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Initiating and Responding to Price Changes

Initiating and Responding to Price Changes

Initiating Price Changes

As numerous organisations operate in the market. determining the prices of its products by an organisation is not a one-time activity. Every organisation needs to revise the prices of its products as a result of the competition it faces. Once the pricing strategies and structures are developed, there often occur situations where initiating price changes or responding to the prices changed by the competitors become necessary. The company might be interested in either increasing or decreasing the prices of its products in certain scenarios. In either case, it becomes important for it to anticipate the possible manners in which the customers or competitors might react.

Initiating Price Cuts

There might be numerous situations where it is necessary for an organisation to reduce the prices of its products. Surplus capacity and deteriorating demand are the two such situations. Here, the organisation would cut down the prices of its products aggressively so that sales and market share can be increased. As per the industries like automobile, airline, fast food, etc., situations like price wars may arise because of implying price cuts in industries with surplus capacity. This is so because competitors try not to lose their market share. By incorporating this strategy in its operations, Big Bazaar has become the leading retailer in India. Following are the circumstances under which an organisation reduces its price :

1) Declining Market Share : 
The most inducing factor for cutting prices is the declining market - share of a particular organisation. The organisation commences price cutting when its market share starts decreasing as compared to that of its competitors.
For example, the prices of Pantene range of shampoos were slashed by 16% by P&G a reaction to the reduction in prices of HUL's shampoos Sunsilk and Clinic Plus by 50%. Also HUL had to slash the prices of Wheel and Surf in the detergent sector since P&G had already reduced the prices of Tide and Ariel. All these decisions were made only to maintain the individual market share.

2) Market Domination : 
Another circumstance or factor responsible for price cuts is desire to attain market dominance. In order to dominate the market, organisations sometimes imply the strategy of price cuts significantly and become price leaders. Implying price reduction strategy results not only in market dominance but also the disturbed market share of the competitors.
For example, few years back, Hindustan Times and Times of India underwent a price war in Delhi, chiefly to attain maximum share in the market.

3) Excess Production : 
The next circumstance leading to price reduction is excess production. When the level of production or supply of an organisation surpasses the actual demand, it needs to slash the prices of its products. 
For example, organisations manufacturing consumer durable products, often introduce major reductions in the prices of their products like TVs, refrigerators, or washing machines, as part of their consumer promotion schemes.

4) Economic Downtrend : 
During economic recession, the prices of the products have to be reduced by the organisations so as to match the buying power of consumers.
Price reduction is a strategic decision, which is taken only after the thorough analysis of its impact on the sale of the product. In case, such decisions are taken carelessly, many types of traps may arise. The major possible traps are as follows :

1) Low Quality Trap : 
Here, price reduction at massive level creates a doubtful perception in the mind consumers about the quality of products offered by organisations. The consumers think that they are being offered low quality products by the organisations.

2) Shallow-Pockets Trap : 
An organisation may improve its market share through price reduction. but it does not guarantee market loyalty. The customers who were attracted due to low prices might move to other organisations offering prices that are even lower.

3) Fragile Market Share Trap : 
As a financially. strong organisation is capable of operating at low prices for significantly long duration, it (financially strong organisation) can give robust competition to financially less strong organization and reduce its market share.

Initiating Price Increases

Profits can be immensely improved with the help of an effective price increase. 
For example, if the profit margin of an organisation is 3 per cent of sales, an increase of 1 per cent in price will enhance profits by 33 per cent, if the volume of sales is constant. Immediate increase in the profits is the main advantage of price increases.

Different kinds of factors or situations are responsible for price increases. Cost inflation is the prime reason behind price increase. Due to increased costs, the profit margin of organisations shrinks and it forces the organisations to increase the prices of their products so as to pass the increased costs to the customers and maintain the profit margin.

Another reason leading to price increase is over demand. When the customer needs exceed the level of supply, organisations need to take several actions; increasing price is one of them. 
For example, worldwide oil and gas organisations frequently increase its prices so as to balance its demand. It is very essential for organisations to ensure that they are not perceived as price gouger by customers due to price increases.

Prices are also increased in case of : 
  • Possibility of inflation
  • Possibility of modification in governmental policies or rules
  • Release of a big banner or an immensely hyped movie

Customers Actions to Prices Changes 

Price changes are not always recognized in a forthright manner by the customers. Generally it results in reduced sales, but the buyers might interpret a positive meaning of price increases. 
For example, if Titan increases the price of one of its latest models, customers may react in two ways - they may think either the quality is improved or Titan is only making profit. Generally the image and price of a brand are closely associated. Customers perception about the brand may adversely be affected due to such price changes (specially due to price cuts).

Every element of the business environment, be it customers, suppliers, competitors, channel partners, or even the government, responds to the price changes.

