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Tip: Don't Overreact to a Price War

February 7, 2011

Companies sometimes go overboard and lower prices on more products or markets than they are actually being challenged on, according to pricing expert Mark Bergen, the James D. Watkins Chair in Marketing at the University of Minnesota's Carlson School of Management. If a competitor is challenging you on price, minimize the damage.

"Limit the markets, limit the products, limit the time, and limit the size of the price change to only that that's required," he tells MDM. Avoid expanding the price war by cutting prices on all products to all customers, for example. "A competitor could see you as cutting prices in places where they haven't cut prices; they think you're attacking them. It's a vicious cycle."

And limit the cuts to a set of customers where it's most important. "For the rest of your customers, instead of lowering the price, offer an additional service, a reaction that helps them realize you know something's a risk."

When you do respond to a price challenge, don't react on the terms your competitors set. "They'll set it at places that are to their advantage," Bergen says, "in the places where they gain the most. Your first goal should be to change the rules to your advantage." For example, ask your customers for a long-term contract. "The competitor may look and say – I don't know if I want to extend my price to that length of time."

Of course, there is no magic bullet for price wars. But companies that step back and analyze how they would respond to the price challenge if it were to arise are usually more successful, he says.

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