Get ready for the upcoming (Price) War!

You may have heard of the current supermarket price war in the UK or the drugstore one in Germany. What you may not know is that almost one out of two companies nowadays is engaged in a price war! An additional 20% operates in an industry where a price war takes place but they just do not take part!

We argue that price wars are going to intensify and we consider it critical to be familiar with the theory and the practices of how to deal with such a war.

Seems price wars will become fact of daily life.

Recently I came across a nice infographic on price wars and how to stay competitive. It was from a software company that was specialized in retail and which supplied a “pricing engine which monitors, analyzes and reprices retail products in real time”. Reprices in real time!! It claimed that 30% of retailers consider implementing such pricing tools in the next year.

If you want to have an idea about such companies, have a look at 360pi, Boomerang commerce or Wiser.

Another report showed that Amazon had changed the prices of an item 8 times within a single day and in average 15-20% of all its inventory change prices every day! 15-20% of the huge inventory they manage!

They have chosen some categories in which they ensure they have the lowest prices, they introduce the Prime day promotion (in the same way TaoBao does the Single’s day on 11/11 every year) where they slash prices in an aggressive way and extend their private label ranges. Finally, they enter the categories of food and household products fighting for the daily supply of products and essentially entering in direct competition of hypermarkets and drugstores. After they entered the garment industry!

That doesn’t mean that all the prices are getting lower; some are increased, especially after the extensive analysis they make on purchasing habits. Their big data analysis provides all the information they need to know what the competition does and how the customers will react to various pricing scenarios.

As they expand, they will certainly provoke reactions from other e-tailers. And, as other traditional retailers implement their e-commerce policy, (Walmart moved to acquire Jet.com, one of the fastest growing e-commerce companies in the U.S. in order to advance their plans in competing with Amazon), dynamic pricing will become the norm risking to expand price wars in more industries and product categories than seen before.

Price wars on a global level.

In Europe, price wars are associated with inevitable bad and are fought reluctantly. In the US, they are used more openly, as the free market and the competitive culture allows for such practices. In China, it seems to be totally accepted to fight such a war. A study from Wharton Business School revealed that price wars are widely considered as a legitimate, effective marketing strategy by executives and business thought leaders. They are regularly conducted in their home market, before expanding abroad and have helped many Chinese start ups gain a foot in the global arena. Actually, price wars are considered as an excellent way in gainning the winning spirit in a company!

Also, the Chinese consumers are those with the highest % of purchases over the internet. That is a major factor because all consumers nowadays are better informed about prices, exactly because of their exposure to the internet. According to Deloitte (Apr 2014) 70% of consumers go on line before they shop in stores. On top of those checking prices while being in the store. Most of the times, somewhere, a retailer has an offer on this product. Over the years, we have all become so accustomed to buying things in offer that the pressure on retailers to communicate that they have the best offers is continuously increasing. Other dimensions like availability or service seem to have lost in importance, as a criterion for purchase. In the garments industry, it seems that only 30% to 50% of the collection is sold in full prices (vs 70% some years ago).

Some retailers have the systems to do the analysis and take calculated risks and appropriate decisions but many are just clumsily reacting, knowing that they have to respond in one way or the other to this threat.

How retailers’ price wars influence suppliers.

How many times have you been caught in a quarrel between marketing and sales because you find impossible to implement price increases due to retailers’ push back? How many times you have been contacted by your customer to be asked for special conditions to support their aggressive promotional campaigns? Even if you are not allowed to accept it publicly, how many times have you been contacted by your customers because one or more of your products are sold in extremely low prices by one of their competitors? In how many cases have your products been the “loss leaders” ( selling at cost to attract attention and convey low prices) by one of your customers, creating havoc in the market and anger to your marketing department?

Retailers involved in price wars will do what they always do: come to suppliers to share the burden and seek extra margin. If you do not give it, they threaten to promote your archrival and shift attention and sales to them.

Suppliers also know that their brands will be used as a bait to attract customers in a store and there the own label products will be promoted, eroding their image and the sales.

With channels expanding ( which company does not think of supporting their sales over the internet nowadays?) so will price transparency and price competition will intensify.

Is it only for retailers to initiate price wars?

Suppliers do start price wars. It is just that often they are disguised with innovation. When pcs were custom ordered over the internet, the prices they were offered could not be matched by the manufacturers who used stores as a main channel. Still, they had to aggressively reduce their prices, in order to respond and capture the maximum market share within the smaller segment left to them.

The same happens with new suppliers who have a strategy of building market share based on competitive prices. Check the solar panel industry and the role of Chinese and Korean suppliers.

Most often the reduced prices coincide with increasing costs and the consequence is the reduction of profitability. A study has indicated that basic raw materials and pharmaceuticals are some of the industries which suffered most, not being able to compensate the increased costs with increased prices. In extreme cases, that means bankruptcy and exit from the industry of the weakest players.

What to do if caught in a price war.

A study revealed that 13% of the companies manage to increase their margins despite the “war” environment. They do something right.

Keep tuned because we will deal with the ways how to fight a price war in our next post.

What to do next?

Define the extend and intensity of the pricing competition in your industry and link it with your company’s ability increase margins. Pay particular importance to the competition in the internet and get familiar with the tools some of the leading companies in your field employ to track this market place. Create a sense of urgency within your team and senior management on pricing and the action plan towards the now-happening / upcoming price war. Get ready for the next post on how to act when caught in a price war.