Escaping the Price Wars

I've worked with many clients who trapped themselves into price wars, eventually driving their product/service down into the death realm of perceived commodity. IMO, the keys to maintaining healthy margins are to 1) have a product or service that delivers real value to customers, 2) knowing how to clearly communicate that value, and 3) believing in the value yourself to resist pressure to drop prices.

Along these lines, I found the following Q&A on the Strategic Pricing Group's web site that I thought made a terrific point:

Question: How can we deal with a company that allows users of our product to select us based on the value we bring to them, but then expects us to negotiate a price with a purchasing department that treats us like we are supplying a commodity?

Answer:
The answer is, in principle, quite simple and similar to the question above about dealing with "reverse auctions": un-bundle the elements of value. When you tell the purchasing agent that you are willing to meet or come closer to the competitive price but only by taking away the things that differentiate your offering, the purchasing agent is forced to reintroduce the users to evaluate the tradeoffs. If you can't unbundle, then you have to be prepared to walk away. Do not do so without, however, reinforcing your value to and desire to work with the users. It is their job to fight the battle with purchasing. It is your job to empower them with a compelling value story for buying your product.

Comments

[Peter Davidson]

So, Jennifer, what was your advice to your client? How did you help them in light of their price war?

[David Foster]

One thing that makes this issue even more difficult is the "growth at any cost" obsession that many companies have...this makes it difficult to walk away from marginally-profitable (or even outright unprofitable) business. Clayton Christensen's new book "The Innovator's Solution" has some useful correctives to this kind of thinking (review of the book at my blog).

A good understanding of your own costs is also important in deciding what business is worth having, and really good cost analysis systems are sadly lacking in many businesses.