On the surface, it looks as though your competitor has entered into a price war with you. However you need to make sure that this is really the situation.

First, how sure are you that he is selling goods at less than he pays for them? You need to confirm this and be 100% certain. It is possible that your competitor is not selling at a loss but has negotiated an excellent price with the supplier or that the goods are not identical to what you are offering and are lower quality. Before doing anything else, you need to confirm that the price your competitor pays for his products is more than what he sells them for. To do this, you must identify his supplier, and the prices paid.

Don't just consider the obvious or traditional suppliers. It is possible that there is a new entrant to the market selling at a very low price to break into the market or who can produce at a lower cost. If this is the case then this discount may be passed on by your competitor. Such a new entrant could come from a different geographical area with lower costs and thus lower prices. (In Europe, for example, a lot of companies now purchase goods from India and the Far East as costs are cheaper, even including transport and communication costs. There are companies that supply bespoke computer software in the UK and instead of paying UK programmers to write the software they use programmers from Southern India who are a lot cheaper than their European equivalents for the same skills and quality.)

One approach to identifying the supplier, especially if the competitor has found a new source, is to speak to your competitor, or people who know your competitor (for example ex-employees of your competitor, or partners who work with your competitor, etc.) and try and elicit the supplier's name and prices. This is possible, but takes skill to do ethically. An easier approach is to speak to suppliers in the market. It would be in your interest to find a cheaper supplier, so it is legitimate to approach suppliers with a view to buy. If your competitor is selling the products at $95 (or euro or GBP...) then what would be a reasonable purchase price. Use this as your price in the negotiation. If the supplier refuses or laughs, mention your competitor. Say that this "must" be the going rate as otherwise your competitor could not sell at the price he is doing. Most suppliers will agree that he is selling for less than he is paying.

The aim is to find out who your competitor's supplier actually is. This may take quite a bit of work if there are many suppliers in the market (and you can't ask your competitor directly). When you mention prices you may want to show your competitor's products to the suppliers. Purchase samples (or get somebody to do this for you). You need to get a supplier to admit to supplying the goods, and also their price. This will help you decide next steps.

You could be lucky and find a supplier who agrees to the low price. You can then match your competitor prices (although this may not always be the best strategy). Or a supplier may give clues suggesting that they are the competitor's supplier and explain how they offer such a low price to them but cannot to you. (Perhaps they needed to clear old stock before bringing in new and your competitor bought up the whole range at a low price that cannot be repeated when the stock runs out. In this case the problem is short-term and prices will go up when the stock runs out. In addition your competitor's customers will be dissatisfied if they cannot re-order at the low price. So many will come back to you!).

In both the above cases the problem will be solved. It is also possible that this is not the case and your competitor is genuinely selling at a price lower than the purchase price on one range of products but makes up the loss through other products sold at higher prices. This is a legitimate marketing strategy (called a "loss leader"). To compete, you need to understand all his pricing and products. Where does he make his money? Who buys what from you and from the competitor? If the loss leader is aimed at your best selling item then it can hurt you. So you need to think how to combat this. Could you also offer a "loss leader" for some other items that are less popular for you but not for your competitor? Alternatively, the loss-leader may bring in customers who are price sensitive for this item but not for others for which the you charge more than the competitor. Overall prices may be the same or even more, but customers perceive that the prices are lower because they are for the products for which they are price sensitive. So, you need to find out ALL your competitor's prices and especially those matching your products. Also what customer perceptions on price are and how price sensitive they are for different products, etc?

You may discover however that the competitor's supplier genuinely does not know what is happening. It can actually be damaging to the supplier if a customer always sells at a very low price as this devalues how people see the quality of and value of the goods. It could also result in other companies pulling out of the market not being able to compete resulting in less sales overall for the supplier. So you may be able to show the supplier how this customer is bad for business. (This is one reason why manufacturers recommend a minimum price. Although retailers can offer a lower price, the recommended price is often still quoted as a guide so consumers feel that they have a bargain but know the true value.). If the supplier realises what is happening they may stop the problem for you by ending their contract with the competitor.

Another approach is to speak to your clients and explain the situation to them. Say that your competitor's approach means that you have no choice but to stop offering these products resulting in customers having less choice. You can also say (it does not matter if it is true or not) that you believe that this is what your competitor wants: to gain a monopoly market. You can claim that if he achieves this he will put prices up higher than they were before. With no choice customers will have to pay new higher prices. You can recommend to customers to ignore the cheaper prices and go for your more reliable and honest service as you promise fair prices all the time. (This approach is an example of disinformation – a defensive strategy involving putting out information that is not totally true to damage a competitor).

In summary, there are a number of steps you can take. Before taking them though, you need information about your competitor: who are his suppliers; what prices does he pay for his products; what are his best selling product lines, etc? You need to know about the suppliers in the marketplace and may need to gain an understanding of customer price sensitivity. You will probably need to do some analysis on this information to gain an understanding of where your competitor is making money so as to cover the losses from the low-price products (if any). You may also need to communicate what is happening to clients and suppliers to protect your position. What you say will depend on your findings, but the one thing you should be wary of doing is entering into a price war. This is always damaging except perhaps to the firm with the deepest pockets. So if you do consider this, be extremely careful and aim it at where it will hurt your competitor most and you least.

What ever you do, sitting back and doing nothing is not an option. Without knowing more however, you cannot make a safe decision so it is essential to do the competitor research to uncover what is really going on.

Note: This FAQ was originally published in the Society of Competitive Intelligence Professional's membership magazine (Competitive Intelligence Magazine - Sep-Oct 2002)