When price war begins: Part I

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.

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About 1mmarketing

Working as Associate Professor, School of Business, United International University, Bangladesh; a North-American graduate, with doctoral studies from UUM, Malaysia; cherishing a wide-view of the world, with multiple interests in culture, people, traveling, and specifically marketing science. I have a colorful and diversified background with a blend of corporate experience, research, consulting, training, public speaking and teaching. I love to write about marketing issues that affect our lives, and talk about its direction that would promote the greatest human welfare.
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3 Responses to When price war begins: Part I

  1. Anonymous says:

    what a company can do in this case ? how they can hold the brand image without diminishing the price of their brand?

  2. Moitree Rahman says:

    Does it suggest that there can not possibly be a blend of Porter’s diffrentiation and cost leadership strategy? Well i think, in some cases, may be it depends on the kind of industry, cost leadership can be able to creat an edge. Lets say about the example of Southwest airlines, the domestic passenger carrier of USA (the one we come across quite often in Kotler’s Marketing textbook) and their offer “Less for much less”, whereby the airline offers no-frills service to the passengers. It did manage to stand out. Or what about WAL-Mart?

    Does the brand image necessarily gets turnished by charging a low price or successsive price cutting? May be its true when there is continous discounts which makes customers “discount prone” and they start taking the brand for granted. And people hold on their purchases till it offers another discount. OTOBI, the first local furmiture brand, lately making its debute in the international competition, has recently been caught up with this trap in the local market. Their persistent discounts over the last several months on every other occassion did exactly the same to its brand image.

  3. 1mmarketing says:

    Blending cost leadership and differentiation opens up a whole new era. It might create a “Blue Ocean” or uncontested market-space. The post in the blog was more focused on price wars among brands that tend to follow more of a premium pricing due to its branding efforts. You cited good examples of being different by being “simple” and no extra frills. You may also look for Japanese chain store “Muji” who follows this price leadership and differentiation mix. This retail chain does not have a logo, and it is a “no-brand” brand, yet offers a line of quality products.

    For Muji, low price with quality is the norm, whereas, Otobi is not a type of brand that can be equated with Muji or Wal-Mart. It is a premium priced brand with lots of branding efforts. Offer of frequent discount by premium-priced brands is not a good idea. Actually, without knowing the purpose of discounts offers, it would be difficult to comment on the appropriateness of such discounts. If it is meant to clear extra stocks, then it is fine in the short-run. But if extra stocks need to be cleared frequently, then it is a forecasting and production planning problem which is getting its hands down on the brand image. If discount offers are meant to increase sales and if it is done frequently, then the brand would be in deep trouble.

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