Conventional wisdom says that a price war is a bad thing. But have you ever seen real evidence to support this common view? New analysis presented at the Marketing Science Institute conference The New Competition: Challenges and Opportunities in Lisbon, Portugal, suggests that in this instance, the conventional wisdom is true.
The work of Els Gijsbrecht, Harald van Heerde, and Koen Pauwels was presented by Dr. Gijsbrecht. Gijsbrecht and van Heerde are professors of marketing at Tilburg University in Holland, and Pauwels is an associate professor at the Tuck School of Business of Dartmouth College in the United States. The presentation focused on the price war started by the Dutch supermarket chain Albert Heijn in the fall of 2003. It is unlikely that the results were what the chain expected or intended.
The year 2003 found Albert Heijn’s market share falling, and the shares of the hard discounters rising. Retailers like Aldi and Lidl were not just hurting manufacturer’s brands; they were eating into the share of traditional retailers.
The economic environment favored the discounters. Recession-induced consumer price sensitivity heightened awareness of the price disparity between traditional retailers and discounters. Albert Heijn scored lowest of all Dutch retailers on perceptions of offering low prices. Therefore, consumers in search of a good deal looked elsewhere.
On October 20th, Albert Heijn publicly announced their commitment to shrink the price gap. BIG MISTAKE. Not only did this confirm perceptions that Albert Heijn was the most expensive chain, but by October 22, the competition had reacted by matching the initial price decreases and unleashing six further rounds of price decreases. As a result, food prices in the Netherlands dropped 11 percent.
Gijsbrechts, van Heerde and Pauwels used a multivariate Tobit II model to analyze handscan household purchasing data from GfK, using consumer perception data, scanned sales data and more to explain changes in purchasing over time. Results for the time period before the price war were projected forward to demonstrate what might have happened if the price war had not taken place. These projections were then compared to the actual purchasing behavior which occurred.
The analysis suggested that traffic to Albert Heijn decreased as a result of the price war. Basket size fell, too. The price war encouraged consumers to shop around, and when they discovered they could get the same quality at a better price elsewhere, they spent less time and money at Albert Heijn. Who gained? The hard discounters.
This is a useful tale for brands that hope to use price to bail themselves out of trouble, but not a surprising one. Earlier in the conference, Jan-Benedict Steenkamp, University of North Carolina at Chapel Hill, revealed that when recession strikes, people start to shop around for a better deal. If the quality of the cheaper alternative is acceptable, then people tend to stay with the cheaper option. Interestingly, brand marketers contribute to this effect when they cut back on marketing and R&D spending. Seeking to deliver value to shareholders, they end up weakening consumer perceptions of brand value.
All of which proves that price is a double-edged sword. Gain a sustained advantage over your competition and it can work to your benefit. Start a price war and everyone loses. Marketers play with price at their peril.
(31 votes, average: 3.77 out of 5)
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October 4th, 2006 at 7:32 am
This seems to provide good support to the old argument that brands need more support rather than less when times are hard: consumers need to be reminded why brands are good for them rather than being allowed to fall into commoditised purchasing.
These papers seem to suggest that discount retailing is like Pandora’s box for consumers - once they are opened up to the possibility, they don’t come back. But isn’t easy to respond confidently to a specific threat (pricing) by taking the brand’s communications in exactly the other direction, especially if the whole of the rest of the business is frantically trying to find cost savings.
But isn’t there an opportunity here? Increased price competition will generate pressure to cut the cost base. If marketing is able to communicate to consumers that they are better of staying with the more established (and expensive) brands they know, then the resulting higher profit margins will really demonstrate the value of the brand (and its stewardship) to the bottom line.
October 4th, 2006 at 8:03 am
Interesting suggestion Trevor, but one that I suspect is hard to carry out in practice. It would require senior management to see marketing as an investment and hold to that belief in face of pressure from other departments. My suspicion is that few would do so and most would see marketing as a variable cost to be reduced in hard times. An unfortunate vicious circle that is tough for marketers to break.
October 10th, 2006 at 1:08 am
I think that’s my point Nigel. What we’re saying is that brands need support when the the competition gets fierce and when times are hard for the business.
Maybe one way to help marketers break the vicious circle would be for us to identify some (similarly generic) circumstances when brands don’t need such concerted support, so they aren’t seen as just arguing for marketing investment all the time??
October 10th, 2006 at 9:27 am
Sorry if I misinterpreted your comment. I guess the only time when a marketer might safely decrease spending is when a) economic times are good, b) the competition is quiet too. Is that what you had in mind?