An analysis of competitors—their cost structures, capabilities, and strategic positioning—is equally valuable. Industry wide price reductions may be appropriate under certain circumstances. But many unprofitable price wars happen because a company sees an opportunity to increase market share or profits through lower prices, while ignoring the fact that competitors will respond.

Market research may reveal that sales increases following a price cut justify the action, but this same research often simply ignores competitors’ price responses. Businesses need to pay attention at the strategic level to the twin questions of who will respond and how. Smart product managers recognize the need to understand the competition and empathize with them. They project how competitors will set prices by carefully tracking historical patterns, understanding which events have triggered price changes in the past, and by tracking the timing and magnitude of price responses. They monitor public statements made by senior executives and published in company reports. And they keep their eyes peeled for activity in resource markets: competitors that acquire a new technology, labor force, information system, or distribution channel, or that form a new brand alliance, will probably make some kind of a price move that will affect other players in the industry. This sophisticated environmental scanning identifies possible adversaries and their likely modus operandi.

But which competitors should you watch? Identifying competitors often has important pricing implications. A company’s direct competitors that share the same technology and speak to the same markets are important rivals. But indirect competitors that satisfy customer needs through the use of different technologies and that have completely different cost structures are perhaps the most dangerous. The process of identifying competitors also reveals the strengths and weaknesses of current and potential rivals. This has important implications for how a company competes. When analyzing your competition, carefully determine who they are, how price fits with their strategic position, how they make pricing decisions, and what their capabilities and resources are.

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