Competitor Price Attack, What to Do?

One of your competitors has just announced a significant price reduction on one of their products that competes directly with you.   What should you do?

Before you answer the question, have you done and do you understand the following issues in determining your selling price?

1-      Are your current product price objectives in line with the corporate objectives (profit oriented, gain market share, etc)?

2-      Do you understand the values (quality, serviceability, ease of use, etc.) customers put on your product/service?

3-      How is your cost method derived (sell price minus margin to arrive at cost or is it a combination of fixed and variable cost)?

4-      Do you understand the competitor’s strategy (gain market share or market entry) and their cost structure (initially a loss leader or penetration)?

5-      Are there any legal issues regarding price reductions( some cases like market monopoly/oligopoly)

6-      Does this price reduction impact other products in your portfolio?

For more details on pricing, see our Pricing Guide.

Given the above, here are some considerations you should consider before you react.

A-     If you react with a price reduction will it be less then preventable sales losses?

B-      If you react will the competitor just reduce their price again

C-      Where will multiple reductions lead you ( margin issues or sales loss impact)

D-     If you react, how will it impact other products/service?

If you have good product/service differentiations, then I would suggest stressing your benefits and value proposition via marketing messages to your customers in some form of a campaign.  Also look at the competitor’s pricing strategy, cost structure and past record regarding price changes.

Third, look at the market with regards to new potential technologies, customer’s experiences with your competitor’s product and any past or present technical issues.  Use the results to combat the price changes.

In most cases responding to a price reduction by matching it results in disaster.

George Cressman Jr. & Thomas Nagle of the Strategic Pricing Group state “Pricing is like playing chess: players who fail to envision a few moves ahead will almost always be beaten by those who do.”

Cressman and Nagle recommend the following:

1-      Never participate in a competitive engagement you cannot win.  Fight from strength NOT your weaknesses.

2-      Compete from an advantage position ( example, value differentiation), do not compete by using the competitor’s rules

In summary,

** Know your overall pricing objectives and know your competitor’s objectives and position.

** Project the possible next steps (what if scenarios).

**Engage from a competitive advantage.

**Consider actions such as improved warranties or including some form of service.

** Use price reduction as a very last resort!

RHL 8/3/10

2 comments to Competitor Price Attack, What to Do?

  • Jim Matorin

    I am not in technology, but from my CPG and food experience, I like the advice about engaging with competitive advantages clearly communicated. Let the competition take the margin hit. I would also suggest exploring other options of how to deliver additional value to your customer with the price point you have already established and they have been paying.

  • Jim:
    I completely agree, price reduction is a downward slope, use other tools/features to combat

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