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Responding To Price Changes

This document discusses strategies for initiating and responding to price changes in marketing management. It provides advice on cutting prices to gain market share but warns of potential traps like a price war. When responding to low-cost rivals, it recommends maintaining price and quality, reducing price selectively, or launching a lower-priced product line. The document also covers initiating price increases due to costs or demand and anticipating buyer and competitor reactions to price changes.

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zubair ali
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0% found this document useful (0 votes)
973 views34 pages

Responding To Price Changes

This document discusses strategies for initiating and responding to price changes in marketing management. It provides advice on cutting prices to gain market share but warns of potential traps like a price war. When responding to low-cost rivals, it recommends maintaining price and quality, reducing price selectively, or launching a lower-priced product line. The document also covers initiating price increases due to costs or demand and anticipating buyer and competitor reactions to price changes.

Uploaded by

zubair ali
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Marketing Management

Initiating and Responding to Price Change


A Price Cutting Strategy may Lead to …

• 1. Low Quality Trap


• 2. Fragile Market Share Trap (Low price doesn’t buy market
loyalty. Customers may shift to other brands).
• 3. Price War Trap
Respond to Low Cost Rival by …

• 1. Maintaining price and adding value


• 2. Reducing Price
• 3. Increasing price and improving Quality
• 4. Launching a low price fighter line
Initiating to Price Change

• 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

• Every business firm wishes to increase its sale quantity. Changes in


price may be needed to achieve such objective. So,
the producer should cut down necessary amount of leadership
price of the products. Sometimes companies’ products can enter
in more markets segments only after cutting down prices. This
strategy should be adopted in order to face strong competition.
Otherwise, there may appear a situation either to quit the market
segment or abandon the production. On the other side, there may
be a compulsion to cut down prices of products to control the
target market segments.
2. Initiating price increase

• Sometimes a strategy to increase in price may be adopted not


affecting sale quantity. Price may need some changes due to cost
inflation. Price may need changes due to government’s policy to
control price or to increase revenue. On the other hand, demand
for products may grow suddenly. In such situation, one needs price
change. In the situation, one needs price change. In the situation
when all continuations are suitable, price may be increased
according to the time. However, such increase should be very low
percent. Price should not be increased at the rate which may spoil
the image and competition of the company.
Responding to Price Change

• While changing price of any products, many reactions may come


from concerned sides. At first reaction may come from consumers.
Such reactions may be positive when price is cut down and
negative when it is increased. The company should carefully as
well as logically answer both reactions. In the same way,
competitors’ reactions may also come. The company should give
satisfactory answer to them with all reasons such as cost, market
study, transport expenses, administrative expenses, etc. The
following strategies should be adopted to face reactions of
competitors and distributors.
1. Maintaining Price

• 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

• Producer may increase in existing quality and price. Production


companies may bring in markets the new products or adding new
features to the products challenging their competitors. Little more
prices of such products do affect competitors so much. However,
such analysis cannot last long. Other competitors also may adopt
such strategy. This may be only a periodical means to stop
competitors’ reactions. After sometime, the company should seek
other alternatives.
3. Reducing price

• Most of the customers become conscious about price. So,


the producer should cut down the price of the products after
certain time. Competitors of similar products also may adopt this
strategy. The producers who cannot adopt such policy may get
compelled to quit main market segments among many segments.
Such markets once quitted need very hard labor to supply
products to there again. Policy of taking low percent of profit
should be adopted. Even decreasing price, quality, features and
services should be maintained same. Only then, products can
control markets.
Initiating and responding to price changes

• An organization may initiate price changes to deal with new forces


arising within the organization or the market. The price change
may occur at both directions: increasing price or lowering
prices. After the development of structure and strategies of
prices, the firm usually, faces situations in which they must have
to initiate price changes or respond to price changes by
competitors.
Initiating Price Changes

