Price War - Reactions To Price Challenges

Reactions To Price Challenges

The first reaction to a price reduction should always be to consider carefully. Has the competitor decided upon a long-term price reduction? Is this just a short-term promotion? If it is the latter, then the reaction should be that relating to short-term promotional activity, and the optimum response is often simply to ignore the challenge. Too often, price wars have been started because simple promotional activities have been misunderstood as major strategic changes.

But if it seems that it is a long-term move then there are many possible reactions:

• Reduce price: The most obvious, and most popular, reaction is to match the competitor's move. This maintains the status quo (but reduces profits pro rata). If this route is to be chosen it is as well to make the move rapidly and obviously - not least to send signals to the competitor of your intention to fight.
• Maintain price: Another reaction is to hope that the competitor has made a mistake, but if the competitor's action does make inroads into a merchant's share, this can soon mean customers lose confidence and a subsequent a loss of sales.
• Split the market: Branch one product into two, selling one as a premium and another as a basic. This effective tactic was notably used by Heublein, the owner of the Smirnoff brand of vodka).
• React with other measures - Reducing price is not the only weapon. Other tactics can be used to great effect: improved quality, increased promotion (perhaps to improve the idea of quality).