Don’t react with your pricing and follow them. You need to try and avoid following their price down at all costs; it’s a negative sum game; it’s the primrose path. Take a pill, lie down and re-read Chapter 11 of “The Strategy & Tactics of Pricing” 5th Edition by Nagle, Hogan & Zale. This doesn’t directly cover what to do in the event of an inadvertent price move which could lead to an unintended price war, but it will help you develop the framework within which you will need to make your decisions. Before you respond, you will need to think through how the competition will respond to your response, how you in turn will respond to that, and so on. The extra twist is how you think that they made the mistake – the inadvertent move – in the first place. Will a response just compound the problem by pushing your competitor to make more or less the same mistake again? Another reason for not responding.

Put out feelers to find out the extent of their communications to customers and channel partners; check out their website, industry press, and social media. Monitor the situation. Be extra vigilant. Increase the frequency of your competitive monitoring.

In the first case that I mentioned in my previous blog, following the competitor’s downward price move would have more likely make it difficult for them to see that they had made a mistake in the first place. Competitor premiums would have returned to their “normal” level. Monitoring competitor premiums would have been the one, and perhaps the only analysis that they were performing. You’re starting to get more insight into what metrics they do and do not monitor. Useful. Following them down and normalizing the premiums would reduce the probability of them noticing and correcting their error. And this is what you want them to do, notice that they made an error and correct it.

In the second, it was in a way gratifying to note that all our competitors had ignored our super low pricing. Remember, our list prices were lower than everyone else’s street prices (list minus average discount). All our competitors had ignored our pricing. Not some of our competitors, all of them. Not some of pricing, all of our pricing. There was no mention of our super low pricing anywhere in the press or online. It was as if our prices hadn’t existed. This was good news. They – we – somehow hadn’t trashed the margins in the industry. It left the door open for us to raise prices and remove a potentially destabilizing threat to the profitability of the market.

In the third, not raising prices in the face of a weakening local currency would have made us miss our US$ financial targets and also – because the competitor premiums would have been “normal” – there would have nothing to indicate to our competitor that might want to consider raising prices too. We had to raise prices, and keep on raising them, even if they didn’t.

So how did these situations resolve themselves?

Sometimes competitors make price moves which have the potential to start an price war. But how can you tell if the move was deliberate or not? This is critical because you will need to respond to those situations very differently. Well, you can’t immediately tell for sure in all cases, but there are some tell-tale signs. In one case I came across a competitor which had reduced prices across the board in a large market in a region where it had its largest market-share and more importantly its highest relative market-share (their market-share/our market-share). I investigated this very discreetly with a few key regional team members and to see if our competitor had been communicating anything to customers or the channel, and they had not. If this was intentional there would have been some sort of communication out there otherwise they would not have been able to fully leverage the price move. As we pondered on our competitor’s motivations (as we always did), we couldn’t find a single reason why anyone with a pulse would intentionally attack on price where they had their largest relative market-share, and concluded that they had done this unintentionally.

In a second case, I started working with a small division in a company and I realized that its products were massively under-priced compared to the competition. It’s list prices were lower than the competitors’ average discounted prices (street price). Not just one competitor, all of them. Think about that: list prices lower than competitors’ street. That effectively it had created the potential for a price war without even realizing. And because it didn’t realize this – it was still growing more quickly than all the other divisions in the company which had helped it evade internal scrutiny – it hadn’t fully taken advantage of its aggressive price position.

In a third case, one of our major competitors didn’t raise prices as that country’s currency declined in value rapidly against the US$ during the 2008 financial crisis. As we – and our other competitors in this US$ denominated industry – raised our prices across the board three times, this one competitor did nothing. We observed this for about nine months and they still didn’t move. Nor did they try to take advantage of their aggressive price position; there were no communications to customers or the channel. They didn’t have an uptick in sales or market-share. They were asleep at the wheel.

So how do you try to stop a competitor’s inadvertent move from turning into a fully-fledged price war? More to follow.

88% of companies said it was someone else who started it.

Only 5% reported that they started it on purpose.

And 7% said that they started it accidentally.

It seems highly probable that many of the 88% actually started the price war without realizing it …. or maybe are in denial.

Have you ever started a price war by mistake?

Presented at the Professional Pricing Society Conference in May 2015 by Prof. Dr. Dr. h.c. mult. Hermann Simon (Source: Simon-Kucher & Partners Global Pricing Study 2014)

59% of companies reported that they are currently engaged in a price war.

19% reported that there is a price war, but that they are not involved.

Only 22% reported that there is no price war.

Presented at the Professional Pricing Society Conference in May 2015 by Prof. Dr. Dr. h.c. mult. Hermann Simon (Source: Simon-Kucher & Partners Global Pricing Study 2014)