The business organizations deals with situations in which they must start price changes or reacts to price changes by the competitors, after developing their pricing strategies and structures. It is the second important element of marketing, so it needs to be determined properly.
There are various factors, which may lead to change in prices. It might be due to change in demand or the result of inflation as well. Whatever the reason is, price change has become the important part of business organization.
Factors of Price Changes
- Initiating Price Changes
In some situations, the business organizations may consider that it is desirable for them to start a price increase or price cut. In both cases, the purchasers and competitors responses are anticipated in advance by the business organizations.
Read More: Price Adjustment Strategies
Initiating Price Cuts
There are many reasons that compel the business organization to cut its price. Excess capacity is one of such condition. In this condition, a business organization requires more business and it cannot obtain it through product improvement, enhancing sales efforts or other steps.
It may stop to follow leader pricing which means charging same price as the market leader and it boost its sales by aggressively cuts its prices.
In recent years, industries like fast food, construction equipment, airline and other industries have understand that when the price is cutis in the industry with excess capability may take to the price wars as competitors also needs to keep their market share in the industry.
Another situation taking to price alteration is the dropping market share in the form of potential price competition. Either the business organization begins with reducing costs than its competitors or market share is gained by reducing its prices which will further decrease costs through larger volume.
Initiating Price Increase
Profits can greatly increase by successful price increase. For example, if the profit margin of business organization is 3 percent of sales, price will increase 1 percent than the profit will increase 33 percent if volume of sales remains same.
Cost inflation is a main factor in price increase. When costs rise than the profit margins become reduce and the business organization passes this increase in costs on to the customers. Excess demand is also another important factor in price increase.
In case the business organization is unable to fulfill the needs of all its customers, it increases its prices, or rations its products to customers or both.
In order to sustain with increasing costs, business organizations increase their prices in many ways. By adding high-priced units to the line and dropping down the discounts, the prices can be almost invisibly increased. Or prices can openly increase.
The business organization must avert being perceived as price swindler in passing price enhancement on to customers. Business organizations also require considering that who will tolerate the brunt of enhanced prices.
For avoiding this problem, there are some particular techniques. A sense of equity surrounding any price enhancement should be keep by the business organization. The business communication program supports the price increase by telling customers about why the prices are enhanced and advance notice should be provided to the customers so that they can shop around or perform forward purchasing.
Another effective technique is producing low-visibility price movement first. Common examples include, increasing minimum order sizes, eliminating discounts, curtailing manufacturing of low margin products. Escalator clauses should be included in contracts and bids of long term projects which are based on such components like enhancement in acknowledged national price indexes.
Business customers are assisted by sales force of the business organization in finding manners to economize. Higher demand and costs should be meeting by business organization by considering ways without enhancing prices, wherever it is possible.
For example, it can view more cost-effective manners to distribute or manufacture its products. Instead of increasing the price, it can shrink the product as candy bar producers mostly do. Less expensive ingredients are replaced or particular product characteristics, packaging or services are removed by it.
Or it can remove, separately pricing its components that are previously element of the offer by “unbundling” the product or service.
- Purchaser Reactions to Price Changes
Purchasers, distributors, competitors, and suppliers and also government interest are influenced by the increase or reduction in the price. Prices are not always interpreted in straight forward manner by the customers. They may consider price reduction in many manners.
For Example, what would customer think of when particular company abruptly reduced its price of VCR into half? Customers might think that these are old VCR and need to be substituted by new models or that they are not selling properly nor have some fault in them.
Or the customers may consider that the VCR providing business organization is ceasing its business and may not operate to provide parts in future. Or customers might consider that the quality of VCR has been decreased. Or customers might consider that the price of VCR will reduced further and it is best response to pay to hold and visualize.
In the same manner, an increase in price that would reduce the sales have good signification for purchasers. What should customers consider when the above mentioned business organization enhances the price of its latest version of VCR?
The customers might consider that the item is very “in” and may be not be acquire able unless they purchase it quickly. Or customers might consider that VCR is remarkably better worth.
