I often find myself in discussions with clients or potential clients about whether lowering prices to take market share is a good pricing strategy. To illustrate the effects of trying to win with lower prices, I look back at this story, sent to me by a former service station manager in Texas.
“In 2010, my company started a price war with our local competitors. Within a week I saw the price of gas drop more than thirty cents, and my margins dissipate until we were losing money. The erosion of margins crippled the store’s ability to stay profitable, and by year’s end we were forced to shut down.”
“Price wars may seem like a good idea in the short-term, but the long-term results can be a loss of quality and the destruction of competition. Many people are at fault for a price war, and in my situation there were three players: lower management, senior management, and consumers. Understanding their role in a price war can help to avoid future disasters.”
“I was the man with the best view of the company’s policies, and I bear a alot of blame for the price war. In my case, I blindly followed corporate policy, because I did not feel empowered to question it. Once I noticed that my neighbors were following our pricing model I did not speak up and let upper or middle management know how quickly margins were falling. It was not until my store started losing money on gas that the company took notice, but by that time we were in serious trouble and would have been almost impossible to save. While my mistake allowed things to begin to get out of hand, I am not the only one to blame for the failure of the policy.”
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