Everyone Loses in a Price War – January 2010 Master Negotiator

Click here for printable version.

“Nowadays people know the price of everything, but the value of nothing.”

-Oscar Wilde

As we learn about the current price wars going on between competing retailers, it is easy to be reminded of the above Oscar Wilde quote. Retailers who constantly lower prices to beat competitors may bring more traffic to stores, but does this really bring any long-term value to their bottom line or are they discounting themselves into oblivion? This is something that you should heed if you ever find yourself in a negotiation situation involving a price war with a counterpart.

In this issue, we will provide you with some ammo in case you ever see a price war coming your way. Please feel free to contact us with any negotiation questions or article ideas. We’ll do our best to address them in upcoming issues. (peter@pbsconsulting.com)

Remember, almost everything in life is negotiable.

Peter B. Stark & Jane Flaherty

The question we are asked almost as frequently as, “How do you negotiate with a bully or shark?” is, “What do you do when the only thing your counterpart cares about is price?” What makes the situation even worse is only having one strategy in your tool bucket when you reach a roadblock in your negotiation; lowering your price. Negotiating solely on price is a long-term losing proposition, unless you have a huge cannon and losing money or operating on extremely low margins does not hurt your ability to operate as a strong, sustainable business.

The greatest recent example of two companies that are in a price war, without their counterparts even asking them to lower their prices, are Wal-Mart and Amazon. Wal-Mart started the war when they marked down the prices of their top ten best-selling books to $10.00. Amazon, determined not to be beat, matched Wal-Mart’s price. In turn, Wal-Mart lowered their price to $8.99. Then Target joined in by selling their top ten best-sellers at $8.99, forcing Wal-Mart to lower their price to $8.98.

Keeping in mind that retailers can buy books from the publishers for one-half of the retail price, it becomes apparent that, by lowering their prices to $10.00 and below, all three of these retailers were losing money on every book they sold. The retailers are probably thinking, “If we are losing money on each sale, let’s lower the price even more to increase sales and steal our competitors business.” This makes no business sense. In a price war, almost always, everyone loses.

The good news for Wal-Mart, Amazon and Target is that they all have big cannons and these sales leading to losses will not hurt their business. It is important to note that these three giants actually had a goal: entice new, on-line shoppers interested in the top ten best-sellers, and introduce other items to them which they, otherwise, may never have been exposed to in brick and mortar stores. Indirectly, this price war helped Wal-Mart, Amazon and Target, but I will bet that anyone smaller who tries to participate will lose this price war in a big way.

A second retail arena where we see constant price wars is in the electronics industry. Just ask a former Circuit City or Good Guys employee; they will agree that very few people win long-term in a price war strategy.

So, what can you do to effectively compete in an environment where it seems like the only thing that matters is price?

1. Recognize that people seldom buy things solely based on price. If it was really true, we would all be driving YUGOs and the YUGO car company would still be in business. Although the entire auto industry is in a world of hurt trying to sell based on huge price incentives, over the last 18 months it became obvious that sometimes people are unwilling to buy even when you lower your prices to well below your costs. The positive example is that most cars are bought, not because of their price, but because of the implicit needs they meet for the buyer. Many a car salesperson has closed the deal by simply saying, “You look really good in that ride.” Focusing on the value that your product provides for the customer, rather than boasting low prices, will give you a competitive advantage.

2. Realize that very seldom does your counterpart hold all the price power. Many salespeople have told us that if they want to make the sale, they have no option but to lower the price. We always respond by asking, “Does the counterpart call you back, return your emails or agree to meet with you?” If the answer is yes, you have more price power than you think you do. If you did not, the counterpart would instantly call your competitor and place the order with them. It would be your counterpart’s most productive and profitable call of the day. When your counterpart continues to talk with you about price, they are telling you that you have something of implicit value to them other than price.

3. Differentiate or die. If everything is truly apples to apples, and there is zero difference between you and your competitor, then you are right, the only thing that will differentiate you is a lower price.

4. Innovate if you want to be a price winner. One of the companies that I resisted supporting for most of my life was Apple. They were so innovative that I did not fully understand their products. I was an idiot. Then I had kids. Through my kids I was introduced to iPods, MacBooks and so on. The reason the new generation loves Apple products is because they are so innovative and so cool. When a company is so cool and innovative that a customer cannot buy any other competitor’s product and achieve the same experience, price is not negotiable. Last week, I took the kids to the Apple store. It was packed! Not one person was asking for the sales price or a discount. After we bought the new MacBook Pro, they slipped it into a plastic backpack so we could walk though the mall advertising to everyone that we just paid full price and loved the experience.

5. Practice détente with your biggest competitors. Let your competitors know that if they lower their price to try and steal business, you will lower your price as low as you need to go not to lose. If both competitors have the price cannon faced at each other, each will be less willing to play the price war game.

6. Concede small. If you are going to concede and lower your price, in the opening round of the concessions, concede small. Your first concession sets the stage for all future rounds of concession.

Do price wars work? Yes, if you are Wal-Mart, Target and Amazon. For the rest of us, put these six strategies into action and play a different, more profitable game.