...ay Price Wars Summary: Price wars have plagued industry after industry in recent years. Indeed, price wars must be avoided like the plague! More often than not, there are no winners, only losers. The effects of price wars are not only severe but also enduring. Price wars can lead to a severe erosion of profits. Unless there is a significant cost advantage, for the company introducing the price cut, a price reduction will lead to retaliation by competitors. So dropping prices normally does not lead to an increase in market share. Instead it leads to a sharp drop in profits. Price wars also shape customer expectations. Research indicates that the lowest price people pay for a product or service is remembered longest, and becomes their reference point. Driving down prices to unreasonable levels, has a dramatic influence on a customer's perception of what is a "reasonable" price long after the war ends. Price wars also divert the attention of customers away from product benefits towards price. That is usually bad for the industry. Many of the justifications given by managers for entering a price war are untenable. The claim that weak competitors can be knocked out through a price war is weak. Indeed, there is sufficient empirical evidence to indicate that price wars are not guided by any logic. They tend to get emotional and continue long after it has become economically unviable to offer these products at such low prices. As Robert A. Garda and Michael V. Marn, point out,...
Words: 1091 - Pages: 5
...How to Fight a Price War By Akshay R. Rao, Mark E. Bergen and Scott Davis IN THE BATTLE TO CAPTURE THE CUSTOMER companies use a wide range of tactics to ward off competitors. Increasingly, price is the weapon of choice – and frequently the skirmishing degenerates into a price war. Creating low price appeal is often the goal, but the result of one retaliatory price slashing after another is often a precipitous decline in industry profits. Look at the airline price wars of 1992. When American Airlines, Northwest Airlines, and other U.S. carriers went toe-to-toe in matching and exceeding one another’s reduced fares, the result was record volumes of air travel-and record losses. Some estimates suggest that the overall losses suffered by the industry that year exceed the combined profits for the entire industry from its inception. Price wars can create economically devastating and psychologically debilitating situations that take an extraordinary toll on an individual, a company, and industry profitability. No matter who wins, the combatants all seem to end up worse off than before they joined the battle. And yet, price wars are becoming increasingly common and uncommonly fierce. Consider the following two examples: • In July 1999, Sprint announced a nighttime long-distance rate of 5 cents per minute. In August 1999, MCI matched Sprint’s off-peak rate. Later that month, AT & T acknowledged that revenue from its consumer long-distance business was falling,...
Words: 6913 - Pages: 28
...Summary Of Price Wars Product & Price Strategy Summary Of Price Wars Product & Price Strategy Summary Of Price Wars: How To Avoid The Death Spiral Of Permanently Lost Profit, Declining Value And Heightened Price Sensitivity Why to avoid price wars * Reducing prices is not a sound strategy unless you have a 30%+ cost advantage. * Slashing prices is the easiest strategy to copy. * Competitors respond in a day or two to any price move. * A 10% drop in US cigarette prices would need to lead to a 50% increase in volume (assuming unchanged costs) for Trading Profit to be unchanged. This implies a price elasticity of 5. The US Tobacco Policy Research Study Group (which is anti-tobacco) estimates the elasticity as 0 .2 to 1 .4. * Price psychology and price recall show the lowest price is remembered longest. Therefore the low prices in a price war influence a consumer's perception of what is a "reasonable" price long after the war ends. * Consumers become sensitive to price at the expense of value and benefits. * Even if a weak competitor succumbs (and the regulators/courts do not construe illegal predatory pricing) the capacity often stays. Preventing and avoiding price wars should have a high strategic priority. Price wars destroy huge chunks of company and industry profits, and rarely provide a business with sustainable advantage. They undermine the consumer base and seldom alleviate an industry's structural or capacity problems. What really...
