Friday, April 10, 2015

The Danger of Price Wars

By Milad Mosapoor (Own work) [Public domain], via Wikimedia Commons
I read an article in CIO lately that warned of price wars in the IT outsourcing industry. While the article went through the winners and the losers in this scenario, it made me think about price wars in general - airlines have done it, telecom providers have done it, among others, and it seems like nobody wins. At least nobody battling on price.

If the factors you can use to differentiate your product from the competition are limited to quality, price, or innovation, price seems like the most dangerous to hang your hat on. Initiating this type of competition is particularly risky, as it runs a high risk of commoditizing whatever product or service you produce to something that is simply a supply and demand game.

If your sales messaging is limited to describing your product in terms of price, it minimizes your ability to talk about any other differences that set your product apart, and you have attracted a certain type of customer who is only interested in price and only sees price as a factor. The bar is set, and any competitor who comes in with a lower price point may take the business away from you.

It also speaks to product development, in that prices should be set to cover the total cost of managing the customer, whether covering warranty replacements for products, downtime between engagements for consultants, or customer repair or troubleshooting for ongoing services. The more you are forced or allow yourself to compete solely on price, the more the ability to support the customer or support more customers at scale is diminished by every cent you slash off of your margin. By that token, price wars implicitly limit the growth opportunities of every company that fights in them with earnest.

What is your differentiation strategy?