17 Analyse the risks of a business starting a 'price war' in order to gain market share

[Sir Afzal Shad]

17 Analyse the risks of a business starting a 'price war' in order to gain market share. [3]

[Subhan Zafar]

{KN}Starting a price war where competing businesses continually lower prices to attract customers can help a firm gain market share in the short term, but it carries significant risks.
{APP}For example, if two mobile network providers in Pakistan, such as Jazz and Zong, start cutting prices to attract each other’s customers, both may see a temporary increase in sales. However, their profit margins will fall because revenue per customer decreasesAs prices continue to drop, the business might struggle to cover its costs, especially if it has high fixed expenses such as advertising or network maintenance. Smaller firms are particularly vulnerable, as they may not have the financial strength to sustain prolonged price reductions.
{AN}In the long term, a price war can damage the entire industry’s profitability and lead to lower-quality products or services if businesses cut corners to save money. Therefore, while a price war might boost market share in the short run, it can threaten financial stability and long-term survival if prices fall too low to remain profitable.

[Shaliza khawaja]

starting a price war forcs a business to lower profits and hence reduce profit margins making it difficult to cover production
for example if too smartphone companies start to cut price to compete, their profit per phone might fall
this can affect there cash flow and hence company would have problems with reinvestments in the business to improve there product or introduce new products in the long term they would loss stability and also damage there brand image

[areeshasaber]

[kn] a price war is when 2 businesses continuously reduce prices to attract customers.
[app] for example, coke and pepsi keep reducing prices to attract more customers.
[an] this is risky as the 2 businesses could result in lower profits, damaged brand image and long term instability.

[Arham Qadri]

[KN] Price war is when business/firm cuts prices to attract customers.
[APP] For example Nikke and Addidas both reduce the price of their football shoes so that more people will come to buy them.
[AN] This will result in less profit being made, it will damage the markets' structure, and it will degrade the brands image.

[shamaim shakeel]

knowledge Point:
A price war happens when a business keeps cutting its prices to get more customers, but it can be risky because it reduces how much profit the business makes on each sale.

Application:
For example, if OPTP, a Pakistani fastfood chain, starts selling burgers at lower prices to compete with McDonald, both might keep dropping prices to attract people.

Analysis:
This would lower OPTP profits, meaning it earns less money even if sales go up. With less profit, it might struggle to pay costs like staff and ingredients. Over time, this could weaken the business, as customers might see the brand as cheap rather than good quality which makes it harder to recover once prices go back up.

[Shuraim Arif]

(KN) Starting a price war leads to huge risks like a lower margin of safety.
(APP) For example, two car manufacturing companies, operating in the same market, may start a price war to gain more customers. In the short term, the business with lower prices would attract more customers but in the long term, it could pose risks such as a lower profit per unit.
(AN) This would lead to the business with higher prices staying a lot more profitable as keeping the prices higher meant that it earned a higher profit per unit. This would lead to financial problems for the business that earns a lower profit per unit, leading to a less amount being reinvested into areas such as R&D, making them lose their element of USP, eventually making the business with higher prices more successful in the long run.

[Ayaan Fayaaz]

[Kn] A price war happens when businesses repeatedly lower prices to attract more customers and increase market share.

[App] For example, two competing fast-food chains may keep cutting burger prices to win over customers.

[An] This can reduce profit margins for all competitors make it difficult to cover production and operating costs, and damage the business long-term if customers expect permanently low prices, making recovery harder once the war ends