What is Price Cutting?

Running a business is an endless process that requires multiple decisions which can make or break all the efforts in a matter of minutes. Lowering prices is one problem that most business owners have to deal with, especially in a highly competitive market.

So what is price cutting? Price cutting, or cost cutting is a marketing strategy that allows you to lower your prices below market and ward off competition. But try to stay away from the price cutting war and once it starts, make sure you win. Here’s everything you need to know about price cutting and wars…

Why is price so important? 

Determining the right price for your product may seem simple, but it can have a huge impact on the growth of your business. Simply put, the price of a product or service is the value people are willing to pay to use it. Prices that are too high or too low can limit business growth, reduce sales, and cash flow. Furthermore, to stay competitive, one must adopt an aggressive pricing strategy while still earning enough profit to run a healthy business.

How does price cutting work? 

Companies often lower the prices of their products in order to gain more market share and customers in a short period of time. In highly competitive areas, prices often fall, forcing competition to start a price cutting war or exit the market altogether. Lower prices lead to lower profits until they cannot fall below a range. Otherwise, they risk financial loss for the company, which is why price reduction is not a sustainable strategy and should only be done in an emergency.

Key Note:

Lowering prices is not always the best way to stifle competition. Discounts, exclusive offers, subscriptions, free shipping, value marketing, and new product launches can save your business from a crushing defeat in the price cutting war.

Advantages of price cutting

Consumers get the best deal – all thanks to a price war. Suppose a customer wants to buy a car. A car company has to give cheaper offers on demand to sustain the price cutting market and not lose the buyer to other companies. You can also give consumers to work out better financing for the product and get long-term service, repairs, and warranties that give them an advantage in negotiations. In addition, price reductions allow companies to sell more products, which means more people can afford to buy goods and gain greater market coverage. 

Disadvantages of price cutting

A price cutting strategy has more disadvantages than advantages. More often than not, companies with deep pockets win, and smaller companies lose because of a lack of cash flow they can’t sustain for long. This gives consumers less choice because there will be no more competitors over time, making a single company stronger after price wars. As many businesses close, people are forced to look for new jobs, which is especially bad in areas with fewer hiring companies. Employee salaries are also cut by large firms to maintain margins, which also impacts product quality. 

Pros
  • Consumers get the best deal
  • Firms get more customers
  • Increases revenue for winners
  • Helps in fast business growth
  • Increases profit in long term
Cons
  • Companies loses profits
  • Small businesses gets shut down
  • Eradicates healthy competition
  • Salaries of employees may get reduced
  • Requires lot of time, research and money

What are price cutting wars? 

price-cutting-wars

When two or more companies lower prices to gain an advantage in a highly competitive arena, it is called a price cutting war. First, one company lowers the price of a product below the standard range, and in response, another company begins to lower the price until it reaches the lowest price in the market. This causes entire industries to change prices and start a competitive struggle for survival.

What causes price cutting wars? 

The main reasons why price wars start are: 

  • New Competitor

New companies often start price cutting wars to profit from existing products by lowering prices. Discounted prices attract more shoppers and help new businesses grow their wealth by catering to budget-conscious users without adding other benefits such as improved design, quality and customer experience.

  • Bankruptcy

A shrinking market can force companies to lower prices and struggle to maintain a strong market share. In addition, when a company is on the verge of bankruptcy, it can lower prices and maintain cash flow as short-term liquidity to stay afloat and make the necessary payments.

  • Penetration Pricing 

Penetration pricing is a large-scale method of scraping existing margins in the hope of dominating the entire market at an unfair advantage. Every existing or potential company is forced out of the industry by extremely low profits that they cannot sustain. Sellers start by setting prices so low that no other brand can compete, which can result in initially suffering a loss but ultimately making a profit in the long run.

  • Oligopoly 

A small number of brands or companies with sufficient influence come together in an industry to keep others out of their market. Oligopolies are primarily run by big brands to generate above-market returns without adding new value to a product. An oligopoly can easily lead to a price-cutting war if a new competitor enters the market or a big brand decides not to participate.

  • Upgrades 

New improvements in production lines, strategies, and suppliers can drastically lower the overall price of making a product, which can result in lower business prices. This makes upgrades an important business process to stay ahead of the competition and be the first mover in a product focused industry. 

What are the challenges of price cutting? 

