Last month I wrote a post, When to Use Low Prices to Grab Market Share, in which I described situations where that pricing strategy worked and where it didn’t. Recent earnings releases have provided new clarity about the perils of discounting as certain restaurant chains, retailers and manufacturers have suffered stock declines primarily because of margin squeezes. Price wars are inevitably painful for everyone.
Whole Foods reported decreased earnings for their 2nd quarter although sales for the quarter had increased. The cause was continued price reductions resulting in same-store-sales declining 2.6%. Whole Foods’ stock price decreased by 8% following their earnings announcement. (See Whole Foods stock sinks after key metric disappoints Street)
More recently, Motley Fool wrote The race to the bottom is hurting fast food, specifically citing McDonalds, Sonic, and Yum Brands suffering lower earnings as a result of severe price competition. Earlier in the year, Wendy’s had also reported depressed same-store comps. Motley Fool went on to describe a “restaurant recession”, fueled in part by companies aggressively competing for the most price-sensitive customers.
This week a New Zealand manufacturer of toiletries, Asaleo Care, experienced a 30% drop in their stock price when they cut their profit guidance for the year. (See Asaleo Care slashes guidance as profit slumps.) Asaleo specifically cited increased discounting from competitors reducing their own prices and causing increased trade spending to protect market share.
All of these results are huge disappointments to the investors and management teams of these companies. Unfortunately, they are also very predictable results of price wars.
We can contrast those negative results with PulteGroup, Inc. Pulte’s stock jumped 10% in the first few days after reporting earnings that beat Wall Street estimates, PulteGroup (PHM) Tops Earnings & Sales Estimates in Q2. In the earnings release, Pulte reported an 11% increase in the average selling price (ASP) of homes. Although the housing industry has improved the past few years, Pulte identified strategic pricing initiatives as being the biggest driver of the improvement.
None of these examples by itself is proof of anything. In fact, I have written blog posts in the past cautioning against relying on one or a few examples, Be Skeptical of Anecdotes – Use Your Data. However, the examples are more corroboration for the evidence I used last month against competing on price. Unless you have a long-term sustainable cost advantage, discounting prices to gain market share leads to price wars that nobody wins.
One other important point – sometimes you may not have much choice. If one or more competitors decide to try to take your customers by lowering prices, you have to defend your business. Most of the time, that means more clearly demonstrating the value of your product or service compared to the competitor, but sometimes it means lowering your price. Even if you have a superior product or service, a destructive competitor can lower prices enough to distort the value equation in your industry; and when that occurs you have to adjust. In those cases, be careful not to accelerate a downward spiral of prices. Defend with price where you need to, but make sure your messaging is focused on those traits that make your product, service, and company unique. Continue to articulate the value of doing business with you, rather than talking about price.
It has been written many times that nobody wins price wars. They are just painful for all the participants. Discounts, when properly used to reflect the value to certain segments and customers, can be effective if managed. But they are perilous. When used recklessly or extensively, they can destroy the value of your business.
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