With the intensification of marketing competition, some traders, producers, or service providers resort to price competition. Many believe that the easiest and best way to capture a larger market share is by lowering prices to attract customers and change their loyalty. However, price competition is a double-edged sword. It often ends in disaster and not only harms competitors but also has widespread effects on the entire sector. To understand the danger of price competition, let's clarify some concepts.

First: Goods, Products, and the Difference Between Them

The definition of goods varies between economics and marketing. Setting aside academic definitions, let's distinguish between goods and products with some simplification using examples. Goods are the raw materials that make up the final product. They have specific, unchanging characteristics regardless of their origin, production methods, or manufacturing. Their prices, such as reinforcing iron used in construction, are generally determined based on global or local market conditions (country-specific conditions).
Goods do not satisfy a specific need for the final consumer. Taking reinforcing iron as an example, the final goods consumers seek are housing or commercial units (apartments, villas, offices, commercial shops, etc.).
Goods often have a stock exchange to determine their prices. The price is influenced by factors such as supply and demand, seasonality (for seasonal goods), and many other variables. Goods do not undergo changes or additions during production, and their specifications are standardized and do not differ from one producer to another. The production inputs for goods are relatively uniform among producers. Therefore, production costs are nearly constant for all suppliers, as is the profit margin. For example, the price of raw iron is fixed for all producers, and so is the cost of energy, labor wages, and other factors. The cost of production is nearly uniform for all suppliers.

Second: Product Characteristics and Differences from Goods

As for the product, it involves transforming goods by adding them to other goods and conducting transformative operations to create a final product that satisfies a specific consumer need. The product relies on non-fixed, variable transformative operations that differ in production methods, creativity, and design. For example, construction companies use reinforcing iron and cement, among other goods, to produce structures, each company relying on its knowledge and unique designs.
Products do not have standardized pricing and do not share similar specifications in the market. Each producer may follow different methods of production, have unique recipes, distinctive packaging, sales methods, and pricing strategies. Products do not adhere to fixed pricing and do not have similar specifications to other products in the market.

Pricing of Products

Pricing products is based on various criteria, making it a complex marketing issue that requires in-depth discussion. Key factors in product pricing include raw material costs, production costs, competition, brand strength, the value added by the product to the consumer, and other significant factors.
In summary, the pricing of chicken, considered a commodity, is governed by supply and demand laws in the poultry market. Assuming the price of live chicken is set at $1 per kilogram in the poultry market, the breeder will sell the chicken to the trader at the same price. The trader will purchase the chicken, transport it to the slaughterhouse, and proceed with the slaughtering and cleaning processes. These processes are considered value-added operations on the commodity. The question arises: does this transform the commodity into a product? In reality, at this stage, chicken is considered to possess some characteristics of goods and some of products. Among the characteristics of goods is that the production processes applied to the chicken are standardized in terms of quality, cost, and technical knowledge. Therefore, the pricing remains, to a large extent, a fixed price for the same weight of slaughtered chicken. However, the commodity has also started to transform into a product in the sense that it has become capable of satisfying the consumer's need.

Another step that the chicken may go through in its journey from a commodity to a product is, for example, freezing and packaging. At each step of the chicken's journey from a commodity to a product, the price is freed from its fixed nature. The price varies based on the packaging method, but it does not change significantly. However, it changes considerably when the brand printed on the chicken's packaging differs. The price is influenced by the strength of the brand, and even minor changes in branding can affect the price and pricing flexibility.
Let's consider three chickens that came from the same farm to the same trader, the same slaughterhouse, and the same wholesaler. They are purchased by three different restaurants, and coincidentally, all three restaurants offer a fried chicken dish in the same area, even on the same street. Is the fried chicken meal served in these restaurants considered a commodity or a product? In reality, the chicken has reached the end of its journey from a commodity to a product, becoming a complete product offered to the final consumer. Let's review together the characteristics of the chicken now.
Firstly, uniformity: The three chickens left the farm with identical weight, age, and quality, arriving at the restaurants with the same specifications. However, does that mean the final product is identical in specifications? Certainly not. Each restaurant has its unique cooking recipe, so even if the three restaurants offer the same dish, the ingredients, preparation methods, taste, products, and accompanying services may differ.
Secondly, the price: After the chickens reach the end of the journey and transform into a final product, each meal in each restaurant is priced differently based on the production costs and other raw materials used in the manufacturing process. For example, the prices of spices used can vary significantly (some spices may even exceed the price of the chicken itself). Additionally, the additional dishes served with the chicken may differ. One restaurant may serve bread with the chicken, while another may serve chicken with rice. Therefore, the prices of the three meals differ. The price also varies based on how the meals are presented. Whether a restaurant has a comfortable air-conditioned dining area or not can impact the price. The brand also influences the price.
As the complexity of the production processes applied to the product increases, and the variability of production inputs differs, the price changes. Price competition is often considered a strategy that may backfire. Some may believe that the magical solution to overcome fierce competition in their field is to reduce the prices of their products to attract competitors' customers and gain a larger market share. However, price competition can be the worst strategy employed.
Firstly, how price competition happens: Using marketing strategies and tools for competition always reminds me of a chess game where each player plans their moves and tactics. Each player makes a move with the aim of attacking, defending, or repositioning their forces on the board representing the market. Price competition reminds me of "pawn sacrifice" in chess, where a player decides to attack the competitor's protected pieces, sacrificing their essential pieces to eliminate the competitor's pieces. By doing so, they weaken and undermine the competitor, who naturally weakens themselves as well. This strategy relies on patience, evaluating the situation, and playing on the possibility that the competitor may be confused by this attack, making mistakes.
Similarly, when a marketer decides to compete on price and lowers the prices of their products or services, thinking that their competitor will not be able to keep up, the competitor responds by reducing their prices in return. The first marketer then reduces theirs further, and the second one responds with a new reduction. This cycle continues, with both parties believing that the competitor, at a certain stage, will not be able to endure and will withdraw from the market.
How the strategy of price competition succeeds: Sometimes, price competition can be a successful strategy only when the initiator is confident in their ability to reduce production costs without compromising quality and can offer the product with the same quality but at a lower price. For example, the owner of one of the three restaurants in the previous example may own the restaurant and know that his competitors are renting their restaurants at high costs. Therefore, his operating expenses are lower than his competitors', or the owner of the chicken farm can obtain his main commodity at a lower price than his competitors.
Additionally, one of the restaurant owners may have substantial cash flow, enabling them to sell at a small profit margin or even at a loss for an extended period. This way, they can eliminate their competitors from the market.

