What Do You Mean By Price War?

Introduction 

A price war occurs when firms compete fiercely by constantly decreasing prices to acquire market share and attract customers. The emergence of new competitors, modifications in consumer tastes or habits, or a drive to gain market share can all lead to this kind of rivalry. A pricing war is sometimes regarded as a risky tactic since it can result in smaller profit margins, lower-quality goods or services, and a detrimental influence on the reputation of a company’s brand.  Businesses with a cost advantage may find this a valuable tactic since they may charge lower prices and yet turn a profit. It could not be long-term viable and might also result in lower profit margins. Analysing market dynamics, rival pricing, and customer preferences in-depth is necessary for a price competition strategy to be effective. 

Understanding Price War 

A pricing war is when two or more businesses in the same sector compete to lower the cost of their goods or services to outbid one another. A pricing war aims to entice clients away from competitors by undercutting one another’s prices and providing better bargains. 

A corporation frequently starts a pricing war by aggressively decreasing its prices to gain market share. This puts pressure on its rivals to follow suit. As a result of each business trying to undercut the others, prices may fall in a negative cycle. Some businesses may only be able to keep their competitiveness if their profit margins are high. 

Price wars are not limited to a single cause; discounts, promotions, or exclusive deals also play a significant role as a catalyst. Businesses may also launch aggressive marketing efforts to advertise their reduced rates and entice customers away from their competitors. In extreme instances, businesses may even provide goods or services at a loss, hoping to compensate for their losses by attracting new clients or driving their rivals out of business. 

Causes of the Price War 

Price wars are a feature of various aspects.

• Competitive environment: In a market with fierce competition for a few clients, businesses may decrease prices to obtain an advantage over their rivals, which is one of the best price competition strategies. 
• Overcapacity: Businesses may decrease their prices to move inventory and prevent losses from unsold items if there is an oversupply of goods or services on the market. 
• Product homogeneity: When goods or services are comparable, businesses may need to fight on pricing to stand out from the competition and draw in clients. 
• Market newcomers: When a new firm enters a market, the established competitors may feel threatened and start a price war to protect their market dominance. 

• Economic downturns: When things are rough, customers may have less money to spend, making them more price sensitive and concentrating more on finding deals. 
• Shareholder pressure: Businesses under pressure to boost earnings or gain market share may start a pricing war to accomplish these objectives.

Price wars are more likely to develop in markets with low entry barriers, intense competition, and limited product differentiation. Before starting a pricing war, businesses should consider the possible outcomes because the tactic might lower earnings and harm the company’s brand.

Effects of Price Wars 

Pricing Wars can affect a variety of stakeholders in different ways, including

• Consumers: Price wars can significantly affect consumers’ purchasing power and habits. Increased demand for a good or service may result from lower pricing. In contrast, decreased demand or lower total expenditure may result from higher costs. 
• Competitors: A company’s rivals may also be impacted by price adjustments and may need to modify their own pricing strategy to maintain market share. Since one business seeks to undercut the others’ pricing, this might result in a downward price spiral. 

• Suppliers: Price wars may affect suppliers; to remain competitive, they may need to modify their own pricing strategy. Occasionally, if prices drop dramatically, providers and purchasers may need to renegotiate their contracts. 
• Shareholders: Pricing modifications can affect a company’s shareholders, who may see changes in the stock price or dividends due to modifications to the pricing strategy. 
• Market: Substantial pricing adjustments may harm the market as a whole because customers, rival businesses, and suppliers may modify their own business plans in reaction. This may alter market dynamics and affect the economy as a whole. 

The recent Holiday study by Deloitte in 2022 shows that even though customers must negotiate a Christmas season characterised by the ongoing effects of inflation on the American economy, there are some promising signs. Although their priorities have changed, shoppers still find ways to stay in the holiday mood. 

