What is the Price War?
A price war is a competition among the competitors of the business in lowering the price of their products to gain an advantage over their competitors in price and to capture a greater market share. It is used as one of the strategies to increase the revenue of the business firm and for increasing the market share.
- A price war is carried out to eliminate the competitors from the market or to gain an advantage over them by selling products and services at a price lower than that of the competitor. When the price of the goods reduces, customers would prefer to procure at a lower price which in turn would increase the revenue of the business firm. Customers are benefited during this process as they would pay less for the products.
- The business firms entering into price war may not enjoy profits much or even they may incur losses for the initial period when they reduce the prices. This could be a short term strategy to gain an advantage, or it may be a long-term one for capturing the market completely. When one competitor reduces price the other one is forced to reduce its price to sustain in the business and market.
- The small size firms can suffer big time in this war as they can’t run business with less or no profits. It can be managed or it can be triggered only by the business firms which can manage to stay in the market even after reducing the prices.
Example of Price War
Price War in the Airline Industry:
Price Charged by S Airlines to fly from Chicago to London is $560. S Airlines competes with Xone Airlines which charges $550 for the same trip. To attract customers’ S Airlines entered into a price war and reduced its price substantially and brought down the price to $500 per trip. To sustain in the market Xone Airlines also reduced its price to $490 per trip. This mechanism leads the airlines to incur losses and customers are benefitted because of lower prices.
Case A: Where S Airlines backed by Strong financial background:
S Airlines will further reduce its price to $470 since it is backed by strong financial and Xone Airlines cannot reduce the price since it is already incurring losses. If this continues then Xone Airlines will exit the market since it cannot sustain in the price war which in turn reduces the healthy competition in the market, and over time S Airlines will again start increasing price.
Case B: If Xone Airlines has a unique selling proposition:
Though S Airlines reduced its price, Xone Airlines can still retain the same pricing structure if it has unique features and facilities than that of S Airlines. It can be avoided if the product differentiation can be established and customers are benefited by the value addition.
Causes of Price War
- In a highly competitive market and the existence of comparable goods triggers for price war by reducing the price to gain an edge over its competitors.
- It is one of the ways through which the market share can be increased which in turn will increase the revenue of the business.
- It is entered when the business wants to penetrate the established market and offers a price less than that of the existing market players.
- A business that is nearing the stage of bankruptcy may enter into a price war by reducing the price of the products which in turn will improve the liquidity.
- Business who enters the war has to forgo the profits to gain an advantage over the competitors.
- It can be avoided through the right market strategy; Proper networking and understanding of the competitors, and the market.
- Big players in the market reduce prices drastically to eradicate competitors which in turn can impact the consumers as they are left with lesser options to choose.
- If the business enters into price war the chances of brand name getting damaged are high and also once the prices are reduced it is not that easy to increase it again.
- Customers are benefited as the price of the products is reduced.
- Companies have the advantage of getting more customers for their products.
- It can cause a serious impact on the financial performance of the company and brings a big impact on the market and the customers.
- Small business firms cannot sustain this like other big players in the market, over time they would be closing down their business.
- Once the market is captured in the process of the price war, the big players enjoy the market share, and they will start increasing the prices again.
- It eradicates the healthy competition in the market.
- Since prices are reduced, the salaries of employees may be reduced and overtime, when competition reduces in the market and employment opportunities, will also get reduced.
- With a low pricing strategy, the business cannot get the position of the best product available in the market.
Price war gets triggered only when the products are comparable with similar aspects, if more value addition is provided in the products then, customers will automatically choose the best ones. (Eg) Audi Car over Tata Car.
Though the price of Audi Car is more, still customers choose it seeing the value derived from it. It is always better to make the products unique in the market rather than lowering prices and entering into price wars. Healthy competition is needed in the market, and can cause long-term issues for both customers and the business.
It is good if it is a short term strategy where both businesses and customers are benefited. Every business should have its unique selling proposition (USP) to sustain itself in the market for a longer time.
This has been a guide to what is a price war and its definition. Here we discuss the example, causes and effects of price war along with advantages and disadvantages. You may learn more about financing from the following articles –