  1. Competing against other retailer

Once you start lowering prices, others will surely follow. Businesses need consistent, accurate and real-time data about their competition to keep tabs on their activities. If someone pauses in the price-cutting war, a major breakthrough could occur and your company could go bankrupt before your very eyes. It only takes a few seconds to lose customers by not responding to competitors’ prices, and you lose all influence in the target market. 

  1. Varying Prices 

It’s easy to lose control of the different prices. If you play as a loss leader (selling high-quality products at low prices) to attract customers, the total loss may exceed the estimated amount. Always keep the math in store by tracking various prices to calculate real time risk of your decisions and never over risk especially in a price cutting war.

  1. Brand Position 

Don’t let prices get out of hand and ruin your overall brand image. Unnecessary discounts in a fierce price cutting war can negatively impact a business and allow others to become premium brands. People may start thinking that unlike other brands, you are making products with lower quality material. Which can make it impossible for a company to return to the normal price range after things have calmed down. Staying true to your brand image and striving for quality products to build a good market perception that can help you in the long run.

  1. Managing Inventory 

Inventory management is not an easy task and becomes more difficult during the war. When prices collide between brands, customers try to get as much discount as possible by using the leverage of discounts from other companies. So often products are pushed back or discounted at prices that businesses cannot afford. To guard against mismanagement, get a team to handle daily rebates and total sales to protect working capital and cash flow. 

Who survives and who strives in a price cutting war? 

Only a company capable of producing a low-cost product or service at a profit sufficient for day-to-day operations can survive a price-cutting war. If your business can absorb losses in the short term and continue to operate as usual, a price war can help you a lot and even lead to more customers than usual.

Startups entering the market don’t have enough capital, money, or wedges to fund a price cutting war. This makes all the big companies clear winners as they already have the well-established supply chain and contacts to get better deals at lower prices for their business.

How to avoid price cutting war with competitors? 

A price war may seem like a good option to enter the market and crush competitors, but it can be a big mistake. No one sees the future, and after all the analysis, there’s still a chance that you won’t win and lose all your customers, lose your product, and bankrupt your business. There are many other healthy strategies for competing in the market without starting or engaging in price-cutting wars, so they should be avoided until there are no alternatives left.

Hers are some tips to avoid price cutting wars: 

  1. Make Allies 

“Kill or be killed” is the wrong strategy in a business. Competitors are not always enemies. Studies show that people who focus on maximizing profits and increasing sales are clear winners in any area of ​​business rather than beating the competition out of the market.

Turn your competitors into a source of income by creating new networks, combining products and services, building a strong image, creating joint events and promotions. This way you can expand the market and earn more income by making others depend on you.

  1. Reveal your strategies 

Let your competitors know that you don’t want a price-cutting war. Seems a simple advice right? Many price wars start because people are afraid that other competitors will start lowering prices, so they start price cutting to gain an advantage over the enemy. Spread the message that there are many benefits to not focusing on price and making a good product is best for the industry. Avoid plans that show your competitors that you are lowering the price of any product and monitor them to take the necessary actions in a timely manner.

  1. Alert customers of risks

One strategy for gaining people’s trust and staying in power in a highly volatile market is to understand how your competitors are cutting prices and show it to the world.

You can’t change the price and leave the value alone. To produce cheap goods, companies buy cheap materials and focus on wholesale. Show costumes the problem of buying cheap products to break this price cutting cycle.

  1. Introduce new products 

Instead of fighting, companies that are smaller than their competitors can be supported in smart ways. A price war can be avoided if there are many products that no one else is producing. There is no economic benefit from lower prices, instead you can focus on niche channels to find new ideas for amazing products.

New products not only help you make more money and broaden the business scope, but they also help keep your brand image attractive to consumers. Other competitors may try to copy your idea, but you get the advantage as a first mover and it is much easier to beat competitors being in the advantage. 

  1. Buyout competition 

Finally, gaining a monopoly on the market can also eliminate the chances of competitive prices because there won’t be more sellers than you. Buying competitors is a unique way of ending a price-cutting war, where you can trick all competitors into taking ownership of products and services in an entire industry.

This method requires a lot of capital and resources, so startups and other small businesses can’t really apply the formula. The best example of a monopoly is Facebook (or Meta since 2021). For years, Facebook bought out its competitors to gain a monopoly on the market. That includes Instagram, WhatsApp, and 87 other companies you may not have heard of.

