Price wars and the managers who start them

A recent study of 1,225 senior executives of large European companies reports that 95 per cent of those whose firms are involved in ...

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A second study, this time involving close to 4,000 participants from companies in the US, Asia, and Europe, produced a similar outcome: 83 per cent believed the competition was responsible for the downward spiralling of prices.

What do these findings tell us? Why are price wars so often perceived as someone else’s responsibility? We believe that managers, even as they strive to make rational, balanced appraisals of market outcomes, often succumb to psychological biases that cloud their judgment.

The gist of our argument is this: When competitors gain market share, it is more comfortable to blame their aggressive pricing tactics than to acknowledge their superiority in product quality. But when the situation is reversed, then you’d like to think that your own thoughtful and innovative offerings deserve the credit, not the fact that your prices are comparatively aggressive.

To examine this hypothesis, we have been collecting data from  executives with varying years of experience in a broad variety of industries. They were confronted with a simple product launch scenario and asked whether the sales outcome one year later, on the face of it, was more likely caused by the quality of the offered product, or by its price.

The answer was always the same: when people see that the launch was a success (actual sales greater than expectations), about two managers out of three assume it was due to the superior quality of their offering; but, when people see that the launch was disappointing (actual sales lower than expectations), the same majority of managers blame price.

Driving this robust result is a basic psychological phenomenon. The big and small decisions that managers make to improve product and service quality are viewed as a reflection of the company’s core positioning and they engage the identity and values of the organisation. Managers often talk proudly about their firms in terms of the great offerings they bring to market. What they sell is an integral part of who they are! Pricing, on the other hand, is almost never seen as a core competence. After all, there are so many moving parts to figure out: input costs, competitors’ prices, and the response patterns of consumers determine where prices are set, as managers strive to acknowledge the forces of the market. Pricing is hard to control and get right. Pricing choices are perceived as less time consuming and easier to change than product quality choices.

These perceptions cause a potential troubling difference in the way managers assess market outcomes. Psychology tells us that individuals are more likely to ascribe good outcomes to forces under a person’s control (in the case at hand, quality rather than price), and bad outcomes to forces outside of a person’s control.

In the end, what we have is a classic self-serving belief that influences the way we view not only the outcome of our own actions but also that of the competitors’ actions. We believe that this is a powerful force, and two rival firms will interpret the very same market outcome completely different —which makes the situation unsustainable and brings us back to the topic of price wars and how to avoid them: Managers may not be able to recognise that their actions encourage, rather than deter, price competition. A major remedy to this state of affairs is to give pricing decisions a more central place in the organisation, to engage a broad set of collaborators in extensive efforts to get the price right, and let the price be a strong ingredient of what everyone in the company stands for.

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