How deadly are Price wars?

Price wars Excerpt   ROBERT A. GARDA AND MICHAEL V. MARN Price wars have racked industry after industry in recent years: from personal computers to airlines, from grocery retailing to computer software, from cigarettes to frozen diet dinners, from automobile tires to disposable diapers. All too often, there are no winners—and few healthy survivors. The destruction such battles cause can be so severe and linger so long that the only reliable way to come out ahead is to avoid them altogether. No company, however well run, is immune from price wars. The threat is real—and universal. No company, however well run, is immune. Even companies with superior overall strategies and exceptional execution can destroy themselves by not managing this make-or-break issue effectively. After all, most price wars start by accident, through some apparently trivial misreading or misjudgment of market conditions. Rare is the price war that is initiated as a deliberate competitive tactic—and rarer still the one that achieves a satisfactory outcome. Recent price wars raise four topics that we want to explore:

How much should you charge for a new product?

Pricing new products Companies habitually charge less than they could for new offerings. Michael V. Marn, Eric V. Roegner, and Craig C. Zawada How much should you charge for a new product? Charge too much and it won't sell—a problem that can be fixed relatively easily by reducing the price. Charging too little is far more dangerous: a company not only forgoes significant revenues and profits but also fixes the product's market value position at a low level. And as companies have found time and again, once prices hit the market it is difficult, even impossible, to raise them. In our experience, 80 to 90 percent of all poorly chosen prices are too low. Companies consistently undercharge for products despite spending millions or even billions of dollars to develop or acquire them. It is true that businesses and private consumers alike are demanding more for less; the prices of personal computers, for example, have been pushed downward despite their higher processor speeds and additional memory. Global competition, increased pricing transparency, and lower barriers to entry in many of the most attractive industries have contributed to the trend. But these are not the only problems. Many companies want to make a quick grab for market share or return on investment, and with high prices both objectives can be harder to achieve...

How versatile is your pricing strategy?

Do you have a long-term pricing strategy?

Actively pricing products across their life cycle is vitally important, particularly in innovation-intensive industries. Failing to do so may forego potential profits or even destroy value. Walter L. Baker Michael V. Marn, and Craig C. Zawada Source: McKinsey - Marketing & Sales Practice According to this article, industries can suffer when companies fail to grasp the importance of pricing products or services across the life cycle, particularly in innovation-intensive sectors such as consumer electronics and consumer durables, IT hardware and software, medical devices, and pharmaceuticals. That’s especially true today. Companies introduce products more regularly, with life cycles often measured in months, not years. There’s external pressure for low prices from customers expecting more for less and internal pressure from the belief that pricing is a make-or-break factor when products launch. And a company may have a number of related products in the marketplace simultaneously, which complicates their life cycle pricing. Two points are essential to price effectively throughout the life of a product or service....