Avoid Price Wars with Price Guarantees

Today Taco Bell kicks off the TV ad campaign for its “$2 Meal Deals,” in which you get an entrée, side dish, and drink for two bucks. Greg Creed, president of the fast food giant, was quoted by USA Today as saying about the promotion, “If we just tossed a pebble into the pond, the ripple effect wouldn’t find its way to shore…. We’re throwing a boulder….”
     Mr. Creed’s creed here is key to keeping a game of price war limbo from sending your business fortunes into a state of limbo or worse. Unless you are a retailer with substantial leverage in the communities in which you do business, price wars are deadly. You lower a price as a promotion. Your competitor lowers it further. You respond by meeting the competitor’s price and then lowering it even more, at which point the competitor meets your additional reduction, and so on. Your customers find themselves expecting prices to continue to slide downwards. When you can’t maintain the drops while maintaining adequate profitability, your customers’ disappointment might cause them to take their footsteps and money somewhere else.
     If you’re a major retailer player in your market, one of the tactics to avoid price wars makes use of a principle of social psychology: “Anticipate how others will respond to what you do.” The tactic is a “We’ll meet their price” assurance.
     Yes, low-price guarantees add logistical and legal complications. And yes, if you’re a minor-league retailer in town, low-price guarantees might allow a competitor to drive you out of business by slicing you down. But for a retailer with substantial community leverage, the message to competitors is, “You won’t get any lasting advantage from slashing your prices, since we’ll be right there with you.” That message dampens enthusiasm all around for price wars.