I will talk now about the third use case for compare the price models, the price wars. A price war is a vicious circle in four acts. It starts with player A lowers his price to win share, and no surprise, he does win share. However, then Player B lowers price to better compete and win some of the lost share back. And at the end of it, the market shares return pretty much to their original levels, and nobody is really better off. In fact, everyone is worse off because the margins in the industry now have come down as the price "water level" was lowered. Sometimes though, price wars can help you to realize a competitive advantage. And here's a good question for you. If you see yourself as as a winner of a price war, would you end it early? There are typically a couple of goals with price wars, and they go back to three likely drivers. Often it's about winning share, or weaken the competitors. And I would say this has to do with muscle flexing. The second case is where someone enters a new market, but their product is not really that convincing. So they have to lower the price in order to get into the value surplus area and suddenly you broke off a price war. And sometimes companies are just very much in need for additional volume or for cash so if you need to sell off your overstock to improve liquidity, or to acquire more volume in the market to fill your factory capacity. This reeks a little bit of desperation. Oftentimes I get called to clients who say, we have a big price war on our hands, help us. But before you really go to war, I urge you to check what's really really going on and what kind of response does this warrant. Here are a few examples of what I hear. The competition started lowering the prices, but is that actually so? It matters a lot who started it because if your client started it first, then having a competitive response is actually just normal. Second scenario, the competition attacks our market share. And here you should look for, is this really a price war that is here to stay or are there some temporary aspects to it? For example, the competitor might just have extra stock on hands or try to fill his factory temporarily. Thirdly, we are caught up in a big price war. Check whether it is truly a price war across the market, and how bad it really is. Sometimes, you'll find it's actually in a fairly narrow part of the market, or even local in a local market. And there is no immediate threat of an increasing scope. And lastly, there is a new player who prices very aggressively and here, again, check how much of the market is really affected. Sometimes you'll find it's a small part and there is a limited global threat. Once it's clear, though, that you're in a price war, what you actually going to do? There are two types of responses you can choose. Non price moves and price moves. The first non price move is not responding. Yes, that is actually an option. And it makes the most sense when your initial competitor price move was unintentional or you believe it is temporary. Or you think that lowering the price as a response would just make things worse and lead to a total escalation. The second one is sending a message. And its a message slash threat because you basically tell the competitor, and you can do this even preemptively. To say, whatever you do, I will be able to match or undercut your prices and, therefore, what the market hears is there's no point in lowering our prices to win share because you will be following them. Now, be prepared, though, to follow through on this threat because, once you lose credibility in the market, it's clear that you're bluffing. The third non price option is changing the value perception. And here you're trying to take the customer's attention away from a pure price point comparison and bring in value aspects of your offering. You would, for example, say well, the competitor is able to lower their prices by so much because the product is really inferior. They're using not as good as materials, it's shoddily put together. It's not performing as well as ours. We, however, do much better on all of these things and, therefore, we are allowed to have a premium. Once you tried the non price moves but there was no point, or you didn't get very far, you have to play the war. And there you can differentiate between price moves that are fairly surgical, meaning very targeted and in a very thoughtful way. Or you go to a broader price retaliation. If you retaliate I would only do it in three kind of scenarios. Either you have a structural competitive advantage and you are pretty certain you will come out as a winner. The second one is you actually see the chance to end the war. Or the third one is, in markets with very high cross elasticity. Where you just will lose with certainty so much market share that you're probably put out of business, where you have to respond. So a quick summary on the price war, price wars usually don't make a lot of sense. However, they happen all the time, so you better be prepared because I'm certain, within your career, you will face it at least once. Respond if you can with non price moves, and these were no response at all, signaling, and addressing the value perception. Price moves are clearly the less preferred options, and they are try first, surgical or subtle price moves. And if subtle won't do, go to war, but move quickly and unambiguously. And lastly, don't forget to monitor your competition closely after each move. Because you have to confirm, did your move actually have the intended effect and what did the competitor do as a response to your move?
