The Strategy and Tactics of Pricing by Thomas T. Nagle & Georg Müller

Author:Thomas T. Nagle & Georg Müller
Language: eng
Format: epub
Publisher: Taylor and Francis

2. If you respond, is your competitor willing and able to cut price again to reestablish the price difference?

Matching a price cut will do you no good if the competitor will simply reestablish the advantage. Ask yourself why the competitor chose to compete on price in the first place. If that competitor currently has little market share relative to the share that could be gained with a price advantage, and has no other way to attract customers, then it has little to lose from bringing price down as low as necessary to gain sales. This is especially the case where large sunk costs create substantial “exit barriers.”

At one point, a pharmaceuticals company ask us to recommend a pricing strategy to defend against a new entrant. Management was initially surprised when we told them that defending their sales with price was unwise. Only after thinking about the problem from the competitor’s standpoint did we fully understand the competitive dynamics they faced. Customers had no reason to try the competitor’s new drug without a price advantage, since it offered no clinical advantages. The new entrant had absolutely nothing to lose by taking the price down, since it had no sales anyway. Given that the huge investment to develop and test the drug was entirely sunk but that the manufacturing cost was small, winning sales even at a low price would be a gain. The conclusion was obvious that the competitor would cut price as often as necessary to establish a price advantage. If our client insisted upon preventing the new competitor from gaining significant market share, they would have risked destroying the value of the market.

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