In a highly cost driven world created by big corporates and uncertainties in the world. We all have become highly conservative, cautious about pricing of goods and services. Although there is nothing wrong with this practice, but we must also realise in return it has driven us into a price war driven society. We should also understand the impact this way of living has on business, economy and society i.e. us. We also seem to be forgetting why there is a difference in the pricing across various products and services.
We hope this article will help to clarify this.
Price War – What is it?
A "price war" is a situation where multiple companies in the same market aggressively lower their prices to gain market share, win business/clients leading to a cycle where each competitor attempts to match or undercut the other's price, often resulting in reduced profits for all involved parties; essentially, a competitive battle fought primarily through price reductions.
Price Cutting Impact on Business:
Here are the few common effects of price cutting aka undercutting on most businesses.
1. Low Profit Margins
Cutting costs means lower revenue per sale, which can make it difficult to cover expenses, invest in growth, or sustain operations.
2. Perceived Low Quality
Customers often associate lower prices with lower quality. If your price is too low, people might assume your product or service isn't as good as competitors’.
3. Price Wars & Unsustainable Competition
If competitors match or beat your price, it can lead to a race to the bottom where no one profits. Larger companies with deeper pockets can survive, but smaller businesses may struggle or go out of business.
4. Hard to Raise Prices Later
Once customers get used to lower prices, increasing them later can be difficult. You may lose loyal customers who are only there for the low price.
5. Cash Flow Problems
Undercutting can create cash flow issues, making it hard to pay suppliers, employees, or invest in better products/services.
6. Devalues the Market
Constantly lowering prices can devalue an entire industry, making it harder for businesses to charge fair rates in the future.
A Better Alternative:
Instead of undercutting costs, businesses should focus on value-based pricing—offering better service, quality, or unique benefits that justify a reasonable price.
Price Cutting Impact on Economy:
Price cutting—especially aggressive or unsustainable price reductions—can harm the economy in several ways. Here’s why:
1. Encourages Unhealthy Competition
When businesses engage in price wars, it often leads to a “race to the bottom,” where companies continuously undercut each other. This can push weaker businesses out of the market, reducing competition and consumer choice.
2. Reduces Business Profits & Investment
Lower prices mean lower profits. If businesses struggle to make a profit, they may cut back on investments in innovation, research, employee wages, and expansion. This slows down economic growth.
3. Leads to Job Losses
To compensate for lower prices, businesses may reduce costs by laying off workers, cutting wages, or reducing employee benefits. This negatively affects household incomes and reduces consumer spending, which is essential for economic growth.
4. Can Drive Small Businesses Out of Market
Large companies with more financial resources can survive price wars, but small and medium-sized businesses often cannot. This leads to market monopolization, where fewer big players dominate, reducing diversity and competition in the economy.
5. Creates Deflation Risks
If widespread price cutting happens across multiple industries, it can lead to deflation—a situation where overall prices decline. While it might seem good for consumers at first, deflation can cause lower wages, reduced business revenues, and economic stagnation, as people delay spending in hopes of even lower prices.
6. Reduces Product & Service Quality
To maintain profits while cutting prices, businesses may compromise on quality, use cheaper materials, or reduce customer service. This lowers the overall standard of goods and services in the economy.
7. Hurts Government Revenue
Lower prices mean lower taxable revenue for businesses. When profits shrink, corporate taxes decrease, which can reduce government funding for public services like infrastructure, education, and healthcare.
A Better Alternative: Sustainable Pricing & Value Creation
Instead of price-cutting, a strong economy benefits from businesses competing based on innovation, quality, and efficiency rather than just lower prices. This encourages long-term economic growth, stable employment, and better consumer choices.