How to react intelligently in a price war?

Evaluate the alternative of not responding
The first step when facing any competitive threat is to calculate the cost of doing nothing. This cost corresponds to the gross contribution of the sales that could be lost. Then, you must determine whether there is a response less costly than that expected loss.

The best response would be to lower prices only for the most price-sensitive customers, without affecting those who show a low probability of leaving. To achieve this, you can use tactics such as launching a second brand, creating basic versions of the product, or applying segmentation strategies.

Once the alternatives are identified, it is necessary to calculate the cost of each one.

Anticipate the competitor’s reaction
Next, you must analyze the probability that the competitor will lower their prices even further. To do this, it is important to understand why they chose to compete with low prices, whether they have cost advantages that allow them to sustain this strategy, and how much they would be willing to lose in a price war.

If the probability of a second price cut is considered low, it is best to respond in a segmented way. But if it is high, it is essential to determine whether the cost of the multiple responses required is still lower than the value of the sales at risk.

You must also consider that if the competitor gains market share, they will have more to lose in the future, which may moderate their aggressiveness.

Analyze the impact on other markets
In some cases, the loss of sales is not limited to a single product. If the threatened products are complementary to others, there may be a decline in sales across the entire portfolio. If you determine that this will not happen, the best option is to accept the new reality.

However, if the risk also affects other lines of business, you must calculate the total value of the markets at risk and compare it with the cost of the possible responses.

If the expected loss across all markets is lower than the cost of reacting, the loss is accepted. But if the cost of doing nothing is higher, action must be taken.

Four possible scenarios
The final decision depends on two key factors: whether the competitor’s action represents a real threat and whether lowering prices is financially justified.

If it does not represent a real threat and is not financially justified, you should ignore the situation and maintain prices. If it does represent a threat but lowering prices is not financially justified, the best option is not to lower prices and to refocus efforts on other segments.

If there is a real threat and lowering prices is financially viable, you should respond with a segmented action. And if there is no threat but there is financial justification, this represents an opportunity to serve a new segment, and the response should be proactive.

In conclusion, a price war should not be confronted impulsively or reactively. Every decision must be based on rational analysis of cost-benefit trade-offs, competitive risks, and market value. The key is to respond intelligently, not impulsively.