When companies develop their pricing structures & strategies, they wanted to see the customer’s & competitors’ reactions. There’re some factors that affect the cut-off price & increase of price.
Initiating price changes: Sometimes, companies try to find out the desirable price cut-off or price increase but in both cases, it depends upon the buyer’s & competitor’s reactions. Check – price elasticity.
- Initiating price cuts: There’re several reasons for the company to cut off its pricing. One of the reasons is excess capacity; another one is the falling demand in the face of competitors. In this type of situation, companies cut off their price aggressively to boost their sales & growth of market share. A company also does that to dominate the market growth through lower costs. Learn more about – new product pricing.
For example, HP reduces its pricing aggressively to increase its share of the PC market in developing countries.
- Initiating price increases: Strategic pricing can bring improved profits. Profit is determined by the cost of producing a product. One of the major factors in price increase is cost inflation; another one is overdemand. Over demand occurs when the company can’t supply products to all customer’s needs, then the company increases its price.
Buyer reactions to price changes
Customers have always nothing to say directly if the price increase of any product that previously was lower. Obviously, the changing prices may have some positive meanings for buyers.
For example: If the price of a Rolex watch is increasing then what do you think about it? At first, the consumer might think that the watch might be more exclusive than before. Or Consumers also might think that the company is so greedy to get more profits. Learn more about – price-quality relationships.
Similarly, if the company cuts off price may have a negative impact on the consumer’s mind.
For example: If the price of a Rolex watch reduces its price suddenly, the consumer may think it has something wrong or defective. The consumer also doubts its quality. Every brand is influenced by its price & quality.
Competitor reactions to price changes
Competitors also worry about the change in prices in other companies. They also worry about others’ better quality products. This problem is so complex because the competitor can interpret a company’s price cut-off in many ways. First, they think that other companies may try to grab a large market share or boost their present sales or increase the demand for their product in the market. So, gathering knowledge on – Price is a part of the marketing mix.
Almost every company guesses the reactions of its competitors. All competitors may act alike or act differently in the manner perhaps because of differences in size, market shares, or policies. Then separate analyses are necessary to take in this situation. However, enhance yourself by learning market leader strategies.
Responding to price changes
In this sector, we‘ll reverse the question & ask how a company should respond to the changes in price by competitors. The company needs to consider several factors like –
- Why did the competitor change their price?
- Is the change temporary or permanent?
- Are the competitors going to respond?
Besides this entire question, the company considers its own position in the present market, its strategy & its target customer’s reaction to price changes.
See the below figure:
This figure shows that the company might assess & respond to the competitor’s price cut.
Suppose, a company learns that a competitor just reduces its price & decides that this reduction will likely harm its sales & profits. But the company believes that this reduction will not lose too much market share, so they should wait & respond when their competitors change their prices. After waiting too long, the competitors get stronger & more confident as its sales increase. Enhance yourself on – price adjustment strategies.
The company should take some corrective action like-
- Reduce price to match with competitors
- Raised the perceived value of its offer
- Maintain its quality as it cuts prices
- Launch a low-price “ fighter brand”
This is extremely necessary for every company. Because if the company lost its target segment being price sensitivity. Explore – customer and competitors’ reactions to price changes.