The Mobile Termination Rate (MTR) has been lowered. Are we looking at another price war in the telecoms sector? I doubt.

My reasons are that common sense will prevail as the aggressors were hurt most in their war with Safaricom. Secondly, the small players have been mulling the possibility of increasing prices and will take the rate cut as a direct boost to their bottom-line.

If, however, I am wrong, and a price war ensues; it will definitely not originate from Safaricom. This is because the market leader has nothing to gain from that. It is the other players who may try to fight for market share by lowering prices. Safaricom would then be on the defensive.

This can be said for many of the business sectors in this country in terms of wrestling market share from the dominant player.

What options does a business have when responding to a price reduction from competitors?

Maintain existing prices. This can only be done if in your assessment, the market share likely to be lost is insignificant. Such a move may however be suited more for highly segmented markets or niche players. It will also be affected by forces of demand and supply. That explains why all the new players in the cement market price their products lower than Bamburi Cement, advertise more aggressively but are yet to dislodge the market leader. Customers may be reluctant to move for reasons like loyalty or fear of losing certain advantages.

Maintain existing prices but respond with a non-price counter attack. This is fairly common for businesses with seasonal price variations or one off promotions. In the past, milk processors used to lower prices during milk supply glut. In the last rainy season, we saw them prefer to sell 550ml packets and maintain price at previous levels. The fear usually is that if you lower prices in response to short term threats, customers will perceive you as expensive when eventually you adjust it upwards.

Reduce prices. At times, a business has no choice but to lower prices in response to competitor action. This is especially when there have been developments in the market to lower your cost of business. Customers expect such to be passed on. When doing this, care should be taken to maintain profit margins as it makes no sense to sell below cost. It is prudent to understand your competitors’ reasons for lowering prices and assess whether it applies to you as well. It is a widely practiced strategy by business rivals to force you out of business by squeezing your profit margins rendering your business non viable. Therefore, take care not to be lured to your own death!

Raise prices and respond with a non price attack. The market for luxury goods & professional services behaves in strange ways. A customer’s perception of quality is directly linked to the price charged. This response therefore is appropriate for goods and services whose quality cannot be ascertained in tangible ways. Therefore, when your competitor lowers price, the market thinks quality has also gone down. Raising your prices creates the perception of improved quality thus guaranteeing good business.

Next time you see a competitor raising prices, you now know your options.