Price wars are a lose-lose-lose proposition. A race to the bottom can devastate your own profits and those of your competitors. It also hurts customers, who pay less in the short run but sacrifice the opportunity for strategic, long-term benefits. That’s because when a supplier is under price pressure, the urgency of response dominates its management and squeezes out big-picture value building.
Jonathan L.S. Byrnes (@islandsofprofit), an MIT lecturer and author of the 2010 book Islands of Profit in a Sea of Red Ink, advises companies defending their pricing positions to attack the “hidden assumptions” that frame such wars.
On his blog, Byrnes proposes two responses:
1. Shift the time frame.
When a competitor quotes an uneconomically low price, suggest to the customer that it demand a five-year contract. That should force the competitor to back down or risk incurring intolerable losses over an extended period.
2. Change the locus of attack.
In most price wars, the attacker aims at your most lucrative accounts and products. By responding in the segment or category where you are attacked, you do the most damage to yourself and often the least damage to the attacker. Usually, your competitor is funding its war by protecting a lucrative part of the business as its chief source of cash and profits. That’s where you should strike.
Byrnes also suggests ways to prevent a price war from starting, including:
1. Reduce costs.
By lowering the cost of doing business with your most important customers, you can create new and enduring value. Promising targets include the customer’s supply-chain operations and product or category management. Customers can also create significant cost reductions for suppliers, by smoothing order patterns and doing better forecasting. Suppliers pass those savings — real savings, which unlike price cuts endure over time — back to customers.
2. Increase customer value.
Your high-revenue, high-profit customers are most susceptible to a competitor incursion. But they are also the most receptive to innovations that fundamentally reduce your joint cost structure and transform your customer value proposition.
“I recall a situation in which a middle-market company worked with a major customer to create a manufacturing innovation that was especially valuable to the customer,” Byrnes tells Build. “Its sales in the customer rose from $10,000 to over $1 million within months.
Byrnes adds that, “I always advise my clients to work on showcase innovations not with their major customers and suppliers, but instead with a middle-market company that is particularly willing to experiment and innovate, where the conditions for innovation are best.”
On his blog, Byrnes also poses the essential question: “Are you so busy with tactical issues like price wars that you do not have the time or resources to systematically and relentlessly build your customer value proposition? Winning the customer value war is the only way to permanently prevent price wars and really secure your future.”
Byrnes’s 2010 book provides a refreshingly hard-headed and detailed guide to squeezing the best possible performance from a business. At its core is the practice of “value mapping,” or developing a full P&L for every invoice line. Profit maps reveal to managers the actual profitability of every product in every account. The results of this exercise are often surprising.