CHAPTER 7

PRICE COMPETITION MANAGING PRICE THOUGHTFULLY

``Victorious warriors win first and then go to war, while defeated warriors go to war first and then seek to win’’

Sun Tzu

Victorious win first and then go to war in pricing: this means that a company or business that has established itself as a
market leader or has a strong competitive position can set prices at a premium and may not need to engage in aggressive price
war. They ca focus on maintaining their high-quality product or services and may not feel the immediate pressure to lower their
prices to attract customers.

Example: Apple Inc, Rolex, Starbucks.

While defeated warriors go to war and seek to win: this implies that businesses that are in a weaker competitive position
or have struggled in the market may resort price competition as a way to gain an advantage. They enter the war by cutting prices
and attempting to win over customers by offering more competitive pricing.

1. What is price war?

UNDERSTANDING THE PRICE GAME

Price competition is a “game,” as defined by game theorists, because the ultimate outcome resulting from any move that
you make depends upon how your competitors react to it. Making the right choices in a game is very different from making the
right choices to solve a puzzle—such as how to make a product more efficiently. Moreover, competitive pricing is a type of game
that requires skills foreign to many managers.

Positive-sum games are those in which the very process of competition creates benefits.

Consequently, the more prolonged and intense the game—in sports, academics, or sales—the greater the rewards to the
players. The winner always finds playing such games worthwhile and even the loser may gain enough from the experience so as
not to regret having played. In fact, people and companies with a healthy attitude toward these activities often seek
opportunities to challenge themselves. A strong competitive spirit is a criterion commonly used to identify job candidates with
high potential for success not only in sports, but also in scientific research. It is also indicative of people likely to be successful in
sales if the firm creates a competitive culture that honors those who excel in meeting or exceeding sales goals.

Where pricing strategies lead to mutual benefits for both buyers and sellers or for competing business.

Example: in a competitive market businesses may engage in what could be describe as a positive sum pricing game
where they continually strive to offer products, services or pricing to attract customers this competition can lead to lower prices
and increased value to customers, while at the same time, incentivizing businesses to become more efficient and innovative.

Unfortunately, that same gung-ho attraction to competition can be quite unhealthy when applied to negative-sum
games:
Those in which the process of competition imposes costs on players. Warfare, labor strikes and dueling are negative-sum
games because the loser never benefits from participation and even the winner may end the confrontation badly wounded. The
longer the conflict drags on, the greater the cost it imposes on the players.
Price competition is usually a negative-sum game, since the more intense price competition is, the more it can
undermine the value of the market over which one is competing. That is likely to be the case where total market demand is
increased very little by lower prices and competitors have similar cost structures. Therefore, price competitors do well to forget
what they learned about competing from sports and other positive-sum games, and to try instead to draw lessons from what
are, hopefully, less familiar competitive games such as warfare.
Fighting power is but one of the instruments of grand strategy—which should [also] take account of and apply . . .
financial pressure, diplomatic pressure, commercial pressure, and . . . ethical pressure, to weaken the opponent’s will. . . . It
should not only combine the various instruments, but also regulate their use as to avoid damage to the future state of peace.
Sir Basil Liddell Hart

In short, winning battles is not an end in itself, and warfare is certainly not the only means to an end. In the same vein,
winning sales is not an end in itself and reducing prices is not the only, and is rarely the most cost-effective, means for winning
new customers.
For marketers, as for diplomats, warfare should be a last resort, and even then, the potential benefits of using it must be
weighed against the cost. Fortunately, there are many positive-sum ways for marketers to compete.
 Creating new products
 Creating new ways to deliver service
 Communicating more effectively with customers about benefits
 and increasing the efficiency of operation are all positive-sum forms of competition.

COMPETING TO GROW PROFITABILITY

Unfortunately, many managers erroneously believe that the key to financial success is first
to win market share, after which profits will follow (see box “Market-Share Myth” below).
When many competitors pursue this same strategy, they engage in mindless negative-sum
competition, which does little more than destroy profitability for everyone.
Fortunately, there are competitive strategies that can increase, or at least maintain, the value
of markets through positive-sum competition. Rather than attracting customers by taking less in
margin, positive-sum strategies attract customers by offering them new sources of value or by
meeting their needs in new ways that create value more cost effectively.
Example: Apple, coca cola, Toyota Netflix

MARKET-SHARE MYTH
 GROWING MARKET SHARE is the key to profitability
 a sustainable COMPETITIVE ADVANTAGE in meeting customer needs more effectively or
in doing so more efficiently.
 A strategic plan based on BUILDING VOLUME, rather than on creating a competitive
advantage, is essentially a beggar-thy-neighbor strategy—a negative-sum game that
ultimately will only undermine industry profitability.

More often, competitive advantages are carved out of the efficient management of a firm’s value
chain. Michael Porter, the Harvard competition guru, cites three ways that companies can proactively
manage operations to achieve competitive advantage:
  Needs-Based Positioning —based on serving the needs of only a particular customer segment
or niche, which enables the firm to tailor its operations to meet the unique needs of that
segment more cost-effectively.
 Access-Based Positioning —based on the company’s ability to gain access to customers in
unique ways. Access can be a function of geography or customer scale. For example, serving a
uniquely wide or narrow geographic market, based on the firm’s cost structure, can create a
unique cost and service advantage.
 Focus-Based Positioning —based on developing a unique capability to do one or more
narrowly focused activities that add value to value chains across industries. Because the
focused activity does not add value alone, a focused supplier must closely monitor and
coordinate its operations with other suppliers that manage the value chain.

REACTING TO COMPETITION: THIK BEFORE YOU ACT

Many managers are so fully aware of the risks of price wars and the importance of competing from a position of strength
that they think coolly and logically before initiating price competition. It is much harder for most of us to think logically about
whether or how to respond when we are already under attack. Consequently, we will discuss in step-by-step detail how to
analyze a competitive situation and formulate responses in price-competitive markets that are not of your making.
1. Is there a response that would cost less than the preventable sales loss?