How to avoid a price war?
Price wars often begin when a competitor decides to make a significant price cut or launches a new product at a very low price. This action can trigger a chain reaction, where other players in the market feel forced to respond in the same way, affecting everyone’s profitability. But what if it were possible to prevent that first move? Click here to edit.
PRICE WARS
If the threat can be eliminated at its origin, the price war can be prevented from starting. This is possible through strategic information management that persuades competitors not to make destructive decisions.
Immediate reaction to price reductions
The first tactic is to show the market that any price cut will be responded to immediately. This discourages competitors from initiating a reduction.
A clear example of this strategy is implemented by supermarket chains, which have staff continuously monitoring competitors’ prices. Upon detecting a reduction in sensitive products, they quickly react by adjusting their own prices.
With this, they aim to send a clear message: “If I lower prices, my competitor will do so immediately as well, so it’s not worth trying.” This deterrent effect can prevent the beginning of a price war.
Commercial transparency as a preventive strategy
The second tactic is based on publicly communicating certain commercial policies that, without revealing strategic information, clarify how discounts are granted.
In industrial markets such as construction, where opaque practices predominate, competitors tend to react with suspicion, which leads to erratic decisions and value destruction.
When a company decides to publish coherent and fair commercial policies, it sends a message to competitors: “We don’t give indiscriminate discounts, only to customers who meet certain conditions.” This builds trust and can lead to healthy imitation by competitors.
Announcing intentions to raise prices
The third tactic is to publicly communicate the intention to increase prices, along with the reasons that justify it. This is the only legal way to coordinate a generalized market increase.
This method is widely used by consumer goods companies in the United States. When facing an unsustainable rise in costs, they announce their decision to raise prices and wait for competitors to express their willingness to follow. If they don’t receive clear signs of support, they postpone the increase.
The message is: “We are willing to raise prices, but only if you do too.”
Justifying low prices with cost advantages
When you are the one taking the initiative to lower prices, you must accompany this decision with a clear explanation of the cost advantages you possess.
AJE Group, a Peruvian multinational beverage company, applies this tactic when entering new markets. Before their entry, they publicly communicate the sources of their competitive advantage, especially in distribution. In this way, they make it clear to competitors that it’s not worth engaging them in a price war they will lose.
The message is strong: “Our costs are so low that if you lower yours, we can still go lower. Better not try.”
Not every price war must be avoided
However, it is not always necessary to avoid a price war. If a company has a true cost advantage, it should use it to its benefit. This is the case with many Chinese companies, which leverage their operational efficiencies to compete with aggressive prices.
The cost leadership strategy is valid and should not be stigmatized. Used correctly, it can be a sustainable competitive advantage.
The next step: price discrimination without losing profitability
If, despite all efforts, the price war cannot be avoided, the key is to lower prices only for sensitive customers without compromising overall profitability. This will be the topic of the next section, where we will address the pillars of a proper pricing structure.