In case of frequent buying or buying high-cost products, customers tend to be most price-sensitive. On the other hand in case of low-cost products, which they buy occasionally, they hardly identify price increases. Usually, a rise in price results in decreased sales volume, but at times, the customers may perceive that the goods are of better quality and high in demand. Alternatively, sales volume increases as a result of price cuts but customers might infer it negatively assuming that :
  • The quality of the product is low
  • The sales volume of the product is low
  • The organisation promoting the product is in t loss
  • The product is in decline stage and new products will replace it soon
  • The product price might decrease further

Competitors Actions to Price Changes 

Any organisation that is thinking about price change needs to take into consideration the possible reactions of its target customers and competitors well. In presence of certain factors like uniform product, well-informed buyers and small number of players, the competitors definitely react to price changes. It is crucial for an organisation to guess the probable reaction of each of its competitors.

Analyzing a single competitor is sufficient to draw-out the reactions of all the competitors, if all of them respond in a similar manner. Alternatively, individual analysis is required in case of reactions being different from different competitors due to disparity in their organisational size, policies or market share. In case the price change is followed by some competitors, it can be expected that rest will also follow it.

In the markets where homogeneous products are largely present, organisations tend to reduce the prices or improve their product offerings in response to competitors price cuts. Whereas, in case of markets with non-homogeneous products, following points are considered by organisations : 

1) Intention : 
They aim to find out the reason behind the price change initiated by the competitor.

2) Duration : 
They try to ensure if the price change is permanent or temporary.

3) Forecasting : 
They forecast the impact on profitability and market share in case of not responding to competitor's price change.

4) Counter Reaction : 
Finally, they need to think about the counter reaction they would get from their competitor, in response to their reaction.

Responding to Competitor's Changes

Assessing competitor's price change and responding to it is very essential for any organisation. If an organisation comes to know that one of the competitors has slashed its price and it might impact the profits and sales of the organisation, it may decide to maintain its present price and profit margin level. In another kind of response, the organisation might believe that changing price would not impact the market share or profitability much.

The organisation may decide to wait despite of taking any action in order to collect more information about the impact of price change of competitor organisational profit and market share.

However,  if the organisation takes too much time to decide upon its action, it might make the competitor more confident and stronger with increase in sales. The most appropriate response changes as per the situation. It is crucial for an organisation to take into account several factors like the quality sensitivity and price of the product, the stage of the product in the life cycle, its significance in the portfolio of the organisation, the resources and intentions of the competitor, substitute opportunities, and the relation of cost with quantity.

In case the manager finds any of the below mentioned cases, it might have to maintain price : 
  • A major amount of profit will be eroded by price cuts.
  • The image of the product as well as the organisation will be disgraced due to price cuts.
  • Market share will not be disturbed much if the same price is maintained.
  • The market share loss because of not lowering the price can be recovered without excessive expenditure or effort.
assessing and responding to competitor price changes

Yet there are times when retaining the same price might bounce back. The likely results are as follows : 
  • It might give the attacker more confidence and motivation to disturb the organization.
  • It might demotivate the sales team of the organization.
  • It might result in more loss of market share than expected to the organization.
  • It might make the organisation feel that regaining the market share is more tough and costly than expected.
Business organisations usually respond to the price changes incorporated by any competitor. This is because they operate in a competitive environment that is very tough and are hence bound to respond against any price changes incorporated by their competitors. Any of the below mentioned, four responses can be made, in case the organisation decides to take any effective action :

1) Reduction in Price : 
In case the organisation is operating in a price sensitive market and it forecasts severe market share loss to the competitor, it decides to slash the price to meet the price of the competing organisation. The organisation's profits would be reduced temporarily as a result of price cutting. In order to retain profit margins, some organisations may alter the product quality, services or promotions, along the price cuts. Such actions may finally diminish the market share in the long-run. The quality must be maintained by the organisations when they implement price cuts.

2) Increasing the Perceived Value : 
In another kind of response, organisation focuses on enhancing the perceived value of its products instead of reducing the price. The organisation expresses the superiority of the value of its products over that of the low-price competitors through its improved communication strategies. Here, maintaining the price and investing money for improving the perceived value of the product seems more comfortable to the organisation than operating at lower profit margins due to price cuts.

3) Improving Quality and Increasing Price : 
Here, the organisation improves the quality of its products along with increasing its prices rather than implementing any price cuts. It does so to grab the position of high price-value for its brand. Improved quality reflects enhanced customer value that justifies the price increase. Higher price, in turn, safeguards higher margins for the organisation.

4) Launching a Low-Price "Fighting Brand" : 
The organisation might add a low-priced product to its product-line or build a separate low-price brand, i.e., a "fighting brand". This becomes crucial when the market segment is price sensitive and would not be satisfied through higher quality explanations.

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