The industry is seeing its first price wars

Symptom: As competitive pressure intensifies some competitors have resorted to discounting, and the industry has seen its first price wars.

Implications for the market:

Price competition often begins when an industry enters hostility. Discounters can usually gain share from industry leaders, who fail to match the price cuts and thereby allow the discounters to grow stronger at the leaders' expense.
Price wars are likely to last for several years because the early success of the discounter will tend to perpetuate the industry's hostility.
- Customers learn that suppliers are not all pricing alike, and that they can get lower prices by changing their buying patterns.
- Discounters learn that they can win share on price. In the future, they will return to that tactic whenever they feel economic pressure.
- Discounting will continue throughout hostility, even while losing its effectiveness as a means of gaining share. Normally, those competitors under the greatest financial pressure initiate the rounds of discounts. After the first few years, though, each price cut is immediately lateralized throughout the industry. Once that happens, price competition simply causes all competitors to suffer but brings little share change.

Recommended Reading

For a greater overall perspective on this subject, we recommend the following related items:

Analyses:

Perspectives: Conclusions we have reached as a result of our long-term study and observations.

"How Price Kills Profits"
Many people use their costs to determine their prices. But customers don't care about a company's costs. By thinking more like customers when pricing products, a company might increase its profits.
"The Leader's Trap"
Being the market share leader should be an advantage. But leadership also has its dangers. Many times, in a range of industries, leaders have allowed themselves to be trapped.
"The New Pricing Structure"
The structures of industry prices are fundamentally different in hostile and non-hostile markets.
"Who Has Pricing Power?"
One of the first clear signs that a market has become hostile (or that hostility has ended) is a change in who sets prices. Pricing power shifts as a market moves into and through hostility.