  1. Copyright & Patents 

Companies that sell patented products prevent others from copying, producing, selling, or importing your ideas without explicit permission. If you have a patent, no one can enter the market without your permission. The best example of this strategy is a petroleum company called Vaseline. Patented in 1872, Vaseline prevented others from entering the petroleum jelly market to never run into problems with competition or lowering the product’s price. They have a wide customer base in all countries and can change the price of their products at any time without anyone bothering them.

How to win price cutting wars?

Various tactics have been developed in the past to fend off competitors who lower prices and win price cutting wars. Businesses, companies, and entire industries make great sacrifices when a price war breaks out. And no matter who wins, things seem to end up worse than before, but as time goes on, prize fights are becoming more and more common. So if you’ve already started a price war or you are stuck in a one, here are the best price cutting strategies: 

  1. Stop the war before start

The best strategy for winning a price war is not to start it because a price war is such a powerful lever that people start out of fear of other people. As mentioned earlier, companies can end a price war by showing their intentions, turning their enemies into allies, introducing new products, and buying competitors to gain market monopoly. Once you have mastered all the options, there is no chance of anyone interfering with your business plans.

  1. Compete in quality 

Quality competition can help your business eliminate waste, increase efficiency, and generate more profit while selling less product than other competitors. Make people understand that buying quality products over cheap stuff actually saves money in the long run.

Leveraging the idea that better raw materials lead to higher prices, and help buyers understand the downsides of buying cheap products. Combined with a good marketing strategy, a quality product can increase sales while your competitors lower prices to make money in a price cutting war.

  1. Focus on Customer Retention

Apple is the most profitable and successful company in the world with many competitors selling phones and laptops at lower prices. Other brands may have better technology like screens, cameras, battery life, and displays, but Apple’s customer base remains loyal to its brand.

Due to customer loyalty and friendly ecosystem, people continue to buy Apple products. It’s much cheaper to keep your old customers than it is to attract new ones. So try to build a loyal customer base so you don’t have to worry about price wars and price drops from competitors.

  1. Re-branding

Instead of lowering the price of a product, you can make it better, more up-to-date, and compete with better features. Rebranding sparks new interest and people start investing their time and money into updated items on the market. The biggest example of rebranding in 2021 is Facebook.

Facebook started as a way for people to make friends, meet new people, and share photos online, but when people started to lose interest in the platform, Facebook shifted its focus from meta and virtual reality. Virtual Reality is a topic that everyone talks about and Facebook wants to grab people’s attention by rebranding social interactions in a new way.

  1. Creative Advertising 

Again, the value of a company’s product is determined by how much people are willing to pay for it. When too many companies try to offer the same products and services, competition and problems arise, which ultimately lead to price cutting wars.

Businesses can win a price war by promoting brand awareness through creative advertising. This can uniquely include reduced shipping costs, attractive packaging, and expanded support for market products. Once you start improving the customer experience and meeting their needs with creative promotion strategies, people will definitely pay attention to your brand.

Red Bull is a great example of this strategy. Red Bull has never made its own drinks like Coca Cola and Pepsi. They outsourced the entire production and bottling process in the Swiss Alps. Red Bull creatively advertises its products at a higher price than other beverage brands. They only work in marketing and customers love the brand and drink it regularly. 

  1. Create New Revenue Streams 

There’s a reason people say, “Never put all your eggs in one basket.” If you focus your efforts and resources on just one business, you could lose it all. Diversifying your business allows you to spot market gaps and increase company profits with new ideas.This way if one business fails you still have other ones or you can fund the first business with other revenue streams. 

An additional source of income can help keep your business afloat in a price war. All your competitors will burn money with little or no profit and it will not affect you in the slightest. Even if your price drops below margin, you can hold it until the market returns to its original value to make a mover.

  1. Best Defense Is Good Offense 

When someone starts a price cutting war, don’t forget to end it. Amazon is known for crushing others by pushing prices below competitors’ budgets. According to one study, Amazon was able to make 25% more profit by changing product prices 2.5 million times a day.

Large companies like Amazon rely on third-party vendors to generate commission revenue. Remember that low prices don’t last forever. So, if you are a producer, respond with an offensive strategy.

These companies attack and take short-term losses to maintain their dominance, and when other players can’t keep up, prices rise again. So to go against the big companies, you need the right cash flow to keep attacking because prices can’t stay low forever.

About the author

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Yash Singh

I'm the CEO of BusinessWeekly. But what matters most to me is running a business and creating content around it. To optimize your business strategy and accelerate your growth, here are some great articles.

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