Price war

Recently I was helping a small business that is in the middle of a price war with a close competitor. The owner was afraid that they were losing money but didn’t know how much and in which jobs as they didn’t have a cost model for the business. The partners hadn’t talked about what to do if the business viability was seriously compromised.

The cost model was a relatively simple exercise as their business was not a complex one. The first thing they wanted to understand is what clients and which jobs were profitable. Once they were identified, it was a matter of focusing on expanding on the type of transactions and clients that were keeping the company going and making money. If you are a small company, your accountant and operations persons should be able to put together a cost model in a spreadsheet program. If you are a medium to large company you will probably need consultants and some costing software.

Of course, during a price war there may not be an option to focus on the profitable jobs or clients. Your competitor may be trying to increase their business at your expense precisely by targeting those jobs or clients. If you have a strong relationship with your clients you may be somewhat shielded from this scenario, but as other factors put pressure on your clients to reduce their own costs, you may be forced into a price war. Unfortunately, everything else being equal, a price war will be won by the company with the deepest pockets.

One way to try to avoid a price competition is to offer value added services. If before you only delivered your goods, maybe is time to make free installs. Or form some sort of customer rewards program – you don’t even have to do it yourself, there are companies that will run them for you. The caveat here is that the value added must be perceived by the client as sufficiently large as to offset your higher price. And even then, the short term gain (lower price) may be the only factor your client is focusing on.

Another thing to do is focus on new revenue streams. Can your product or service be applicable to other industries/clients? What about new uses for your product? Can your equipment be made to produce different products? If your focus is local, maybe you can expand regionally. The internet can help you reach customers from all over the world. Have you tried to reposition your product as a luxury item? Think Apple vs. everyone else. Luxury or premium brands can and do command a premium in price. What about niche markets? A new revenue stream may give you enough of an edge to survive until the worst is over.

Obviously you have to find ways to cut costs – it is imperative that you reexamine your operations and find ways to be more cost effective. Eliminate product lines that are not profitable today and may never be in the future. Much has been written about this so I won’t go into more detail here.

As important as figuring out ways to improve your cost structure and your business strategy, you also have to determine your exit strategy. Decide how much you are willing to lose before pulling the plug. If you can, set aside the money you are not willing to lose today. Have this talk with your business partners. Be realistic, not every business survives. So it is better to figure out your exit strategy now than when your money is depleted and there is no other choice but to fold.