either lower your prices, or find a different marketing angle (see below).
Emphasize your product’s features and benefits instead of price
One way to differentiate your offerings from your competitors is to emphasize the results your target market wants from your business.
Which is to say: focus on selling the value and benefits of your products instead of its affordability.
For example, take a look at how Amazon markets its premium Kindle Voyage eBook reader:
Nowhere in the product description will you see book prices. You’ll have to scroll all the way to the bottom of the page to see Amazon mention Kindle book prices. Instead, Amazon focuses on the design, battery life and screen quality.
In contrast, for Amazon’s cheapest priced Kindle, the product description clearly mentions the affordability of Kindle books — starting at just $2.99.
While by itself this might not be enough — at least in the
Over time, as customers get used to thinking of your products in terms of their features instead of their prices, you’ll be able carve a niche that’s insulated from price wars.
Change your product’s positioning
Steve Job’s vision for Apple was always to create premier products and charge a premium price.
Instead of engaging in a price war, you’d be better off following Jobs’ lead and positioning your products for a premium audience.
This change is not small, so before you go about it, figure out the following:
- Whether you existing market has enough appetite for a premium product
- Whether there is a new market you can tap for selling premium products
- The costs and resources associated with the positioning change. You might need to change your logo, packaging design, product quality marketing material, website design, etc. — all of which can be substantially expensive..
Take the Apple vs Samsung battle for smartphone domination. Apple positions its products for premium customers and usually doesn’t mention product prices on the website.
Remember Apple’s iPad Air Your Verse ad? They make iPad feel much more than it actually is. They don’t bore you with product specifications. Instead, Apple associates its product (iPad) with your daily life by giving it a deeper meaning.
In fact, Samsung has taken a leaf out of Apple’s book. For its flagship phone — the S7
In contrast, for a budget phone such as Moto G, Motorola mentions the price as soon as you land on the site:
Focus on your product’s quality and craftsmanship
Your customers perception of your product’s value is often swayed by their perception of its quality and craftsmanship.
This is the reason why handmade products on Etsy frequently go for much higher than their retail store counterparts.
In your marketing material and product description, focus on the superior quality of your product. Show off its production process, its history and the care that went into making it.
Here are a few ways to achieve this:
A. Focus on endorsements from influencers and celebrities
Endorsements from influencers and celebrities is a powerful form of social proof.
For example, Honest.com features one of its founders — actor Jessica Alba — prominently on its homepage. The celebrity presence comes off as an endorsement, which greatly improves your brand’s perceived value.
B. Show off the manufacturing process
SaddleBackLeather shows off the craftsmanship of their products through an
C. Use high quality pictures
The quality of your pictures goes a long way towards establishing your product’s quality. Large,
BestMadeCo does this really well.
You’ll find high resolution pictures of each product that zoom in on every single detail that makes it stand out.
Also consider providing a 360º view of your products to wow visitors.
Improve your customer experience
- According to a study, customers are 5.2x more likely to purchase from companies with a great user experience.
- One study suggests, by 2016, 89% of the companies expect to compete mostly on the basis of customer experience.
Better user experience almost always results in user convenience. People often don’t mind paying more for something that is convenient to them.
Nyman defines user experience as an equation:
Convenience + Design — Cost = User Experience
Customer are more than willing to use a higher prices product if it provides a significantly better user experience. This is one reason why Apple is able to charge higher prices for its Macs — everything from the software to the shopping experience is better than the competitors.
That being said, good customer experience does not stop at design. Pre and post sale customer service counts as well.
Here are some ways you can achieve this:
A. Analyse competitors
Look out what your competitors are up when it comes to customer service. Do they have phone support 24×7? How quickly are they replying to emails? Do they have an
A competitive analysis is usually a part of the company’s marketing plan.
You can learn a lot from your competitors and split test those techniques to see which one works for you audience.
B. Improve checkout process
It isn’t a great feeling when customers leave your website from the checkout page. You put in a lot of effort to bring them to this page and it all amounts to nothing.
What this means is for every 100 potential customers, 68 of them leave without purchasing. Your revenues would increase drastically if you were to capture these customers instead of losing them.
If you are able to solve most (if not all) of these customer problems mentioned above, it will improve your checkout process by leaps and bounds.
Customer friendly policies such as 30 day free returns, quick refunds, etc. really impact on customer experience big time.
One great example of this is Zappos, which won against Amazon by focusing on its free shipping and returns — in turn creating a customer focused company.
Finally, streamlining your operations can result in substantial savings. This, in turn, means that you have higher profitability and a bigger war chest to outlast a price war.
While improving operational efficiency is beyond the scope of this blog post, here are a few things you can do to streamline your operations:
- Map out your logistics. Chart every single partner/carrier involved in getting products from the factory to your warehouse, and from the warehouse to your customers.
- Focus on productivity. Find out if your employees are wasting time on activities that can be easily automated or outsourced. Are they sending emails manually instead of using marketing automation? Is your marketing team updating your social channels manually instead of scheduling posts?
- Organize for efficiency. Are your warehouse workers spending too much time finding the right products? Could you change the layout to improve your operational efficiency?
non-coretasks. Figure out what your business is not good at (design, marketing copy, etc.) and outsource it. Instead, focus on your key strengths.
This isn’t easy of course, but you must understand that price wars won’t last long. Your objective is not just to last longer than your competitors, but to build a long term profitable business. And for this, streamlining your operations will go a long way.
The best way to win a price war is to avoid it altogether. By constantly dropping prices, you’ll hurt your business and your brand in the long run. Instead, focus on improving your marketing, changing your positioning, and streamlining your operations.
Here’s what you can takeaway from this post:
- Avoid price wars as much as possible.
- Before you worry about price wars, figure out whether they even impact your business.
- Focus on the quality of your products and their benefits in your marketing, instead of the prices.
- Improve your
user-experienceto fight back higher prices.
- Streamline operations to improve profitability.