Summary
The article “How to Fight a Price War” by Rao et al (2000), provides business leaders with well-thought out and explicitly discussed strategies on how to deal with the price war without necessarily reducing the prices of products and/or services.
The authors illuminate the fact that the price war is increasingly becoming widespread in organizational settings because leaders tend to view a price shift as an effortless, swift, and reversible endeavor.
However, leaders need to know that they are endowed with an arsenal of options other than price cuts that they may want to consider so as to remain productive and relevant in today’s competitive business environment. The bulk of the article details these options and strategies.
Main Points
In their critical discussion, Rao et al (2000) outline the strategies that managers may want to use to fight the price war as follows:
- taking inventory by understanding the causes and characteristics of the price war through undertaking a critical diagnosis of the market scene,
- stopping the war before it starts by making sure that competitors not only understand the justification behind your pricing policies, but also the potential consequences of lowering prices,
- responding with non-price actions such as customer price sensitivities, quality interventions, highlighting of negative consequences related to price reductions, and help-seeking behaviors,
- using selective pricing actions such as multiple-part pricing, quantity discounts, loyalty programs, time-of-use pricing and bundling,
- fighting it out with competitors through direct, retaliatory price cuts,
- retreating by ceding some market share to competitors.
Critique
The article is a must read for price leaders and other organizational managers engaged in ensuring that their respective organizations remain competitive in the face of extensive and sometimes back-biting price wars.
The authors not only undertake a critical analysis of the various strategies that could be used to quell price disruptions from competitors, but they also provide industry specific, practical case examples of organizations that have used these interventions with a fair share of success.
From the reading, however, it appears that some interventions are more successful in selected industry-specific organizations than in others. The strategy of retreating by ceding some market share, for instance, seems to work well with technology-oriented firms (e.g., computer manufacturing companies), but fails in service-oriented firms (e.g., fast food firms and hotels).
Equally, organizations within the carrier industry seem to benefit from some interventions, but certainly not from all the interventions highlighted (Rao et al, 2000). It would have been more plausible if the authors had explicitly stated which interventions are relevant to particular industries.
There are two strategies that catch they eyes of the reader due to their intense practicability – responding with non-price actions and using selective price actions (Rao et al., 2000). In the former strategy, it can be argued that most global organizations doing business today are emphasizing quality aspects rather than price, with results demonstrated in positive image and reputation.
However, the authors could have taken more time to explicate the dynamics of complex market scenarios, where neither non-price actions nor selective price actions seems to work. A case in point is the Chinese market, where players seem not to care much about quality issues and government mandarins heavily subsidize local industries to protect them from stiff competition.
Conclusion
The article introduces some fundamental concepts than could be used by organizations to fight the price war without necessarily triggering retaliatory price slashing, which could be costly to their competitive as well as operational efficiencies.
Reference
Rao, A.R., Bergen, M.E., & Davis, S. (2000). How to fight a price war. Harvard Business Review, 107-116. Reprint R00208