When competitors cut prices or how to avoid a price war

Any market has players who use pricing as a competitive tool by lowering prices below the market average to attract customers.

However, experience shows that this strategy only leads to short-term success. Price dumping does not help secure a leadership position in the long run.

Here are five solutions to help you deal with competitors lowering their prices. These strategies will help you avoid price wars, strengthen your market position, and attract new customers.

Content List

• The Danger of a Price War
• Solution 1: High-Quality Products and Superior Service Win
• Solution 2: Maximize Revenue per Customer
• Solution 3: Temporary Discount Promotions
• Solution 4: Introduce a Budget-Friendly Product
• Solution 5: Increase Customer Retention and Brand Loyalty
• Solution 6: Make Price Comparison Impossible

The Danger of a Price War

When competitors deliberately lower prices, it leads to reduced profits. Many price wars have occurred in the past, but none ended positively. The outcome is always the same: profits in a specific niche decline, key players exit the market, and new competitors emerge by attracting customers with more than just low prices.

The logic behind price wars is simple:

• A competitor lowers prices—you respond by doing the same—but the competitor lowers them again.
• Lowering prices does not reduce costs, but it does decrease profits.
• Low profits limit investments in product development, advertising, and service quality, ultimately stalling the company’s growth.
• Operational costs rise while prices remain low, causing declining revenue. Eventually, businesses may be forced to exit the market.
• Once prices are lowered, raising them again becomes a challenge.

Sometimes, a lower price is justified. For example, if you are the only company with access to cheaper resources or have implemented a new technology that cuts costs.

Solution 1: High-Quality Products and Superior Service Win

If a competitor maintains low prices, chances are their product or service quality is compromised. Turn this weakness into your advantage:

• Enhance your product with additional features or improved specifications.
• Introduce new service elements to differentiate your offering.
• Upgrade packaging or design a unique one that stands out from competitors.
• Provide a truly personalized approach to your customers.
• Offer an extended warranty for extra customer assurance.

Solution 2: Maximize Revenue per Customer

It’s better to have one high-value customer than ten who generate little to no profit. Focus on profitability, not just the number of customers:

• Target customers willing to pay more for superior value and results.
• Customers who prioritize price over quality will always choose the cheapest option.
• Encourage customers to buy additional services or upgrades to increase their spending potential.

Solution 3: Temporary Discount Promotions

Unlike permanent price reductions, promotional discounts work because they are temporary. They can help you:

• Respond to a competitor’s price drop while buying time to develop new strategies.
• Encourage trial purchases, allowing customers to experience and appreciate your product.

Types of Promotions:

• Temporary price reductions to match or undercut competitors, increasing trial purchases.
• Short-term discounts (e.g., 50% off for three days) are more effective than long-term discounts (e.g., 10% off for a month).
• Extended payment terms for wholesale buyers.
• Discounts on repeat purchases or bulk purchases to maximize revenue from a single customer.
• Gift bundles or added-value promotions.
• Bonuses or free gifts with purchases to enhance perceived value.

Solution 4: Introduce a Budget-Friendly Product

Smart product assortment management allows businesses to cater to various customer segments. Introduce a product or service that matches the competitor’s low price.

This lower-cost option may have fewer features than your primary offering, justifying the price difference. It may even have fewer features than competing products, but an attractive price will still draw the right audience.

Solution 5: Increase Customer Retention and Brand Loyalty

Competitors engaging in price dumping rely on a continuous influx of new customers. Make customer acquisition harder for them by increasing customer retention:

• Subscription model: Offer annual or semi-annual memberships at attractive prices.
• Frequent purchase products: Run promotions that align with purchase cycles. If customers consistently see discounts on your brand, they will choose it over competitors.
• Long-term use products: Provide exclusive purchase conditions, such as trade-in programs (e.g., auto brands offering trade-ins for new models).

Often, these tactics are enough to make competitors rethink their pricing strategies.

Solution 6: Make Price Comparison Impossible

Customers opt for cheaper options when price comparisons are straightforward. If direct comparisons are not possible, price becomes less of a deciding factor:

• Service bundles: Add a feature that cannot be directly priced.
• Accessories: Include an additional item with your product.
• Exclusive features: Incorporate unique functionalities that set your product apart.
• Custom flavors or scents: Create exclusive sensory characteristics that distinguish your brand.

Remember, continuous competitor price monitoring is crucial for staying informed about market changes and making strategic adjustments in time.