Competition is the name of the game for every firm with a market share, or every firm anyway. What better way to deal with the adversary, then to make a little price change?
The success of a business has certain determinants and factors. It is interesting to observe the cause and effect relationship as every factor makes a contribution towards the achievements of a company. Amongst these factors, there is the utmost variable, price.
Whether it is determining the original price or bring alterations to the prevailing one, a change in price directly influences the important stakeholders of a firm. It is of course, a valuable tool in dealing with the competition. In fact, a number of companies rely on their pricing strategy in order to get the upper hand.
Warren Buffet, celebrated business magnate, calls it ‘the single most important decision’. He explains that the power to alter prices without negative consequences is an extremely powerful position to be in. He continues by establishing that a firm’s ability to increase prices without doing to harm to profits or bowing out to the competitor determines how successful a business is. (Hinterhuber and Liozou, 2012)
For two companies operating in the same market, market share, is a pivotal factor. The ambition to have a greater market share triggers the competition and consequently, a price war. In several situations, firms attempt to avoid the war but in some cases, it cannot be evaded. Once the war begins, it is easy for businesses to be embroiled in it. This does not necessarily end in a favourable way. In fact, it has the likelihood of having a negative impact. Regardless of the outcomes, the cuts made in the price during this war are rarely recovered and the competitors face the risk of being in a less than favourable position by the end of it. (R. Rao, E. Bergen and S. Davis, 2000)
This shows the importance of setting the right price in a competitive market. One of the major determinants in setting the price is the type of market or industry that a firm operates in. Experts argue that, low-cost firms have it easy and they enjoy the freedom to freely manoeuvre their pricing strategy without putting much on stake. They have the ability to intimidate their competition.
The major element here is the focus. The primary focus of a company helps in establishing a firm position in the market. This focus can either be on a certain segment of the market, or it could be on a basic product. This primary focus allows the business to use its strength in gaining an advantage over the competition. Hence, it is crucial to be aware of the company’s strength and applying focus accordingly in order to gain competitive advantage. Altering the price of a focused product or in accordance to a focused segment is always a benefit. (N. Kumar, 2006)
Aldi, has demonstrated exemplary tactics in fighting the competition using its prices. The store employs a strategy to lower its costs. It does not provide for a luxurious shopping experience but it does provide for a cheaper one. This has been the company’s primary focus and they continue to maintain it. It continues to slash prices just like it continues to slash its costs. (N. Kumar, 2006)
Ensuring success in a price competitive scenario requires diagnosis of the market. A company needs to look into four major aspects. Firstly, customer issues play an important role. These include the price sensitivity of the product. Secondly, there are the company issues. These are likely to be based on the cost structures of a company. The competitor is the third most important part of the diagnosis. Cost, positioning, capabilities and strategic positioning, all come into play here. Lastly, contributor issues form the fourth major aspect. (R. Rao, E. Bergen and S. Davis, 2000)
- “How To Fight A Price War”. Harvard Business Review. N.p., 2000. https://hbr.org/2000/03/how-to-fight-a-price-war
- “Is It Time To Rethink Your Pricing Strategy?”. MIT Sloan Management Review. N.p., 2012. http://sloanreview.mit.edu/article/is-it-time-to-rethink-your-pricing-strategy/
- “Strategies To Fight Low-Cost Rivals”. Harvard Business Review. N.p., 2006. https://hbr.org/2006/12/strategies-to-fight-low-cost-rivals