INITIATING PRICE INCREASES AND RESPONDING TO COMPETITORS PRICE CHANGE

INITIATING PRICE CUTS: Companies often face situations where they may need to cut or raise prices. Several situations may lead a firm to cut prices. One reason is excess plant capacity: In this case, the firm needs additional business and cannot generate it through increased sales effort, product improvement, or other measures. It may resort to aggressive pricing, but in initiating a price cut, the company may trigger a price war. Companies sometimes initiate price cuts in a drive to dominate the market through lower costs. Either the company starts with lower costs than its competitors or it initiates price cuts in the hope of gaining market share and lower costs. A price-cutting strategy involves possible traps: Low- quality trap: Consumers will assume that the quality is low. Fragile-market-share trap: A low price buys market share but not market loyalty. The same customers will shift to any lower-priced firm that comes along. Shallow-pockets trap: The higher-priced competitors may cut their prices and may have longer staying power because of deeper cash reserves.

INITIATING PRICE INCREASES: Another situation leading to price changes is falling market share in the face of strong price competition. A company may also cut prices in a drive to dominate the market through lower costs. Either the company starts with lower costs than its competitors, or it cuts prices in the hope of gaining market share that will further cut costs through larger volume. The main advantage of raising the prices is that it immediately raises the profits. The companies increase prices in case of: a) Escalating operational costs and overheads b) Anticipatory pricing when they feel there would be further inflation or change in government rules. c) The multiplexes charge a higher price when a hyped movie is released or a movie is considered to be super hit.

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A major circumstance provoking price increases is cost inflation. Rising costs unmatched by productivity gains squeeze profit margins and lead companies to regular rounds of price increases. Companies often raise their prices by more than the cost increase, in anticipation of further inflation or government price controls, in a practice called anticipatory pricing. Another factor leading to price increases is over-demand. When a company cannot supply all of its customers, it can raise its prices, ration suppliers to customers, or both. The price can be increased in the following ways. Each has a different impact on buyers.

The impact on the buyers is:

a) Delayed quotation pricing: The Company does not set a final price until the product is finished or delivered. This pricing is prevalent in industries with long production lead times, such as industrial construction and heavy equipment. b) Escalator clauses: The Company requires the customer to pay todays price and all or part of any inflation increase that takes place before delivery. An escalator clause bases price increases on some specified price index. Escalator clauses are found in contracts for major industrial projects, like aircraft construction and bridge building. c) Unbundling: The Company maintains its price but removes or prices separately one or more elements that were part of the former offer, such as free delivery or installation. Car companies sometimes add antilock brakes and passenger-side airbags as supplementary extras to their vehicles. d) Reduction of Discounts: The Company instructs its sales force not to offer its normal cash and quantity discounts.

Other ways of Responding High Costs:

There are some ways that a company can respond to high costs or demand without raising prices. The possibilities include the following: i) ii) iii) iv) Shrinking the amount of product instead of raising the price. Substituting less-expensive materials or ingredients. Reducing or removing product features to reduce cost. Removing or deducing product service, such as installation, free delivery, or long warranties. v) Using less expensive packaging material or promoting larger package size to keep down packaging cost. vi) Reducing the number of models offered. vii) Creating new economy brands.

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Factors to be considered while increasing or reducing prices:

1) A successful price increase can greatly increase profits. A major factor in price increases is cost inflation. Rising costs squeeze profit margins and lead companies to pass cost increases along to customers. Another factor leading to price increases is over demand; when a company cannot supply all that its customers need, it can raise its prices, ration products to customers, or both. Prices can be raised almost invisibly by dropping discounts and adding higher-priced units to the line. In passing price increases on to customers, the company must avoid being perceived as a price gouger. There are some techniques for avoiding this problem. One is to maintain a sense of fairness surrounding any price increase. Price increases should be supported by company communications telling customers why prices are being increased. Making low-visibility price moves first is a good technique-eliminating discount, increasing minimum order sizes, and curtailing production of low-margin products. A company should try to meet higher costs of demand without raising prices. It can consider more cost-effective ways to produce or distribute its products. It can shrink the product instead of raising the price. It can substitute less expensive ingredients; remove certain product features, packaging, or services; or it can unbundle its products and services, removing and separately pricing elements that were formerly part of the offer. Whether the price is raised or lowered, the action will affect buyers, competitors, distributors, and suppliers, and may interest the government as well. a) Customers do not always interpret prices in a straightforward way. They may view a price cut in several waysthey might believe that quality was reduced, or that the price will come down even further and that it will pay to wait and see. b) A price increase may have some positive meanings for buyers. Customers might think that the item is very hot and may be unobtainable unless they buy it soon, or they might think that the item is an unusually good value. c) Competitors are most likely to react to a price change when the number of firms involved is small, when the product is uniform, and when the buyers are well informed. d) Like with a consumer, a competitor can interpret price changes in many ways, so the company must guess each competitors likely reaction.