Words: 761 - Pages: 4
...Introduction The assignment aims at critically evaluating the statement, “The recent price wars in the supermarket and mobile phone industries have been beneficial to both consumers and their respective industries” by using various theoretical models. For this, we will also consider various microeconomic models such as Supply, Demand, Market equilibrium, Price discrimination, Opportunity cost. In the other part of assignment, we have critically evaluate the statement, “The cost of mobile phones have fallen to such a level which, if this trend continues ,would make mobile telephony more affordable to much larger segments of the emerging markets population” using various macroeconomic models such as Growth, Inflation, Unemployment, GDP. By definition, macroeconomic models are defined as the analytical tools designed to describe the operation of the economy. On the other hand, the microeconomic models are tools used to describe the behavior of individuals and small organizations in decision-making (Laberge, 2003). The research methodology used to formulate this essay is qualitative in nature. Various secondary resources have been referred including case studies and published & unpublished articles while writing this essay. These secondary resources might have some errors which can reflect in the essay. Hence, credibility, reliability and validity of the information need to be considered. Part 1: Price war is a concept used commonly in markets and arises due to rigorous competition...
Words: 1523 - Pages: 7
...If you find yourself facing a price war, you'll need to understand how it started in order to respond effectively. Often the best counterattack does not. involve a retaliatory price How by Akshay R. Rao, Mark E. Bergen, and War ^ 1 I 1^ f Scott Davis N THE BATTLE TO CAPTURE THE CUSTOMER, companies use a wide range of tactics to ward off competitors. Increasingly, price is the weapon of choice - and frequently the skirmishing degenerates into a price war. Creating low-price appeal is often the goal, hut the result of one retaliatory price slashing after another is often a precipitous decline in industry profits. Look at the airline price wars of r992. When American Airlines, Northwest Airlines, and other U.S. carriers went toe-to-toe in matching and exceeding one another's reduced fares, the result was record volumes of air travel-and record losses. Some estimates suggest that the overall losses suffered hy the industry that year exceed the combined profits for the entire industry from its inception. Price wars can create economically devastating and psychologically dehilitating situations that take an extraordinary toll on an individual, a com- HARVARD BUSINESS REVIEW March-April 2000 107 How to Fight a Price War pany, and industry profitability. No matter who wins, the comhatants all seem to end up worse off than before they joined the battle. And yet, price wars are becoming increasingly common and uncommonly ...
Words: 5496 - Pages: 22
...Sidi Asia Ndioubnan Strategic Plan, Part II: SWOTT Analysis Date: January 10, 2012 Class: BUS/475 SWOTT analysis is an acronym that stands for: Strength, Weakness, Opportunities, Trends and Threats. This analysis gives a company the chance to examine the internal and external factors that can help the company reach an objective. SWOTT analysis is commonly used tool by managers of many different companies to develop a well thought of strategic plan. In this paper I will analyze eight different internal or external forces and trends that could affect Ladies First beauty salon. The information used will be used to create a SWOTT analysis table, which will be featured below. Lastly, the paper will identify the circumstances surrounding each issue, classifying the circumstances, attribute the importance of each classification and testing the accuracy of the importance for each classification. SWOTT Analysis of Ladies First Beauty Salon As stated the in introduction, a SWOTT analysis is a step that should not be over looked when creating or developing a strategic plan because it’s important in simplified the process. The SWOTT analysis where the company has its chance to look at the strengths, weaknesses, opportunities, threads and treads; that are needed to keep the business successful. These elements of the SWOTT deal with the internal as well as the external dwells of the company. The internal elements deal with things happening within the company and the external...
Words: 1183 - Pages: 5
...have to reduce his price to increase the consumer surplus from his product. As a result, the incumbent would respond by cutting the price to match of the entrant. This would lead to a price war with prices in a downward spiral for both the firms. The strategy for the entrant should be to price the product the same as the incumbent to avoid getting into a damaging price war. The entrant can make $100 per unit of sales. 2) If the buyer has a willingness to pay $200 for one unit of the incumbent’s product and $160 for one unit of the entrant’s products it means the entrant is already at a disadvantage. The costs are $100 per unit for incumbent and $120 per unit for entrant. The incumbent can drop its price knowing that it has a better cost structure than the entrant. If the incumbent prices its product at $ 120 per unit, the entrant cannot compete with him as at that price it won’t be making any profits and would have to stop sales. The strategy for the entrant should be to not enter the market as it has no chance of winning the market share and make any profits. 3) If the buyer has willingness to pay $200 for either the incumbent or entrant’s product, the pricing would be based on the cost structures. The incumbent has a $120 unit cost and the entrant has an $80 unit cost. The cost per units give a clear advantage to the entrant as it can keep its prices low and still make substantial profits. The strategy for the entrant should be to keep the prices at $120 per unit...
