How to Win a Price War — by Avoiding the Fight
Imagine that a customer you are trying to win uses the argument “the X company is selling it at a cheaper price.”
You check. There are a couple of answers you may encounter:
- Company X is really offering the same thing cheaper.
- Company X is selling a cheaper product that is only similar to yours but your client failed to see the difference.
- It's not cheaper at all, but the offer has been constructed in such a way that the consumer thinks so (or he is bluffing all the way just to get you to lower the price).
What do you do?
A standard reaction would be to lower the price. After all, you've invested so much into acquiring this customer, it would be a shame to lose him “during the final lap,” right?
Wrong. You may think you're profiting off this client, but the truth is you earned less (or you did not profit at all) in the short-term. And the long-term consequences of lowering the price permanently will be even more devastating. To keep selling for less, you start to skimp on quality. You earn less, so you spend less on advertising and R&D. Fewer people buy less innovative products from you. Can you avoid the price war?
When Not to React to a Price Drop
The simple information that your competitors have dropped their prices should not warrant an immediate reaction. Try to dig deeper and learn their reason for lowering the price, because these price drops may be prosaic and you'll be best off by … doing nothing.
Question one: Do the customers know about the price drop?
In psychology, we have these cognitive biases. One of these biases causes you to assume a higher probability of phenomena you encounter more often. That's why the fear of flying the plane is greater than a fear of driving a car — you encountered a safe car trip more often than a safe plane trip, but the statistics say that it's the plane that is the safest.