2.4 Price Change

2.
4 PRICE CHANGE
INITIATING AND RESPONDING TO PRICE CHANGES
• Firms may need to cut or raise prices in certain situations.

• The challenges of
1. initiating price cuts,
2. initiating price increases,
3. responding to competitors’ price changes
1. INITIATING PRICE CUTS
• Several circumstances might lead a firm to cut prices.

1. Excess plant capacity: If the firm needs additional business but
cannot generate it through increased sales effort or other
measures, it may initiate a price cut. In doing so company risks
triggering a price war.
2. Declining market share: prompt the firm to cut prices as a way of
regaining share.
3. Drive to dominate the market through lower costs Either the
company starts with lower costs than those of its competitors or it
initiates price cuts in the hope of gaining market share and lower
costs.
1. INITIATING PRICE CUTS
• 4 possible traps when marketers consider price-cutting:
(1) Low-quality trap: Customers assume that lower-priced products
have lower quality;
(2) Fragile market-share trap: a low price buys market share but not
market loyalty because the same customers will shift to any lower-
price firm
(3) Shallow-pocket trap higher-priced competitors may cut their
prices and still have longer staying power because of deeper cash
reserves.
(4) Price-war trap competitor respond by lowering their prices even
more triggering a price war
2. INITIATING PRICE INCREASES
• A successful price increase can raise profits considerably.

• E.g. if the company’s profit margin is 3% of sales, a 1% price increase
will increase profits by 33% if sales volume does not drop .
Before After
Price Rs.10 Rs.10.10 (a 1% price increase)
Units sold 100 100
Revenue Rs.1000 Rs.1010
Costs -970 -970
Profit Rs.30 Rs.40 (33.33 % profit increase)
• Firms increase prices just to maintain profits in the face of cost

inflation.
• This occurs when rising costs— unmatched by productivity gains—
squeeze profit margins.
• Cos. raise their prices by more than the cost increase in anticipation of
further inflation or government price controls in a practice called
anticipatory pricing .
• Overdemand When a company cannot supply all of its customers, it can use one of
the following pricing techniques:
1. Delayed quotation pricing co. does not set a final price until the product is finished
or delivered.
• prevalent in industries with long production lead times.
2. Escalator clauses co. requires the customer to pay today’s price & all or part of
any inflation increase that occurs before delivery, based on some specified price
index.
• found in many contracts involving industrial projects of long duration.
3. Unbundling co. 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.
4. Reduction of discounts co. no longer offers its normal cash & quantity discounts.
HOW SHOULD A FIRM RESPOND TO A PRICE CUT
OR PRICE RISE THAT IS INITIATED BY A
COMPETITOR?
3. RESPONDING TO COMPETITORS’ PRICE
CHANGES
• If competitor cut its price in a homogeneous product market
• Search for ways to enhance its augmented product, or
• will have to meet the price reduction.
• If competitor raises its price in a homogeneous product market,
• Other firms might not match it, unless the price increase will benefit the
industry as a whole.
• By not matching it, the leader will have to cancel the increase.
CHANGES
• In non-homogeneous product markets, a firm has more latitude to
consider the following issues:
(1) Why did the competitor change the price?
• Is it to steal the market, to utilize excess capacity, to meet changing cost
conditions, or to lead an industry wide price change?
(2) Does the competitor plan to make the price change temporary or
permanent?
(3) What will happen to the company’s market share & profits if it does
not respond? Are other companies going to respond?
(4) What are the competitor’s and other firms’ responses likely to be
to each possible reaction?
CHANGES
• Market leaders often face aggressive price cutting by smaller competitors
trying to build market share
• Fuji has attacked Kodak
• AMD has attacked Intel
• Brand leaders face lower-priced private-label store brands
ASSIGNMENT NO.1
SUBMISSION DATE 1ST MARCH
1. Discuss the different pricing strategies. Give factors affecting pricing
decisions
2. What is PLC? Explain various strategies to be adopted at each stage

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2.

• Firms may need to cut or raise prices in certain situations.

• Several circumstances might lead a firm to cut prices.

• A successful price increase can raise profits considerably.

• Firms increase prices just to maintain profits in the face of cost

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