The Art of (Price) War Low prices sound good, but can you slice deep without hitting profit?

In 1998, VC-backed online DVD retailers had slashed prices to asmuch as 50 percent below retail. Not good news for 28-year-old JeffRix, who started DVDEmpire.com in 1995 in Warrendale,Pennsylvania--long before the price wars--with just $6,000 and abusiness model that called for pricing just 20 percent belowretail. Online DVD retailers, including Rix's 42-personcompany, were buying DVDs for no more than 35 percent off retail."The [other companies] were losing money on everytransaction," Rix says.

Rix couldn't go as low as his competitors and live, butcutting profits almost to the bone, he reduced prices to 30 percentoff retail. That made him one of the highest-priced DVD retailers,but by concentrating on service and surfing the surge in DVD sales,he kept growing despite the markdowns by deep-pocketed companieslike Amazon.com, DVD Express and Reel.com.

In the end, he triumphed. One morning in 2000, Reel.com stoppedselling DVDs direct, and then DVD Express shut down."Then," Reed recalls, "everyone raised theirprices." Today, Rix has raised prices back to 20 percent offretail, but that now makes him one of the lowest-cost online DVDsellers.