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Price Wars – Bane of Profitability

August 13, 2011

Price wars – we all heard about this especially in airline industry where one airline increases the fare but is not matched by others and have to retreat etc. On the contrary we also heard about how different industries and companies collude each other to rig prices to derive max profits for themselves. But all these stories are around companies with multi billion dollar revenues etc and I was of the opinion that these rules apply to these behemoths.

I was suddenly woken out of my slumber when DesiSauda which is just a two month baby with multi billion dollar (Zimbabwian currency) faced with the same dilemma. We offered a deal and the same deal was offered by others as well – we went live first with the offer and others went later with a reduced price offer. Now the question was whether to match their offering, beat the offering and do nothing.

1) Do Nothing: We started to get customers coming back to us and asking for refunds because they saw a better deal. Given that the economy we are in now where everyone is connected to everything we have seen price guarantee as one of today’s customer’s rights. So we figured that doing nothing would not be an option as more and more customers would come back with either returns or “demands” to match price

2) Beat their offering: Let us assume that we did that for once, but what about them if they match or beat our price. Then we are again at stage one, also to us it seemed that beating the price might bring us some few customers in the beginning but not in the long run. This option is also suitable if you are a company with deep pockets and your competitor is not or vice versa. The end result of this option would be that the customers would get a great deal and it might result in customers getting used to this kind of a war.

3) Meet the offering: This is the most sensible option in the long run but some might consider that the second company which is matching the offer is not the leader. They always follow with a price matching offer.

All these options are applicable in case where companies are selling almost same product (less differentiation), service levels are same and customers are more price conscious.

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