10. Price wars - Pricewars No-nonsense advice on how to...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
Price wars  No-nonsense advice on how to avoid the death spiral of permanently lost profit, declining value, and heightened price sensitivity. AUGUST 1993 • ROBERT A. GARDA AND MICHAEL V. MARN We’re sorry, exhibits are not available for this article. P rice wars have racked industry after industry in recent years: from personal computers to  airlines, from grocery retailing to computer software, from cigarettes to frozen diet dinners,  from automobile tires to disposable diapers. All too often, there are no winners—and few  healthy survivors. The destruction such battles cause can be so severe and linger so long that  the only reliable way to come out ahead is to avoid them altogether. No company, however well run, is immune from price wars The threat is real—and universal. No company, however well run, is immune. Even  companies with superior overall strategies and exceptional execution can destroy themselves  by not managing this make-or-break issue effectively. After all, most price wars start by  accident, through some apparently trivial misreading or misjudgment of market conditions.  Rare is the price war that is initiated as a deliberate competitive tactic—and rarer still the  one that achieves a satisfactory outcome. Recent price wars raise four topics that we want to explore: Why companies should do everything they can to avoid them; What has been causing their spread in recent years; How to stay out of a price war; and  If all else has failed, how to get out of one—and minimize the damage. Why to avoid price wars If you have ever imagined that reducing prices to gain share might be a sound strategy for  your business, think again. Reducing prices, unless you have a significant cost advan- tage (30 percent plus), all too often triggers a suicidal price war. Price reductions are almost  always copied; no one wants to lose customers, volume, or share. You should go to almost  any lengths to avoid a price war, for several compelling reasons: 1. Profits are extremely sensitive even to slight declines in average price levels.  Everyone knows that price is the most sensitive economic lever in business. Any decrease 
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
goes straight to the bottom line. Take, for example, the average S&P 1000 company—the  largest publicly traded companies in the US—as shown in Exhibit 1. If price falls by a single  percentage point and costs and volume remain unchanged, then operating profit drops from  8.1 to 7.1—a 12.3 percent profit reduction from only a single percentage point decline in  price.
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 02/08/2012 for the course ECONO 205 taught by Professor Bringingdecipline during the Spring '11 term at Instituto Balseiro.

Page1 / 11

10. Price wars - Pricewars No-nonsense advice on how to...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online