I often find myself in discussions with clients or potential clients about whether lowering prices to take market share is a good pricing strategy. To illustrate the effects of trying to win with lower prices, I look back at this story, sent to me by a former service station manager in Texas.
“In 2010, my company started a price war with our local competitors. Within a week I saw the price of gas drop more than thirty cents, and my margins dissipate until we were losing money. The erosion of margins crippled the store’s ability to stay profitable, and by year’s end we were forced to shut down.”
“Price wars may seem like a good idea in the short-term, but the long-term results can be a loss of quality and the destruction of competition. Many people are at fault for a price war, and in my situation there were three players: lower management, senior management, and consumers. Understanding their role in a price war can help to avoid future disasters.”
“I was the man with the best view of the company’s policies, and I bear a alot of blame for the price war. In my case, I blindly followed corporate policy, because I did not feel empowered to question it. Once I noticed that my neighbors were following our pricing model I did not speak up and let upper or middle management know how quickly margins were falling. It was not until my store started losing money on gas that the company took notice, but by that time we were in serious trouble and would have been almost impossible to save. While my mistake allowed things to begin to get out of hand, I am not the only one to blame for the failure of the policy.”
“Senior management has to create pricing strategies that apply to giant sectors of the company; however, in making these policies, companies can lose sight of how competitive pricing affects individual products or stores. At my location, gas volume was up, and so were total customer counts, but those were only a small piece of the picture of sales in the store, since aggressive gas prices were not generating a corresponding increase in inside sales. Customers enjoyed the lower gas prices, but they were shopping at competitors for beer, cigarettes, etc., so there was nothing to offset the losses from gas margins. Other stores were seeing record sales inside and outside, but the situation for my location was different, and made it impossible for us to gain any ground. When evaluating any pricing policy, management must take care to look at all metrics, and break down the numbers to the smallest level, if a policy is going to continue.”
“It is hard to blame consumers for following the lowest prices, but they play a role in price wars. Low prices can bring customers to the business, and so companies create strategies that will create foot traffic, and hope that volume will make up for the loss of margin. During the price war my company fought, consumers got some of the lowest gas prices in Dallas, but those low prices could not last. The end result for the consumer in that neighborhood was two of three gas stations on one corner going out of business, and as soon as they closed their doors, the remaining company raised prices higher than ever before.”
“Competitive pricing is a necessary part of business, but blindly offering the lowest prices or giving price match guarantees are not good ideas. A pricing strategy must be based in concrete data that takes into account many factors, including the quality of the product or service and how customers behave; and managers on the ground must be empowered to give feedback. When those conditions have been met, a price war can be avoided, and everyone involved can still make money.”
While I might have stated things differently, the writer made a very important point- price wars are not always things started by others that we just have to live with. Our individual actions and reactions are important factors in whether price wars occur at all. Trying to take share based on price can often be disastrous, and we all must be careful that we don’t lead our companies into battles we cannot win.