Overview

• Being the predominant supplier of a product in your market has distinct advantages. With a loyal core of customers, you enjoy the profit inherent with steady volume and desirable price mark-ups. You keep an ample supply of your items on hand to meet your history of demand by your target market. Your company can advertise regularly or decide to use those dollars in other areas. However, if another business selling similar products opens in your market, you become threatened by the competition and worry that your customer base will sacrifice loyalty for lower prices. In anticipation of a loss of volume, you lower your prices to retain customers and to make it difficult for a new competitor to stay afloat with a thinner profit margin, if any at all.
  
  

Impact

• Your company might be willing to sacrifice profits to offset the entry of new competitors to your market by offering retaliatory price cuts to your customers. If your competitor is a start-up company, it may not have the resources available to match your price cut. Increasing your advertising helps to ensure that your customers stay loyal. However, if your competitor is a large company that can absorb losses in its first months or fiscal year of business, your retaliatory price cuts may be expected and won't have an impact on market position.
  
  

Prevention

• Selling products that are expensive to develop and manufacture can help to prevent the entry of a new competitor into your established market due to insufficient funding. Also, maintaining your quality over lowering prices may cost customers less in the long run, and, although you may see an initial drop in revenue, savvy consumers, who are willing to pay more upfront than repeatedly buy the same item, will return. Ultimately, you may have to change your business model to attract customers with an update of your product, especially if you offer technology-based items.
  
  

Alternative

• As an alternative to price wars, a competitor entering your market may help you increase your profits. This is accomplished by raising your prices when a new company opens. If your competitor follows suit, you will be sharing portions of the same market, but the increase in profit will keep your revenue steady or result in a higher income. However, this can be risky because if your competitor lowers the cost of the product, you can lose a large portion of existing customers and target market.