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Ian

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7

Capturing Market Share with Price Wars

Does capturing market share from competitors by lowering prices (i.e. price wars) ever work? Will it ever lead to anything more than bleeding profitability our of the market? What industries will this work best for? Experienced consultants, please share your thoughts and real life examples. Thanks.

Does capturing market share from competitors by lowering prices (i.e. price wars) ever work? Will it ever lead to anything more than bleeding profitability our of the market? What industries will this work best for? Experienced consultants, please share your thoughts and real life examples. Thanks.

7 Antworten

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Coaching mit Ian vereinbaren

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Hi there,

Be careful with wording here. Price wars involve lowering prices, but lowering prices don't necessarily involve price wars.

I can lower my price without my competitor following suit.

As such, if you're lowering price to capture market share, always you make sure you analyze/understand the following:

  1. How many more additional units will get?
    1. What is the profit and market share result...does it actually result in a net gain?
      1. This is essentially price elasticity analysis
  2. Will our competition respond?
    1. If yes, how, and will that negate our gains
      1. To determine: analyze their current profit margins, cost structure, behavior, etc. to figure out if they are likely to cut costs (i.e. do they have that trait and can they even physically accomplish this)

Note: plenty of monopolies like Amazon, Facebook, Apple do this regularly. I.e. cut prices, snuff out competition (and/or gain massive economics of scale), then bring prices back up.

Saudi Arabia also did this in 2018/19 (I think these years) to make American shale bleed.

Lots of examples of price cutting being an effective tactic...but it's not a "light" decision to make :)

Hi there,

Be careful with wording here. Price wars involve lowering prices, but lowering prices don't necessarily involve price wars.

I can lower my price without my competitor following suit.

As such, if you're lowering price to capture market share, always you make sure you analyze/understand the following:

  1. How many more additional units will get?
    1. What is the profit and market share result...does it actually result in a net gain?
      1. This is essentially price elasticity analysis
  2. Will our competition respond?
    1. If yes, how, and will that negate our gains
      1. To determine: analyze their current profit margins, cost structure, behavior, etc. to figure out if they are likely to cut costs (i.e. do they have that trait and can they even physically accomplish this)

Note: plenty of monopolies like Amazon, Facebook, Apple do this regularly. I.e. cut prices, snuff out competition (and/or gain massive economics of scale), then bring prices back up.

Saudi Arabia also did this in 2018/19 (I think these years) to make American shale bleed.

Lots of examples of price cutting being an effective tactic...but it's not a "light" decision to make :)

(editiert)

Coaching mit Clara vereinbaren

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Hello!

It does, and it´s used when you think that you are going to be able to mantein this long term.

However, at least theorically, this only benefits in the long term the clients, not the companies, who would lower more and more the prices until it becomes unprofitable for one of them.

Hope it helps!

Cheers,

Clara

Hello!

It does, and it´s used when you think that you are going to be able to mantein this long term.

However, at least theorically, this only benefits in the long term the clients, not the companies, who would lower more and more the prices until it becomes unprofitable for one of them.

Hope it helps!

Cheers,

Clara

Coaching mit Francesco vereinbaren

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Hi there,

I agree with Sidi that there are two main advantages for a price war:

  1. Kick a competitor out of the market
  2. Rise barriers to entry (if you do this before a competitor enters, it may discourage them from doing so)

The first practice is illegal if you price below your costs just to kick a competitor out (predatory pricing), but not very easy to prove in court.

You may also decrease prices and not lead to a price war as mentioned by Ian. This is usually done to increase market share, hoping competitors won’t copy the tactic.

Best,

Francesco

Hi there,

I agree with Sidi that there are two main advantages for a price war:

  1. Kick a competitor out of the market
  2. Rise barriers to entry (if you do this before a competitor enters, it may discourage them from doing so)

The first practice is illegal if you price below your costs just to kick a competitor out (predatory pricing), but not very easy to prove in court.

You may also decrease prices and not lead to a price war as mentioned by Ian. This is usually done to increase market share, hoping competitors won’t copy the tactic.

Best,

Francesco

Coaching mit Henning vereinbaren

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Of course it does, and there are real-life examples for this. A very prominent one is Didi that killed Uber in the Chinese market around 2014-16 if I remember correctly. The two were fighting a brutal war with offering basically free rides (I remember taking 30min ride half way through Beijing for around 3RMB, and getting a bottle of water worth 2RMB from the driver). The result was that Uber couldn't sustain bleeding cash and eventually sold their China businesss to Didi.

Of course it does, and there are real-life examples for this. A very prominent one is Didi that killed Uber in the Chinese market around 2014-16 if I remember correctly. The two were fighting a brutal war with offering basically free rides (I remember taking 30min ride half way through Beijing for around 3RMB, and getting a bottle of water worth 2RMB from the driver). The result was that Uber couldn't sustain bleeding cash and eventually sold their China businesss to Didi.

Coaching mit Sidi vereinbaren

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Price wars are obviously bad for the supply side of the market. Unless you have a structural cost advantage which allows you to push competitors out of the market by undercotting their marginal cost with your prices, and then idealy errecting entry barriers to the market before raising prices again (thereby behaving like a protected monopolist). But this is a very theoretical construct and there are few examples in real life that would come to mind.

Cheers, Sidi

Price wars are obviously bad for the supply side of the market. Unless you have a structural cost advantage which allows you to push competitors out of the market by undercotting their marginal cost with your prices, and then idealy errecting entry barriers to the market before raising prices again (thereby behaving like a protected monopolist). But this is a very theoretical construct and there are few examples in real life that would come to mind.

Cheers, Sidi

Coaching mit Gaurav vereinbaren

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Hi there,

yes, for example - big companies which make it really hard for new companies to compete / even enter the market.

GB

Hi there,

yes, for example - big companies which make it really hard for new companies to compete / even enter the market.

GB

Coaching mit Antonello vereinbaren

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Hi, I confirm it's used to keep new entrants out of the market or to gin MS in order to create a large customer base to upsell services or ancillary products

Best,
Antonello

Hi, I confirm it's used to keep new entrants out of the market or to gin MS in order to create a large customer base to upsell services or ancillary products

Best,
Antonello

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