Posted by: Patrick Lefler | February 7, 2010

And you thought airline price wars were bad?

Here’s a great story that highlights a pricing war than even the airlines couldn’t replicate. It comes from Rafi Mohammed in his Book: “The Art of Pricing”.

“The intense rivalry between Jay Gould’s Erie Railroad and Commodore Cornelius Vanderbilt’s Central Railroad in the nineteenth century illustrates the pivotal role that competition plays in determining value. These adversaries battled to control livestock transportation between Buffalo and New York City in 1867. The standard price for the route was $125 per carload. Vanderbilt incited a price war by reducing his rate to $100; Gould responded with a another $25 price cut. The Commodore reciprocated; Gould struck back by dropping his price to $25. When Vanderbilt set his price to $1 per carload, Jay Gould’s cars ran empty, and Vanderbilt celebrated his victory – given that both railroads offered virtually the same service, why would customers pay more to Gould?”

“The Commodore’s merriment ended abruptly when he discovered that Gould had purchased every steer in Buffalo and sent them to slaughter in New York on Vanderbilt’s rail cars – yielding large profits for Gould, quite literally at the Commodore’s expense. Moreover, in the process, Vanderbilt’s aggressiveness wiped out a profitable business”

Two points here. First, if you want to avoid price wars, have a product or pricing model that is not viewed as a commodity by your buyers. Second, if you can’t differentiate your product or pricing strategy, you need to understand that your prices will be heavily influenced by the competition.

More on this topic and others next time…


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