Words: 388 - Pages: 2
...PRICE SETTING Worksheet Things to Take in Consideration When Setting Price| You should consider setting prices above your competitor’s prices if…|Yes|No|?| Your market is not sensitive to price changes.|||| Your market consists mainly of growing commercial customers.|||| Your product is an integral part of an established system.|||| Your reputation for status, service, and other positive perceptions in the market increases your products’ perceived value.|||| Your customers can easily build your price into their selling price.|||| Your product is only a tiny percentage of your customers’ total costs.|||| You should consider setting your prices just below your competition if…| Your market is very sensitive to price changes.|||| Your customers need to reorder parts or supplies.|||| Your business is small enough that a lower price will not threaten your larger competitors and start a price war.|||| You have the option of economical production runs which decrease your unit cost.|||| You have not reached full production capacity.|||| Estimating Demand| 1. Which products/services do customers shop around for?| 2. Which products/services are in greater demand even at higher prices?| 3. Are certain products/services in greater demand at one time of the year than another? If so, which? And what is the duration of the demand?| 4. Do your customers expect a certain price range?| 5. What is the balance between price and quality in your market?| The Competition| ...
Words: 397 - Pages: 2
...deposits are made, and remittance information (invoice numbers, account numbers, etc.) are digitally captured or manually keyed. Data files are then created and sent to clients allowing for updates to their accounts receivable record. Lockbox services is categorized as a monopolistic competition since there are many buyers, products /services are diverse, service providers are price makers, and the industry is free entry and exit in this market. Bargaining Power of Buyer With Lockbox locations scattered across the United States, potential clients strategically shop the market for prices, during the third quarter since preprinted coupon/statements containing the current Lockbox provider’s information will soon be depleted; this provides the client the opportunity to have coupons/statements printed with the new Lockbox information and P.O. Box if the client decides to make a switch. Existing and potential clientele shop around for the best deals and will use bargaining leverage to propose for the Lockbox service provider to meet or beat competitor’s prices; hence, buyers have the upper hand and dictate driving prices down. Banks with Lockbox services are willing to absorb cost for switching the client over from the exiting Lockbox to their location; this will encompass all operating cost, to include...
Words: 1339 - Pages: 6
...can be noted that the answer of local retailers illustrates that there is some price-taking ability exists, but will not be able to follow the price maker due to the low prices that Coles and Woolworths sets for their products. They cannot be price makers due to the inability to be able to earn enough profit as a result of the costly payments made to suppliers due to the lack of influence over their suppliers. They buy smaller quantities of their products and thereby pay a higher price per unit and cannot earn from economies of scale due to their small size. This forces...
Words: 723 - Pages: 3
...their revenue (both Otis and Schindler posted losses). In order to weather this storm, The European elevator company R&D had developed “Breakthrough”, a product with many superior value propositions. “Breakthrough” was launched in Netherlands, France and UK to begin with. And the strategy employed was articles in journals and face to face meetings. However, the sales of “Breakthrough” units did not pick up as expected and entry into Germany was imperative. Germany was the largest elevator market and was dominated by residential constructions especially in small size elevators. Its growth CAGR was 9.91%. However, with abrupt end to the construction boom, the demand was slated to fall. Major players in this market were engaged in price wars and exerted price pressure and depended on service for their survival and growth. “Breakthrough” was an innovative product which could change the revenue mix...
