How to Fight a Price War
If you find yourself
facing a price war, you 'll need to understand how it started in order to respond effectively. Often the best counterattack does not. involve a retaliatory price
How
^ 1
War
1^ f Scott Davis
by Akshay R. Rao, Mark E. Bergen, and
I
HARVARD BUSINESS REVIEW March-April 2000
N THE BATTLE TO CAPTURE THE CUSTOMER,
companies use a wide range of tactics to ward off competitors. Increasingly, price is the weapon of choice - and frequently the skirmishing degenerates into a price war. Creating low-price appeal is often the goal, hut the result of one retaliatory price slashing after another is often a precipitous decline in industry profits. Look at the airline price wars of r992. When American Airlines, Northwest Airlines, and other U.S. carriers went toe-to-toe in matching and exceeding one another 's reduced fares, the result was record volumes of air travel-and record losses. Some estimates suggest that the overall losses suffered hy the industry that year exceed the combined profits for the entire industry from its inception. Price wars can create economically devastating and psychologically dehilitating situations that take an extraordinary toll on an individual, a com-
107
How to Fight a Price War
pany, and industry profitability. No matter who wins, the comhatants all seem to end up worse off than before they joined the battle. And yet, price wars are becoming increasingly common and uncommonly fierce. Consider the following two examples: • In July 1999, Sprint announced a nighttime longdistance rate of 5 cents per minute. In August 1999, MCI matched Sprint 's off-peak rate. Later that month, ATikT acknowledged that revenue from its consumer long-distance business was falling, and the company cut its long-distance rates to 7 cents per minute all day, everyday, for a monthly fee of $ 5.9 5. AT&T 's stock dropped 4.7% the day of the announcement. MCI 's stock price dropped 2.5%; Sprint 's fell 3.8%. • E-Trade and
facing a price war, you 'll need to understand how it started in order to respond effectively. Often the best counterattack does not. involve a retaliatory price
How
^ 1
War
1^ f Scott Davis
by Akshay R. Rao, Mark E. Bergen, and
I
HARVARD BUSINESS REVIEW March-April 2000
N THE BATTLE TO CAPTURE THE CUSTOMER,
companies use a wide range of tactics to ward off competitors. Increasingly, price is the weapon of choice - and frequently the skirmishing degenerates into a price war. Creating low-price appeal is often the goal, hut the result of one retaliatory price slashing after another is often a precipitous decline in industry profits. Look at the airline price wars of r992. When American Airlines, Northwest Airlines, and other U.S. carriers went toe-to-toe in matching and exceeding one another 's reduced fares, the result was record volumes of air travel-and record losses. Some estimates suggest that the overall losses suffered hy the industry that year exceed the combined profits for the entire industry from its inception. Price wars can create economically devastating and psychologically dehilitating situations that take an extraordinary toll on an individual, a com-
107
How to Fight a Price War
pany, and industry profitability. No matter who wins, the comhatants all seem to end up worse off than before they joined the battle. And yet, price wars are becoming increasingly common and uncommonly fierce. Consider the following two examples: • In July 1999, Sprint announced a nighttime longdistance rate of 5 cents per minute. In August 1999, MCI matched Sprint 's off-peak rate. Later that month, ATikT acknowledged that revenue from its consumer long-distance business was falling, and the company cut its long-distance rates to 7 cents per minute all day, everyday, for a monthly fee of $ 5.9 5. AT&T 's stock dropped 4.7% the day of the announcement. MCI 's stock price dropped 2.5%; Sprint 's fell 3.8%. • E-Trade and