Initiating and Responding to Price Changes

Price Changes

After developing its pricing structure and strategy, the company typically encounters circumstances when it must either set its own prices or react to competitors' price changes.

Initiating Price Changes

The business may decide that in some circumstances it would be advantageous to start a price reduction or an increase in pricing. In both situations, it is necessary to consider potential customer and rival reactions.

Initiating Price Cuts

A corporation might think about lowering its price under a number of circumstances. Excess capacity is one of these situations. Another is a decline in demand brought on by fierce price rivalry or a failing economy. In these situations, the business may aggressively reduce prices in an effort to increase sales and market share. However, as numerous industries, like the airline, fast-food, automobile, and others have discovered recently, lowering prices in a sector with excessive capacity may result in price wars as rivals strive to maintain market share. A business may drop its prices in an effort to dominate the market at a cheaper cost. Either the company begins with lower costs than its rivals, or it lowers prices in an effort to acquire market share, which will lead to additional cost reductions through increased volume. Lenovo's aggressive low-cost, low-price strategy is used to grow its market share in emerging nations for personal computers.

Initiating Price Increases

Profits could climb significantly with an effective price hike. For instance, if a company's profit margin is 3% of sales, a 1% price rise will unquestionably raise earnings by 33% even if sales volume is unaffected. Cost inflation is the primary cause of price increases. Profit margins will be squeezed by rising costs, which will force businesses to pass cost hikes on to customers. Oversupply: When a business cannot meet all of its customers' demands, it may raise prices, limit the amount of things it sells to customers, or both. Take a look at the global oil and gas market today.

The company must avoid coming seen as a price gouger while boosting pricing. For instance, when gas prices spike suddenly, upset customers frequently claim that the big oil companies are enriching themselves at the expense of the general public. Customers have long memories, and if they think a business or perhaps an entire industry is charging exorbitant or unreasonable rates, they will undoubtedly avoid it. Price gouging allegations taken to their logical conclusion might even lead to more stringent government control.

There are some methods for preventing these issues. One relates to upholding a sense of justice about any price increase. Firm communications explaining to clients why prices are increasing must accompany price increases. The company should, whenever possible, look into solutions to satisfy rising costs or demand without raising pricing.

Buyer Reactions to Price Changes

Customers don't always understand pricing changes in a straightforward manner. A price rise that would often result in reduced sales could actually have some advantageous effects on consumers. What, for instance, would a buyer think if Rolex increased the cost of its most recent watch model? They might believe that the watch is now even more expensive or better manufactured, on the one hand. On the other side, they might believe that by pricing what the market will bear, Rolex is just being greedy.

Similar to how customers could perceive a price reduction differently. What, for instance, would a buyer think if Rolex abruptly reduced its prices? They may believe they are receiving a better deal on a premium item. However, it is more likely that customers would believe that the quality had decreased and the company's reputation as a luxury brand had suffered. Price and image of a brand are frequently intertwined. A price adjustment, particularly a price reduction, could have a negative impact on how consumers perceive the brand.

Competitor Reactions to Price Changes

A company considering a pricing change needs to be concerned about both the opinions of its customers and those of its rivals. The likelihood of competitors responding is highest when there are few firms involved, the product is uniform, and customers are well-informed about options and costs.

How did the company foresee how its rivals would likely respond? Due to the fact that the rival can interpret a company price reduction in a variety of ways, just like the customer, the issue is highly complicated. It can believe that the company is attempting to increase its market share or that it is struggling and attempting to increase sales. It can also believe that the company wants the entire sector to lower costs in order to boost overall demand.

The company needs to be able to predict what each rival will probably do. This will equal to examining only a typical competitor if all competitors act similarly. Separate assessments are needed if the competitors do not behave similarly, which could be due to variations in size, market shares, or policy. However, there is more reason to believe that the remainder will follow suit if some competitors match the price change.

Responding to Price Changes

Understanding how a company should react to a competitor's pricing change is essential. The business must think about a number of things: Why did the competition alter its pricing? Is the price change temporary or permanent? If the company doesn't act, what will happen to its market share and profits? Do rival businesses show up to answer? In addition to these concerns, the company must take into account its own circumstances, strategy, and potential customer responses to pricing increases.

Let's say the company discovers that a rival has lowered its price and determines that this move will certainly hurt its sales and profits. It might just decide to maintain its current profit margin and price. The company might think that if it lowers its own pricing, it won't lose too much market share or too much profit. It might determine that it needs to wait and reply once it knows more about how the competitor's price increases would affect consumers. However, delaying too long to take action could allow the rival to grow stronger and more self-assured as its sales rise.

The company may take a number of actions if it determines that effective action can and should be done. It might first cut its price to match that of the rival. It may conclude that the market is price-sensitive and that losing too much market share to the competition with a lower price would be detrimental. In the short term, the price reduction will lower the company's profitability. In order to maintain profit margins, some businesses may also lower the quality of their goods, services, and marketing materials; but, doing so will eventually affect their market share over the long term. While cutting costs, the company should attempt to preserve its quality.

Alternately, the company might keep its price the same while increasing the perceived value of its item. By highlighting the relative worth of its product in comparison to the lower-priced competitor's, it can strengthen its communications. Instead of lowering prices and operating at a reduced margin, the company might find it more cost-effective to keep prices the same and invest in raising customer perceptions of its value. Alternately, the company might raise prices while improving quality, putting its brand in a stronger price-value position. The higher price is justified by the increased consumer value that the higher quality creates. Therefore, the higher price keeps the company's higher margins intact.

Reference

Kotler, P., & Armstrong, G. (2013).Principles of Marketing.Chennai: Pearson India Education Services Pvt Ltd.

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