Conflicts that destroy huge chunks of profits

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The Independent Online
THE international management consultancy, McKinsey, has published a study of price wars world-wide, analysing what has happened to afflicted sectors including personal computers, airlines, cigarettes, tyres and disposable nappies. It says they should be avoided at all costs, writes Maggie Brown.

'All too often, there are no winners - and few healthy survivors. The destruction such battles cause can be so severe and linger so long that the only reliable way to come out ahead is to avoid them altogether. If you have ever imagined that reducing prices to gain share might be a sound strategy for your business, think again. Reducing prices all too often triggers a suicidal price war,' the study says.

Michael V Marn, who co- authored the report said yesterday: 'Our findings are true in spades for newspapers. Newspapers are items of rather intangible value, unlike a machine tool, and the acceptable market level is set by what the prices are. So when people in the UK get used to paying 30p rather than 45p or 50p that new price changes their perception of what is acceptable and will stay a long time after the price war is over. Prices are not likely to spring back once the skirmish is over. What is really scary when you look at the arithmetic is the danger of long- term damage.'

The study says: 'As price wars play out, suppliers bombard their customers with price rather than benefit messages. The inevitable result is that customers become more price-sensitive and less and less benefit-sensitive.

'Price wars destroy huge chunks of company and industry profits, and rarely provide a business with a sustainable advantage. Avoid the knee-jerk response of lowering your price. Counter-intuitive though it may sound, the best thing to do is often nothing. Not every competitive price initiative deserves or demands a reaction.'