How should a company try to deal with the threat of a price war? Fontinelle (2010) believed that price war has a big impact which leads to a string of price reduction that vaporizes the profit margins. There are some solutions which can cope with the menace of a price war. To start with, Rao et al. (2000) showed that the manager of a company should take into account of other options before answering the price cuts call. The manager should consider matching price cut is a good choice or not before deciding. Moreover, additional information about the price war is needed to be figured out immediately. Does the discounted price apply for a short period of time or long term? In addition, the terms and conditions for the promotion are also involved.
For example, Starbucks drove their customers crazy because of the 50% discount Frappuccino in happy hour campaign. In addition, it also attracts more new customers. Meanwhile, their competitors should consider about applying the same strategy or do nothing. The competitor’s managers must be particularly careful as the threat of price war is high. In addition, they may get more disadvantages instead of advantages as if their brand is not as strong as Starbucks. Misreading the competitor’s purposes which is one of the main factor causes price war can lead to unavoidable price war (Little, 2003).
Therefore, correct information about competitor’s intentions must be obtained carefully. The reason behind the price cuts must be figured out to have the right respond. With the same example above, the competitors’ managers should research in detail about Starbucks promotion campaign to have their suitable marketing strategy. According to Rao et al. (2000), marketing communication strategy plays an important role in ensuring the competitors understand the reason behind the company pricing tactics which assists in avoiding a price war. Advertisement should not only focus on the price but also the quality and benefits of the product. Therefore, the companies should selectively reveal their strategy intentions in the purpose of staying away from price reductions.
To avoid igniting a price war, Swartz (2012) claimed that products are required to be differentiated. It means that the products must be customized to become outstanding in the market share. Although other traders may offer products which are similar to those competitors are selling, it doesn’t necessarily mean the company must serve identical products or services. Therefore, there are many ways of differentiation in order to make the customers realize which product is more valuable to purchase. Rao et al. (2000) pointed out that awareness of customer’s level of price sensitivities is also important.
To carry out a successful pricing strategy, a company must first comprehend the basic understanding of customer perception of price sensitivity. This changes when new competitors enter the current market as company have to be aware of other competitors pricing strategy as well. As a conclusion, companies should keep clear of price wars as it can be difficult to manage as soon as price wars begin to gain a head start. Arguments between companies regarding price wars should be handled calmly to avoid unnecessary conflicts. As a side benefit, it would also reduce the chances of initiating price wars.