Friday, 6 June 2014

Learn from Ryanair –Avoid a Price War

If you learn anything from the reports that Ryanair has seen its first profit drop in five years that have surfaced this week, it should be to avoid a price war. Profit drops are poison for those of you out there looking to sell your business.

The link between profitability and lucrative business sales are obvious. Any buyer interested in your business will be so because they see profit potential. If you can show them that they can use your business to make money, they’ll suddenly be a whole lot more interested in buying your business.
Naturally, this leads us to the conclusion that if you can’t show them high profit margins, then they’ll doubt that your business can make any money, and it’s more than likely they’ll end up saying no. Seeing profits drop as you’re selling, by the way, is particularly disastrous because it’s so immediate, it is bound to stick in any buyers mind.

The Misconceptions of a Price War
One of the easiest ways to drive down your profit margins is by getting involved in a price war. People usually get the wrong idea about this. The theory behind drastically cutting prices is that because you are cheaper than your competitors, people will come to you to buy the product/service you sell, because they’ll save money.

This is a terribly short sighted view of the realities of drastic price cutting policies. Yes, they can be lucrative in certain circumstances, but there are other things to consider. It may not, for example, attract enough customers to make it viable, as there may be issues of convenience or may not make enough money to prove profitable due to prices falling too far.

Ryan Air: A Case Study
Let’s look at what’s happening with Ryanair right now to see how drastic price cuts can have the opposite effect to those intended. It is a low cost airline that has been making money for years because it is popular with customers.

They recently went too far and engaged in a price war to compete with other low cost airlines. It has now seen its net profit fall to 523 million Euros (£426 million) for the year to March, down from 569 million Euros the year before.

This is why RTA Business Consultants suggest that if you’re looking to sell your business, you should think long and hard about whether engaging in a price war really will drive up your profit margins. If you’re not careful, it can actually damage them, turning off that potential buyer who otherwise would have signed on the dotted line and purchased your business!

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