Sometimes an analysis of the market reveals that several customer segments exhibit different degrees of sensitivity to price and quality. Managers should can identify and exploit differences in customers’ price sensitivities— even in an information-rich environment. Understanding the basis for certain customers’ price sensitivities lets managers creatively respond to a rival’s price cut without cutting their own prices. For example, a company might be able to focus on quality, not price. One way companies can avoid a price war is to alert customers to risk— specifically, the risk of poor product quality. A related weapon is to emphasize other negative consequences.

A senior product manager from the European operation of a large multinational pharmaceutical corporation lamented her recent pricing predicament. Her company’s product, a medical diagnostic device, was the market-share leader, but a rival company had recently become aggressive on price. “They’re crazy! Don’t they see what they’re doing to profits in the industry? Nobody can make money at these prices.

Not surprisingly, research confirmed that a large segment of customers in this “life and death” industry— doctors and testing laboratories—was quite risk averse and sensitive to variations in a product’s performance. So rather than compete on price, the multinational appealed to customers’ concerns about performance by emphasizing product enhancements such as improved reliability and greater detail in the information generated by the diagnostic device and by alerting buyers to the negative consequences of incomplete diagnoses. Some sales were lost to lower-priced products from the competitor, but the quality-sensitive segment allowed the multinational to maintain reasonable margins and avoid the negative spiral of a price war.

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