Advantages Of The Price War 

• While participating in a pricing war might be dangerous, there are certain possible benefits that businesses may take into account when formulating their product plans: 
• Market share growth, by lowering prices, a business can draw in more clients and expand its clientele, especially if its rivals cannot match the pricing it is giving. 
• Price-sensitive customers may be drawn to a company’s brand if it is positioned as inexpensive and value-oriented by offering reduced pricing. 
• Increased sales volume and reduced pricing may result in more sales, which, over time, may boost income for the business. 
• Pressure on competitors by starting a pricing war. A corporation can pressure its competitors to match its prices, making maintaining profit margins difficult. 

Disadvantages Of the Price War  

While a pricing war may seem appealing for businesses wanting to gain a competitive edge in the market, several drawbacks should be considered throughout the product planning stage. Some negative aspects include 

• Decreased profitability: Reducing prices may result in smaller profit margins, eventually hurting a company’s earnings. 
• Harm to branding: Low pricing can harm a company’s brand image, making it harder to maintain a premium image and attract clients who value quality above money. 
• Unsustainable pricing: Businesses may struggle to maintain low prices for an extended time, especially if their rivals can equal or undercut their rates. Price volatility and an inability to provide long-term revenue are potential consequences. 
• Decreased product differentiation: Businesses participating in a pricing war may find it difficult to differentiate themselves from their rivals because customers may view their goods and services as interchangeable based purely on price. 
• Market share loss: If a company’s price strategy is unsuccessful in bringing in new clients or keeping hold of its current clientele, it may lose market share to rivals that can provide better value. 

Example of Price War 

Sprint Competes with Rivals in the Telecom Industry

In 1999, Sprint, one of the largest telecom companies in the US, waged a price war with rivals to gain market share and enhance profitability. Sprint started the pricing battle by introducing an unlimited long-distance plan for $50 per month, much less expensive than AT&T and MCI were charging. With the move, Sprint was able to gain more market share and gain more customers, but it also forced its rivals to drop their costs in response. As a result of matching Sprint’s pricing, AT&T and MCI caused a price decline that lasted for several months.

Sprint started to provide further enticements like free mobile phones and lower activation costs as the price battle heated up to draw users. As a result, there was an even greater price war among the telecom firms, increasing rivalry among them.

While the pricing battle helped Sprint gain new consumers, it also had a detrimental impact on the business and the sector as a whole. Many telecommunications firms, including Sprint, experienced decreased profit margins and financial losses due to the fierce competition. In addition, the pricing war pushed many smaller competitors off the market since they could not compete with the bigger firms, which resulted in industry consolidation.

In general, the pricing war that occurred in 1999 between Sprint and its rivals had a big influence on the US telecoms sector. While it successfully brought in new clients and expanded market share for certain businesses, it also had unfavourable effects, including decreased profitability and industry consolidation. 

CVS Health Disrupts the Retail Pharmacy Industry with Free Prescription Delivery

CVS Health announced in the latter part of 2018 that it would provide customers with free delivery of prescription medications. This action was perceived as a reaction to growing competition from rivals expanding their pharmacy services, such as Amazon and Walmart.

A further significant drugstore chain, Walgreens, replied to CVS’s action by collaborating with FedEx to provide next-day delivery of prescription prescriptions in the early months of 2019. Also, the business declared that it would provide its same-day delivery service to several additional markets.

This price war between Walgreens and CVS is an example of how businesses in the retail pharmacy sector are increasingly fighting on price and convenience to draw customers. Moreover, it emphasises how crucial it is to act swiftly to preserve market share and profitability in an extremely competitive pitch. 

Conclusion 

Successful trading and investing depend on solid comprehension of price action. A price action analysis examines past price movements to spot future market trends and openings. Traders and investors may increase their chances of making long-term profits by making informed judgments on when to purchase, sell, or retain assets by understanding the fundamentals of price action. A price action analysis is not an ideal approach; it is crucial to remember that traders should also consider other things like market fundamentals and technical indicators when making investing decisions. Trading and investing professionals may successfully traverse the markets and reach their financial objectives with the appropriate strategy and a firm grasp of price action. For more information on the price war and other critical concepts that you must learn to become a proficient project manager, opt for UNext’s PG Certificate Program in Product Management.