In one line
When a rival cuts its price you can hold yours, match the cut in full or in part, or answer with something other than price. The right answer is the one that protects profit over the next two years, not the share figure next quarter.
What it does
- A rival's cut takes some buyers from you, but it also takes them from every other brand in the category, so your loss is usually smaller than the cut suggests.
- Matching wins most of those buyers back, but the lower price applies to every unit you sell, including to the many buyers who were never going to switch.
- Habitual buyers barely react to price. The more of them a category has, the less a rival's cut takes from you, and the more a matching cut gives away.
- Research across hundreds of real brands found the most common reaction to a rival's price promotion is no reaction at all (Steenkamp and colleagues, 2005), and pricing advisers warn against matching by reflex (Rao, Bergen and Davis, 2000).
Business and brand
Impact on the businessP&L, cash, share price
- Matching costs margin on your whole volume to protect a small slice of it, so profit usually falls more than if you held.
- A match can start a price war: if the rival cuts again, both of you end up with lower prices and the same shares.
- Holding price shows up as a small share loss in the quarterly numbers, which is easier to explain to a board than a profit miss.
Impact on the brandMemory, loyalty, pricing power
- A brand that matches every cut teaches shoppers that its price is negotiable.
- Answering with brand media or a better product keeps the reason to pay your price, rather than the price itself.
- Share lost to a short rival cut tends to come back when the rival's price does, if buyers still think of you.
Try it
Answer Halvard Cola's price cut
Halvard Cola, the market leader, cuts its shelf price for a year, then goes back. Pick how deep its cut is and how Brightwater answers for the same year. Nobody reacts to your answer, so every difference comes from it.
The brand answer adds 50% to Brightwater's brand media for the year. Everyone goes back to their old price after four quarters.
Brightwater's value share by quarter. The cut runs Q1 to Q4; the line marks its last quarter.
Notice: Match it: value share ends the year ▲ 0.7 pts against holding, and profit after media is −€5.55m over two years. The lower price goes to every buyer, not just the ones who would have switched. Best answer over two years: hold, add brand media.
Runs Countermove's market engine: the reference soft-drinks market, three brands. Only Halvard Cola's cut and your answer change; Brisa holds its plan and nobody reacts to your answer.
Sources
- Steenkamp, Nijs, Hanssens & Dekimpe (2005), Marketing Science: competitive reactions to advertising and promotion attacks
- Rao, Bergen & Davis (2000), Harvard Business Review: how to fight a price war
- Bijmolt, van Heerde & Pieters (2005), Journal of Marketing Research: price elasticity meta-analysis
Teaching this? Teaching notes, a 20-minute plan and homework.