Your competitor might have started a discount program today. Next day, you would be worried to see the long queue of customers to buy that brand that would ultimately boost its sales. To fight that war, you would start discounting your brand to switch customers to your brand. It would go on spiraling around until someone breaks the chain and halts the war. The ultimate result is the same- profitability is hurt for both the brands at the end.
Price is, probably, the only element in the marketing mix that works quickly, at least in the short-run. That is why, most brands will get into discounts as soon as they need quick cash. Even though consumers are benefited, the brand’s profitability may hurt, both in the short-run and long-run. On the other hand, if the brand’s quality is not satisfactory, and/or it requires after-sales customer service, then raising sales by price discounts without ensuring customer service will not be sustainable as this will create more dissatisfied customers at the end. However, in certain cases, a new yet good quality brand may quickly get market share and mind-share through promotion of short-run price discounts.
Price war is not a good news for a brand. Because the whole branding proposition is to create emotional connection to a brand by being different in the minds of customers in such a way that customers are willing to pay a premium price to get their favored brand. Price war is actually anti-branding. This spiraling war, if cannot be stopped or slowed down, will ultimately “de-brand” and demote a brand close to a generic version where customers don’t see any significant difference among brands, and “anything that costs less will do”. It is to be noted that, short-run price wars and restoration of premium pricing would abound in any strongly branded industry. However, sustained price wars and permanent downward adjustment in prices would mean a more serious problem in the industry. It might mean a sustained change of industry’s core competitive structure that would be redefining the whole rules of game.
One such example is the mobile service provider industry in Bangladesh. The industry enjoyed private monopoly at its inception. Price was ultra-high, only affordable to a few. Gradually, it moved into an industry of six players where avid effort to be different, at the same time to offer competitive prices to customers, are abundant. When industry structure changes from monopoly to monopolistic competition as of today, companies’ profitability would be hit hard since being different and being low cost provider would run in just opposite directions. At this juncture, firms in the industry would be asking a basic question: how can we be different so that we can hold the pricing structure and make profit? (since most of the differentiation propositions are already used by everybody!). We will pursue the answer in the next post.