It’s the kind of dilemma no CEO wants to face. You learn from a valued customer that a competitor has dramatically undercut your most profitable product in the opening salvo of a price war. There are two obvious courses of action, and neither of them is very palatable. Do you match their price and sacrifice your own profits, or do you ignore them and risk losing business?
As MIT senior lecturer Jonathan Byrnes explains in the latest episode of his Profit Levers podcast, shared with Management Today, price wars are the ultimate lose-lose scenario. Even customers, who might enjoy the short-term savings, will eventually suffer as price squeezes out other forms of value from the business relationship.
Winning such a conflict might seem impossible, Byrnes says, but only if you play your opponent’s game.
Cutting prices to match your competitor "is an invitation to lose your profitability for two reasons," says Brynes. "First, your competitor probably will up the ante with another price cut, setting off a vicious cycle, and second, you are essentially training your customers to hammer you on price at every turn."
A much better response, Byrnes says, is instead to find ways of reducing the costs of doing business with your biggest customers, for example by flow-through supply chains or product rationalisation. Above all, you can ‘win’ by focusing on the value that you offer customers as a long-term business partner, which can be far more significant to them than a short-term cost reduction.
"If you do what a customer asks for, you are a good supplier, but if you do what a customer really needs – underline really needs – you are a vital and irreplaceable strategic partner. And the most important innovations create new value for your customers in ways that they never even thought of," says Byrnes.
Click the image below to visit the Profit Levers site and listen to the full podcast:
Main image credit: Chen Yang/Visual China Group via Getty Images
Profit Levers credit: Jonathan Byrnes/Profit Isle