How to Win A Price War

Price wars happen in many industries and they can kill your margins -- and make it more difficult to close business. A reader writes:

I am on the sales team of a large company manufacturing flexible packaging material by the conversion of polymers. As the oil prices continue to rise, the basic raw material for our industry is rising as well. We are finding it difficult to absorb the cost increase and so our financial guys want to increase prices to match. However, we can't pass the increase on to our customers, because majority of them don't try to understand our problem and our competitors are still hanging on to their previous pricing. Do you have a value-based selling strategy or remedy that can help?

You say that your customer's don't "try to understand" the situation. That's incorrect. They understand it all too well. They know that they'll eventually have to pay more for your product if oil prices remain high. They're hoping to pick up some bargains while you and your competitors play "chicken" to see who's going to raise prices first. They're also hoping that oil prices will drop before your industry raises its prices, in which case their industry won't have to pass the price increase to their own customers.

For the purposes of this discussion, let's assume that oil prices are going to remain relatively high for the foreseeable future. If that's true, then it is inevitable that ALL the firms in your industry will eventually raise their prices, because no industry can operate unprofitably forever.

So you know you're going to be raising your prices at some point. The only question is timing. If you raise your prices first, you'll risk losing customers. If you wait until the competitors raise their prices, you'll end up losing money. What to do? Here are your options:

1. Tough it out. If you've got the deep pockets, you simply hang tight, keep selling at a loss, until the competitors raise prices. Then you rush in and grab customers before raising your own prices. Note that by doing so, you're training the customers to jump ship whenever anybody has a lower price. This will come back to bite you.
2. Raise and Pray. If you don't have deep pockets, you raise your prices and pray that your customers stick with you. This will probably only work if you've built up some really strong customer relationships. Since your offering lacks market differentiation, the only thing that will keep a customer "in the fold" is probably their desire to continue doing business with you, personally.
3. Fix prices. This is illegal in most countries, but not in all countries. If it's not illegal in your country, you can get together with your competitors and decide to raise prices in lockstep. If it is illegal in your country, you can announce that you'll raise your prices but won't keep them high unless your competitors follow suit. (Airlines in the U.S. do this; occasionally it works.)
4. Limit customer risk. Rather than raising your prices to match the rise in oil prices, raise them a bit more than that, but guarantee that same price for, say, two years (even if the price of oil goes even higher) if the customer will sign a long-term contract. Include a proviso that if the price of oil drops, your price will drop proportionately. That way you're always getting a premium and the customer reduces catastrophic risk.
5. Rubbish the competition. Raise your prices and then position the competition as being irresponsible and likely to go out of business if they don't do the same. This raises the specter that the customer may end up without a supply of the product at some critical point because they're buying from boneheads. In other words, you raise the customer's fear level in order to make your high price into a (temporary) positive market differentiator.

The long term solution to getting clobbered by price wars is to become a strategic vendor rather than a commodity vendor. Price wars are only possible when when the products from different vendors are so identical that the customer doesn't care who supplies them.

Had I been in your position, I would have tried to completely "own" your customer's product packaging problem. I would have positioned my firm as an strategic outsourcer who could provide a complete packaging service at a lower cost than they could run it themselves.

If that were the case, it would cost your customers more money to build their own packaging capability than they'd save by going to a lower-cost commodity supplier, and you'd be able to pass the expense along, just as if you were an internal group.

Unfortunately, it's too late at this point to become a strategic vendor, so you're pretty much screwed. Sorry.