How Price Competition Strategy (Price Erosion) Fails

In most cases, price competition fails significantly when competitors start reducing their expenses at the expense of the products, services, and their quality. This puts all competitors and even the entire sector at risk of failure.
The meaning of the term "price erosion": Price erosion simply refers to the loss of a product's specifications and distinctive features, reverting the product to a commodity state characterized by a lack of differentiation in features and a stable price.
Price erosion is a reverse journey in which the product gradually loses its features, returning to a commodity state. In our previous example, when the three restaurant owners decide to enter an unregulated price competition and, in the absence of the ability for one of them to reduce operational expenses without compromising production costs, the following occurs:

1. Cost Reduction: The producers initially attempt to find cheaper sources for production inputs so that they all reach the same prices for production inputs.
2. Quality Reduction: The next step involves lowering the quality by using lower-quality materials. For example, using lower-quality spices or cooking oils. Additionally, producers may cut operating expenses by hiring untrained and unqualified labor at lower wages, gradually changing the product's characteristics with each quality reduction, altering the distinctive taste of the offered meals.
3. Quantity Reduction: At this stage, the product owner has no choice but to reduce the quantities of used goods. This involves reducing the primary goods and additional goods used in the production process. In our case, this would mean reducing the quantity of chicken and additional items like spices, bread, and accompanying salads.
4. Erosion: The final stage involves reaching the end of the price war by stripping away all the distinctive features of the product, presenting similar products by all producers that might be identical. In our example, all three restaurants offer similar meals in terms of ingredients, preparation method, presentation, and taste, just as the three chickens were similar when leaving the farm, they become indistinguishable again.

Drawbacks of Price Erosion:

1. Consumer Abandonment: Consumers may turn away from the product after it loses its unique features and advantages.
2. Substantial Losses for Producers: Many producers may incur significant losses and withdraw from the market.
3. Diminished Consumer Confidence: Over time, consumers lose confidence in the entire sector due to the poor quality of products offered.
4. Lack of Innovation and Development: The absence of new investments for developing products with unique features hinders innovation and creativity.

How to Face Price Competition

We have seen the dangers of getting involved in competitors' movements and engaging in price competition. So, how can one effectively face price competition?
Marketing science responds with one word: "Positioning." This term refers to establishing the mental image of the brand and its distinctive product features in the consumer's mind.
In simpler terms, convince your customer that the price of your product aligns with its features and that your brand deserves the customer's money for the products and services offered. Highlight multiple product features, and also emphasize accompanying services such as after-sales service or loyalty programs. Establish sustainable relationships with your customers, listen to suggestions, and address complaints.

1. Focus on Quality and Highlight it: Ensure the message reaches the customer that you use the finest ingredients. List them in the menu, display images of chicken being fried in pure oil, highlight the quality of spices used, and make your restaurant kitchen with glass or open walls, allowing customers to enjoy watching their food being prepared while ensuring quality and cleanliness.
2. Provide an Enjoyable Experience: If you have a dining area, make it comfortable with suitable lighting, always keep the place clean, and strive not to delay orders for your customers.
3. Take Care of Your Employees: Customer satisfaction starts with satisfied employees. An employee cannot make a customer happy if they dislike the place they work.
4. Maintain Customer Loyalty: Simple things can make your customers return, such as a staff member's smile, a call to inquire about food quality – all cost-effective but effective measures.

The list of actions a restaurant owner can take to overcome price competition may extend, but it always revolves around solidifying the brand's mental image.
Dear reader, you might feel that these steps and others are not sufficient, and there is no alternative to lowering prices. Well, let me conclude with one more statement: What if one of the three restaurants is a branch of KFC? Who would prevail, the price reduction or the strength of the brand?