- Competitor Reactions to Price Changes
The reactions of competitors and customers are considered by the business organization which is viewing price change. When the product is uniform, when number of business organizations is small and when the purchasers are well informed, than competitors are most likely to react.
How the likely responses of competitors can be anticipated by business organization? The response can be easily anticipated when the competitor tends to response in particular manner to price change or when there is one huge competitor.
But if every price change is taken as fresh challenge by the competitor and responses according to self-interest than the business organization should find out only what create the competitor’s self-interest at that time.
The competitors similarly to the customers, can interpret the price cut in various manners which is quite a complex problem.
It might consider that the business organization is struggling to catch a higher market share that the company struggles to increase its sales and it is currently poorly working, or the business organization desires to enhance the entire demand of products by letting the industry to cut prices.
Every competitor’s likely response should be viewed by the business organization when there are many competitors. Only distinctive competitor should be analyzed if all competitors behave similar.
On the other hand separate analyses are required when the behavior of all the competitors are not same because of their different in market share, size or policies.
However, if certain competitors will agree on the change in prices than it is better sign to hope that others will also agree on it.
- Responding to Price Changes
An important question a rises that what should a particular business organization do when the competitor changes the prices of its products. Many problems need to be viewed by the business organization. Why the price is altered by the competitor?
Did it utilize excess capability, to take more market share, to lead an industry wide change in price or to fulfill altering cost situations? Is the change in price is permanent or temporary?
If the business organization does not react than what will happen to its profit and market share? Are remaining businesses organizations need to react? What likely reactions of the competitors and other business organizations are to be against every possible response?
Wider analysis should be made by the business organization, besides these problems. It should view its significance of product in the product mix of business organization, its product stage in the life cycle, the possible consumer responses to change in prices, and the resources & intentions of the competitors.
However, at the time of price change the business organization cannot always perform a lengthy analysis of alternatives. This decision is made by competitor by taking much time for preparation, but the business organization should response within days or hours.
To plan ahead for both possible responses and possible change in price of competitors, is about the only way to cut down reaction time.
There are many manners a business organization might evaluate and react to price cut of competitor. The business organization just make decision to maintain its profit margin and current price when once the business organization has decided that the competitor has reduced its price and this decrease in price can be harmful to profits and sales of the business organization.
The business organization might consider that it will not forfeit a large portion of market share, or if it decreases its own price than it would lose a large portion of profit. It might make decision that when it has more information on the results of price change of competitor than it should wait & react.
It might be hard to maintain better customers for now, while providing the poor ones to the competitor. However, the fact behind this maintaining strategy is that competitor may become more confident & powerful as its sales enhances and the business organization might delay very long to react.
Any of the four reactions may be made when the business organization determine that potential action can and should be taken. First one is that it could lower its price in accordance with the price of competitor.
Read More: Product Mix Pricing Strategies with Examples
As it is clear fact that market is price sensitive and business organization would lose much of its market share in case the price of products of its competitor is lower than its price. Or it may consider that it would be too much difficult to retake the market share later.
The profits of the business organization are reducing in short run when it lowers its price. Certain business organizations may also reduce the quality of their products, marketing communications and services to maintain profit margins, but this will finally badly affect the market share in the long run.
So while reducing its price, the business organization should also struggle to keep its quality. Another way is that the business organization increases the perceived quality of its product while keeping its price same.
It could enhance its communication, emphasizing the comparative quality of its product over that of reduced price product of competitor.
The business organization may notice that it is inexpensive to keep the price and expend money to enhance its perceived value than to reduce price and functions at a low profit margin or the business organization enhance its price and better its quality, transferring its brand to a higher-price position.
Increased price is justified by increased quality which finally conserves business organization’s increase margins or the business organization maintains the price of existing product and launches a new product brand having increase-price position.
Finally low price fighting brand may be introduced by the business organization. Making a separate reduced-price brand or adding lower-price items to the line is mostly one of the best reactions.
This is essential if specific market portion being lost is price sensitive and will not react to statement of increased quality.