• In some cases, the company may find it desirable to initiate either


a price cut or a price increase. In both cases, it must anticipate
possible buyer and competitor reactions. An example for this
tactic of initiating price changes is the worldwide oil and gas
industry.
Initiating Price Cuts

• Several situations lead an organization to reduce the price of its


products. Organizations with excess capacity try for extra sales in
order to achieve higher capacity utilization rates. In such a
situation, it may find lowering price the most easy method of
achieving higher sales volume.
• Example: GP and Banglalink always dramatically change their
price when any new packages launch by another. Uber and pathao
also do the same thing. Pathao has started their business only with
motor bike and Uber with car. Now they both have the car and
motor bike option. They both give discounts and different rides
offer to compete each other.
Various Traps …

• Low quality trap


• An organization initiating price cuts may fall in a low quality trap when consumers associate
the new low prices to a poorer quality product. Example: Electronic products.
• Fragile market trap
• It may fall into a fragile market trap when price sensitive consumers wait for further price
cuts or search for cheaper products. Example: Online shop.
• Shallow pocket trap
• It may fall into the shallow pocket trap if financially strong organizations react by huge price
cuts to counter the price cuts initiated by a weak organization. Example: Apparels
accessories.
• Price war trap: Competitors respond by lowering their prices even more, triggering a price
war.
• Example: Foods
• Increasing price
• Increasing price of a product is an attractive proposition for every business
organization, since a small increase in the price results in huge increase in the
revenue and profits. If an organization feels that the sales volume will not be
affected by a small price increase, it may always be tempted to increase the price.
Circumstances leading to price increases cost inflation and over demand. It can be
handled by delayed quotation pricing, escalator clauses, unbundling and reduction
of discounts. When raising prices, customers will eventually turn away from
companies or even whole industries perceived as charging excessive prices. In the
extreme, claims of price gouging may even lead to increased government
regulation. For instance, more cost-effective ways to produce or distribute the
products could be the key to avoiding price increases. The company could shrink the
product or substitute less-expensive ingredients instead of raising the price. Or it
can unbundle its market offering, by removing features, packaging or services, and
separately pricing elements that were formerly part of the offer.
• Buyer Reactions to Price Changes
• It can be of quite diverse nature. Buyers often depend on the way
of initiating price changes. Customer reactions to price changes
are not always straightforward: A price increase, which would
normally lower sales, may have some positive meaning for buyers.
For instance, what would you think if Rolex or Apple raised the
price of their products? It might be even more exclusive or better
made. Similarly, a price cut in the case of Rolex or Apple would
rather indicate reduced quality and a tarnished brand luxury
image than that you get a better deal on an exclusive product.
• Competitor Reactions to Price Changes
• An organization considering a price change must worry about the reactions of its competitors
as well as those of its consumers. Competitors are most likely to react if the number of firms
involved is small, if the product is uniform, and if the buyers are well informed about
products and prices.
• How could the organization anticipate the likely reactions of its competitors? The problem is
quite complex because, like the customer, the competitor can interpret a company price cut
in several ways. It might think the firm is trying to grab a larger market share or that it is
doing poorly and trying to boost its sales. It might also think that the firm wants the whole
industry to cut prices in order to increase total demand.
• The firm must be able to guess each competitor’s likely reaction. If all competitors behave
alike, this will amount to analyzing only a typical competitor. But if the competitors do not
behave alike perhaps because of differences in size, market shares, or policies then separate
analyses are required. However, if some competitors will match the price change, there is
better reason to expect that the rest will also match it. Example: Telecommunication,
Electronics and FMCG company are very much aware of their competitors.
Responding to Price Changes

• 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 …

• Q1. Compare prices of various products in the FMCG sector, take


at least 5 examples with references quote the differences.
• Q2. Revisit the price increases on automobiles pre and post tax
hikes of the current government? with references quote the
differences.
• Q3. Read online reports on consumer behavior towards these
prices hikes in “New Pakistan Era”.
• Thankyou

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