Words: 1772 - Pages: 8
...machines that are able to automatically change prices according to ambient temperature. How it works: ▪ If the temperature is high then price will be high. ▪ If the temperature is low then price will be low. Coca Cola tried to maximize profit from these smart vending machines, after facing war price in supermarkets. This practice is called price discrimination, where a company is charging different prices for the same product to different consumer. In the Coke’s vending machine case, the differentiation is on how consumer values cold drinks in different weathers. Benefits of Smart Vending machine: o Increasing sales by providing discounts in off season or when there is less traffic. o Facilitates micro-marketing and understanding the local consumer. o Help the company to manage logistics and capture real time data for analysis. o Increase profit as it remains untouched by discount war. o Improve product availability, promotional activity and even offer consumers an interactive experience when they purchase a soft drink from a vending machine Rationale behind the move: ▪ Price Discrimination: selling the same product to different group of buyers at different prices. “Hot” day v/s “Cold” day prices. ▪ Economic Rationale: -Higher price (hot) = higher profit. -Lower price (cold) induces sales = higher profit. Problems with coke’s new vending machine strategy: ➢ Price Discrimination: The company segmented group...
Words: 839 - Pages: 4
...to form at a very young age, such that when those children become parents themselves, they are very well disposed towards it. This is a huge asset, but also a big responsibility for the brand. It is important to remember that all the activities are generic and therefore could vary between industries. LEGO was among other things, saved by entering into strategic partnerships with companies such as Lucas Arts and Warner Bros, who hold the licenses for Star Wars and Harry Potter respectively. Place A change in any of these factors can create new opportunities or threats, which the organization will have to corporate to create a successful business. Since the LEGO group is a multinational organization then it is important that all relevant countries will be analyzed to give a credible evaluation of the LEGO group’s macroeconomic environment. Strategic partnerships add to the next level while aid in retaining their large fan base and promoting the company to future costumers. Price Although in the future raw material prices might be influenced, either positively or negatively giving its utilization of the same materials as in the production of LEGO, LEGO has...
Words: 500 - Pages: 2
...planning period. Which means that it is used for comparing costs or prices proposed by offerors or applicants. The IGCE also serves as an objectives basis for determining price reasonableness. Agreement, Contracting, and Budget Officers review past government purchases to justify both price and costs of a product and services before awarding a contract. Also the ability to review current reasonable market price, provides an opportunity to negotiate realistic prices when the Government request corrections in the IGCE. There are three primary purpose of cost estimate. The primary purpose of cost estimates are: To reserve funds for the contract during the acquisition planning phase, As a basis of comparison for costs or prices proposed by prospective vendors, To determine price reasonableness if only one vendor responds to a solicitation. Reserving the funds for contracting during the acquisition planning phase is great because it helps with assisting preparation for upcoming budgets. Budgeting officers are able to ensure that allotted funds are available for government projects. The second primary purpose is the comparison for costs or prices proposed by prospective vendors. This importance of this purpose as it relates to cost estimates, serves as an evaluation criteria as well as help determine whether prices offered by vendors are fair and reasonable. Cost estimates can also be used to determine prices reasonableness if only one vendor response to a solicitation. This...
Words: 578 - Pages: 3
...ISM – II Case Analysis I Charles Schwab Corporation (A) Pricing Decision - 1 The following are the three possible price points that Pottruck is faced with: David Pottruck Is not a viable price point as they do not want to indulge in a price war with the low price discount traders The brand “Schwab” would be hurt as they would not be able to provide the service associated with the brand name at this price The range of services commanded at least a $10 price premium to the mid sized firms and a $20 premium on the bare bone providers The revenues impact will be similar to the 29.95 price point They also have an existing product - e.Schwab at a lower price point.They are looking to resolves issues with it and come up with a product with full range of services $19.95 $39.95 $29.95 The price would eventually drop down to this level due to competition Even at this price point, Charles Schwab will have the highest prices in the market At this price point price elasticity is more than that at $39.95 Pricing Decision - 2 Pricing has to be tackled on both the strategic as well as tactical level. Based on the analysis, our recommendation is: ◦ To provide a product with full features at $29.95 price point ◦ This price justifies their added services and will help prevent the other low cost firms from eating away at their market share ◦ Also, Charles Schwab has earned the reputation of entering every segment first. Entering at $29.95 will make it a market...
Words: 717 - Pages: 3