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Reaction to Price changes:

Any price change initiate responses from all the stages of the management processes ranging from customers, competitors, suppliers and other trade channel partners to government. 1) Customers reaction: Customers are most prices sensitive when they buy frequently or the cost of purchase is high. They rarely notice higher prices on lost-cost items that they buy infrequently. Some customers are more concerned with total costs obtaining, operating and servicing the product over its life time than the tag price. In this case, the company can charge more if it can convinces that the life time value is lower. Although, normally any price increase lowers the sales volume, sometimes the customers perceive the products are good and high in demand. In contrary to this, although any price cut generates more sales, the customers may interpret it negatively such as: i) ii) iii) iv) v) vi) The product is not good in quality. The product is not selling in the market. The promoter company is in crisis. The product will no longer be in the market and soon will be replaced by new product. The quality of the product has been deteriorated. The price may lower down further.

2) Competitors Reactions: A firm thinking of price change has to consider about the reactions of its competitors. The extent of reaction will be higher if the product offers are homogeneous in nature, the numbers of companies are few or the cognitive level of buyers is very high.

Responding to competitors price changes:

In responding to competitors price changes, the company needs to consider several issues: 1) Why did the competitor change the price? 2) Was it to take more market share, to meet changing cost conditions, or to lead an industry-wide price change? 3) Is the price change temporary or permanent? 4) What will happen to the companys market share and profits if it does not respond? 5) What are the other competitors and other firms responses likely to be to each possible reaction?

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Market leaders often face aggressive price cutting by smaller firms trying to build market share. When the attacking firms product is comparable to the leaders, its lower price will cut into the leaders share. The leader at this point has several options: 1) Maintain price: The leader maintain its price and profit margin, believing that: a) It would lose too much profit if it reduced its price. b) It would not lose too much market share. c) It could regain market share when necessary. 2) Raise perceived quality: The leader could maintain price but strengthen the value of its offer. It could improve its product, services, and communications. It could stress the relative quality of its product over that of the low-price competitors. 3) Reduce Price: The leader might drop its price to the competitors price. When it believes a) Its cost fall with volume. b) It would lose market share because the market is price sensitive. c) It would be hard to rebuild market share one its lost. 4) Increase price and improve quality: The leader might raise, its price and introduce new brands to market the attacking brand. 5) Launch low-price fighter line: 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. The best response varies with situation. The company under attack has to consider: o o o o o o The products stage in the life cycle, Its importance in the companys product portfolio, The competitors intentions and resources, The market price and quality sensitivity, The behavior of costs with volume, and The companys alternative opportunities.

6) Planning ahead for price changes cuts down reaction time. Below figure shows the ways a company might assess and respond to a competitors price cut. e) It could reduce its price to match the competitors price. It may decide the market is price sensitive and that it would lose too much market share to the lower-price competitor. f) The company could maintain its price but raise the perceived value of its offer. It could improve communications, stressing the relative quality of its product over that of the lower-price competitor. g) The company might improve quality and increase price, moving its brand into a higher-price position. Marketing Management -5-

h) The company might launch a low-price fighting brand by adding a lower-price item to the line or creating 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.

Summary:When a firm considers initiating a price change, it must consider customers' and competitors' reactions. There are different implications to initiating price cuts and initiating price increases. Buyer reactions to price changes are influenced by the meaning customers see in the price change. Competitors' reactions flow from a set reaction policy or a fresh analysis of each situation. There are also many factors to consider in responding to a competitors price changes. The company that faces a price change initiated by a competitor must try to understand the competitor's intent as well as the likely duration and impact of the change. If a swift reaction is desirable, the firm should preplan its reactions to different possible price actions by competitors. When facing a competitor's price change, the company might sit tight, reduce its own price, raise perceived quality, improve quality and raise price, or launch a fighting brand.

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