Responding To Price Changes
Responding To Price Changes
• After goods have been produce, price is determined on the basis of its
cost and taking reasonable profit. The price so determined may also
need changes. Due to external and internal environmental effects, prices
may need changes. Two main strategies can be adopted in leadership
pricing as follows:
1. Initiating price cut
• The producers should try their best to maintain price at the same
rate. Producers may cut down some percent of profit. The existing
market segments can be maintained with such strategy. Along with
this, opportunity can be found to enter new market segments. In
this way, sale quantity may increase.
2. Increasing price and quality
• Here we reverse the question and ask how a firm should respond to a price change by a
competitor. The firm needs to consider several issues: Why did the competitor change the price?
Was it to take more market share, to use excess capacity, to meet changing cost conditions, or to
lead an industry wide price change? Is the price change temporary or permanent? What will happen
to the company's market share and profits, if it does not respond? Are other companies going to
respond? What are the competitor's and other firms' responses to each possible reaction likely to
be?
• Besides these issues, the company must make a broader analysis. It has to consider its own
product's stage in the life cycle, the product's importance in the company's product mix, the
intentions and resources of the competitor, and the possible consumer reactions to price changes.
The company cannot always make an extended analysis of its alternatives at the time of a price
change, however. The competitor may have spent much time preparing this decision, but the
company may have to react within hours or days. About the only way to cut down reaction time is
to plan ahead for both possible competitor's price changes and possible responses.
There are several ways a company might assess and respond to a competitor's price cut. Once the
company has determined that the competitor has cut its price and that this price reduction is likely
to harm company sales and profits, it might simply decide to hold its current price and profit
margin. The company might believe that it will not lose too much market share, or that it would
lose too much profit if it reduced its own price. It might decide that it should wait and respond
when it has more information on the effects of the competitor's price change. For now, it might be
willing to hold on to good customers, while giving up the poorer ones to the competitor. The
argument against this holding strategy, however, is that the competitor may get stronger and more
confident as its sales increase and that the company might wait too long to act.
If the company decides that effective action can and should be taken, it might make any of four
responses. First, it could reduce its price to match the competitor's price. It may decide that the
market is price sensitive and that it would lose too much market share to the lower-priced
competitor. Or it might worry that recapturing lost market share later would be too hard. Cutting
the price will reduce the company's profits in the short run. Some companies might also reduce
their product quality, services, and marketing communications to retain profit margins, but this
will ultimately hurt long-run market share. The company should try to maintain its quality as it cuts
prices.
• Alternatively, the company might maintain its price but raise the perceived quality of its offer. It
could improve its communications, stressing the relative quality of its product over that of the
lower-price competitor. The firm may find it cheaper to maintain price and spend money to
improve its perceived value than to cut price and operate at a lower margin.
Or, the company might improve quality and increase price, moving its brand into a higher-price
position. The higher quality justifies the higher price, which in turn preserves the company's higher
margins. Or the company can hold price on the current product and introduce a new brand at a
higher-price position.
•
Finally, the company might launch a low-price "fighting brand." Often, one of the best
responses is to add lower-price items to the line or to create a separate lower-price brand. This is
necessary if the particular market segment being lost is price sensitive and will not respond to
arguments of higher quality.
Assignment …