If you are
facing a value war, you'll want to understand how that started in order to respond efficiently. Often the finest counterattack will not. involve a retaliatory selling price
1^ n Scott Davis
by Akshay R. Rao, Mark Electronic. Bergen, and
HARVARD BUSINESS ASSESSMENT March-April 2150
N THE BATTLE TO CAPTURE THE CUSTOMER,
companies use a broad variety of tactics to ward off opponents. Increasingly, cost is the weapon of choice - and frequently the skirmishing degenerates to a price war. Creating low-cost, economical appeal can often be the aim, hut the effect of one retaliatory price slashing after an additional is often a precipitous decline in industry profits. Look at the air travel price wars of r992. When American Airlines, Northwest Airlines, and other U. H. carriers proceeded to go toe-to-toe in matching and exceeding a single another's decreased fares, the end result was record volumes of air travel-and record failures. Some quotes suggest that the complete losses experienced hy the industry that year go beyond the put together profits for the whole industry from its inception. Cost wars can easily create economically devastating and psychologically dehilitating situations that take an extraordinary toll on an individual, a com-
How to Fight a Price War
pany, and sector profitability. Irrespective of who is victorious, the comhatants all appear to end up a whole lot worse off than previously they joined the fight. And yet, selling price wars are becoming increasingly prevalent and uncommonly fierce. Consider the following two examples: вЂў In This summer 1999, Run announced a nighttime longdistance rate of your five cents each minute. In August 99, MCI coordinated Sprint's off-peak rate. Afterwards that month, ATikT acknowledged that income from its client long-distance business was falling, as well as the company cut its long rates to 7 pennies per minute all day, everyday, for a monthly cost of bucks 5. 9 5. AT& T's share dropped some. 7% your day of the announcement. MCI's share price fallen 2 . five per cent; Sprint's dropped 3. 8%. вЂў E-Trade and other electric hrokers happen to be changing the competitive landscape of financial services with their extremely low-prieed broker services. The prevailing cost for low cost trades offers fallen by $30 to $15 to $8 in the past few years. There is very little doubt, inside the first example, that the main players in the long-distance telephone business are in a selling price war. Cost reductions, per-second billing, and free ealls are the main weapons the players hring to the competitive market. There is very little talk coming from any of the carriers ahout service, qual-
a " quality" mantra. Meanwhile, Merrill Lynch and American Express have got reeognized which the emergence in the Internet will affect pricing and are changing their cost structures to incorporate free online trades for sophisticated customers. These companies appear to be involved in more focused prices battles, unlike the " glohalized" price war inside the long-distance phone market. Many managers will be involved in a price war at some point in their occupations. Every lessen price is possibly the first salvo, plus some discounts often lead to retaliatory price cuts that in that case escalate right into a full-blown price war. For this reason it's a good idea to consider other available choices before starting a cost war or responding to a great aggressive value move with a retaliatory one. Often , companies can prevent a unbearable price conflict altogether through a set of option tactics. Our goal is usually to describe a great arsenal of weapons apart from price slashes that managers who will be engaged in or contemplating an amount war could also want to consider.
Generally, price wars start because somebody someplace thinks prices in a selected market are too high. Or someone is usually willing to acquire market share with the expense of current margins. Price wars are becoming more widespread because managers tend to perspective a price transform as an easy, quick, and reversihle actions. When businesses don't trust or find out one another very well, the prices battles can easily escalate in a short time. And...