How to win a price war

Video content: https://www.youtube.com/watch?v=BIGXh9wtxAI&feature=youtu.be

Companies that do not have the best cost structure can still come out on top in a price war. New research by Associate Professor Patrick Reinmoeller of Rotterdam School of Management, Erasmus University (RSM) shows that a carefully laid battle plan can result in victory – without having an optimal cost structure. It is possible for any company to win, provided it establishes that conditions are right for a price fight; picks a weaker opponent; confines itself to a clearly delineated area; as well as keep everything hush-hush in the run-up to the attack.

Dr Patrick Reinmoeller examined hundreds of price wars in various sectors of the economy between 1980 and 2013, discovering that, in most cases, a company’s cost structure is the most important requirement for winning this type of war. However, the Dutch supermarket war between Albert Heijn (belongs to the Ahold parent company) and Super de Boer (Laurus) shows an opposite outcome. This unique case demonstrates that, beforehand, companies are able to determine whether they need to do battle using four criteria. It also makes clear, in the event of a price war, how they can go about increasing their odds of success considerably.

Entering into a price war is risky, often takes a longer period of time and is labour-intensive. Therefore, a company first needs to determine whether there is a sound case for a price war. What could justify declaring a price war? Massive changes to the market that have a seriously adverse impact on the company – such as a strongly shrinking market share; an existing business model that has become entirely unfit for purpose; or an attack from a competitor.

On top of that, a company can boost its chances of success by keeping its plan of attack under the radar as long as possible. If a company keeps its imminent price war under wraps and makes no prior announcements, its opponent will receive a double whammy because of the element of surprise. Maintenance of radio silence gives the attacking side more time to carefully work out its strategy for the assault.

Also, an attacking company should carefully define its area of attack; the more limited in scope the area targeted by the attacker, the more effectively a price war can be waged. Finally, it is important to pick a fight with a considerably weaker opponent.

Rotterdam School of Management, Erasmus University (RSM) is ranked among Europe’s top 10 business schools for education and among the top three for research. RSM provides ground-breaking research and education furthering excellence in all aspects of management and is based in the international port city of Rotterdam – a vital nexus of business, logistics and trade. RSM’s primary focus is on developing business leaders with international careers who carry their innovative mindset into a sustainable future thanks to a first-class range of bachelor, master, MBA, PhD and executive programmes. RSM also has offices in the Amsterdam Zuidas business district and in Taipei, Taiwan. www.rsm.nl

For more information about RSM or on this release, please contact Ramses Singeling, Media Officer on +31 10 408 2028 or by email at singeling@rsm.nl.

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