Price War: Understand Your Target and be Willing to Pay the Price

Competition in business is a thing that can’t be prevented, regardless of how tough it may be to get into a market. Irrespective of whatever wall were raised to discourage new entrants, existing firms, persons in a market or industry may enjoy the benefits therein for so long that another or others have not found sufficient motivation to alter existing order. Motivation here is taken to mean the inducement of prospective gains and capital and strategy. As soon as such incentives are discovered, a new order comes into existence.

One of the first shocks when a competitor comes into a market is that, the existing players realise it’s longer business as usual. Depending on the influence the new entrant can command, previous plans and strategies of existing players will need fine tuning, at best, for it to still be relevant or could become seriously unhelpful, at worst, raising the need to return to the drawing board and map out a new working plan to tackle the development.

A Case Study

It was near Christmas. Her business was booming and she was looking forward to a sweet huge season’s sales and the fat gains that come with it. She wasn’t expecting what she saw that day but to her surprise, she got to market that fateful morning only to discover that she’s no longer the only one selling onions in her line anymore. Her immediate next neighbour, who before then was basically into other food spices business, has added sales of onions too. The motive may not be far fetched. The neighbour too, probably wants a share of the season’s fat harvest.

With the new reality, doing business became such a nightmare for NG (abbreviation of real name) as can be seen in this her exact quoted words. “My annoyance was not that he added sales of onions to his business line. But, how he went about it was making things quite difficult for me. He will call the attention of a customer who is standing in front of my shop to his onions, narrating to the customer that the onions he offers for a price, is better, in quantity and quality, than the one they will buy from me for the same price. Practically, he was selling at a loss. I knew this even more than he knew it. For I have been in the business for many years. I lost some of my customers to him as a result. I didn’t want this to continue so I decided it will be OK to sacrifice my gain for the season, if that’s what it will cost me to make him leave sales of onions alone and focus on his other trade items. I was no longer comfortable with him selling what I sell in the same place.”

That was a real issue there. The difficulty lies in the fact that it’s not easy to know beforehand how everything will turn out. The relative strengths of competing parties could influence how things will turn out in the end. The amount each can command, the loss each is willing to incur, the knowledge of the primary competitors, how competitors deploy resources and knowledge at their disposal are important factors here too.

When waging a price war, it’s important to have an insight into what your competitor is up-to. Here, there are two categories. The first are those who came because of quick cash benefits and are therefore unwilling to risk more than a little tolerable losses. These group will withdraw when prevailing circumstances make it difficult for them to make gains. So rather than risk more losses than they can tolerate, they quit. In other words, those in this category are interested in immediate profit. When this is not forthcoming, it’s alright to call it quits.

The next category comprises of those who, in addition to the desire to make gains, are willing to pay the price, if short term profit is not feasible, to gain good standing in the market in the long run when they can be able to recoup their short-term losses. This often involves subscribing to loss-incurring short-term strategies, aimed at frustrating as many other competitors as possible, out of business. If these prove successful in the long run, the coast will be clear to make gains. The thing is, there’s a difference in the task demanded in each case.

Let’s get back to our case study. From the quote above, it’s clear that NG assumed that her neighbour belonged to the first category. Recall she’d said “It will be OK to sacrifice my gain for the season”. With these assumptions in mind, her task was to cause heavy erosion that will discourage his neighbour from the onion business: “the day I made up my mind to sacrifice my gain, I bought a bell ” [Chuckles] “it’s funny but it had to be. I brought it to market the following day. Trust what started happening from that time onward. I used the bell to attract customers attention. Doing so here gives customers the impression that you’re selling at a give-away price. And that’s what I was doing. Days ran into several weeks and we continued the unexpected ruin. Certainly, it was hard, those periods, to recover half the cost at which I bought a bag (of onion). This was not what I had seen coming. But I couldn’t risk stopping the madness until he stops selling. He was losing. I was losing. I lost so much but I had sources to keep things moving. My suppliers trusted me. When I offer to pay them later, they send me goods, without demanding immediate payment. I also was getting grants. In this way, I kept business moving while operating at huge losses. After a while, he stopped selling. But then, I had a weighty debt hanging on my neck…”

In this typical case of NG, she’d continue to operate to recoup losses and also make gains as long as others have not found sufficient enablement to join. What would have happened if the parties were willing to stretch the fight far into the future? The outcome is beyond this discussion. It may not however be as in the above case especially if the newcomer is willing to deploy massive capital that can help it to dare more than the existing party is willing to cope with.