Responding to Market Changes

There are situations in which a company may need to decrease or increase the price.

i.Initiating Price Cut

There can be following circumstances when a company can cut the price:

•  Excess plant capacity: A company needs more business and the business is not generating even after increased sales efforts, product improvement, and other measures.
•  Declining market share: A company can cut the price if the market share is falling.
•  Dominating the market through lower cost: A company either introduces a product keeping the prices low comparative to other competitors or starts cutting the prices to gain the market share.

But a price cutting strategy can lead to traps like:

•  Low quality trap: A customer assumes that a lower priced product have lower quality.
•  Fragile-market share trap: A customer can shift to other company if offered a low priced product.
•  Shallow pockets trap: A higher priced competitor can cut the price and stay in the market because of having a good financial status.

ii. Initiating Price Increases

Profits may increase if the increase in price is successful. Circumstances that can lead to price increase are:

 Cost Inflation: If the increase in cost doesn't match with the productivity, a company may have fewer profits which can lead to increase in price.
 

Overdemand: As the demand increases it may become difficult to supply all the customers which can lead to increased pricing, rationing supplies to customers,or both. According to Kotler, companies can also respond to higher costs or overdemand without raising prices. The following possibilities can be included:

•  Shrinking the amount of product instead of raising the price.
•  Substituting less expensive materials or ingredients.
•  Reducing or removing product features to reduce cost.l Removing or reducing product services, like installation and free delivery.
•  Using less expensive packaging material or larger package sizes.
•  Reducing the number of sizes and models offered.
•  Creating new economy brands.

iii. Customer's Reaction

Change in price arises many questions in the consumer's mind. A consumer can take a price decrease in several ways:

•  Is the new model of a product coming in the market?
•  Is the product quality is not good because of which the product is not selling leading to reduced price?
•  Will the price come down further?
•  Is the company compromising with the product quality while decreasing the rate?
•  Is the company facing any financial crisis?

Increase in price normally decrease the sales but can have positive impact also.

For example a consumer may think that the new item is in fashion, or provides better quality. Mostly the customers are concerned about the prices if the product cost a lot or is bought frequently. Infrequently bought items price are not necessarily noticed by the customers.

iv. Competitor's reaction

Change in price of a company's product is a cause of worry because the competitor's reaction is unpredictable. Competitors mostly react:

•  If the number of companies are less
•  Buyers have much information about the companies
•  The product is identical.

The two assumptions that can be made to predict the competitor's reaction are:

•  the competitor reacts in a set way to price change
•  Or the price change is taken as a challenge to the competitor

According to Kotler, different interpretations that can be taken by the competitors on a price cut are:

•  The company is trying to steal the market.
•  The company is doing poorly and trying to boost its sales
• The company wants the whole industry to reduce prices to stimulate total demand.

v. Response to Competitor's Price Changes

When the competitor initiates a price cut, a company should consider the following points:

•  What is the reason behind price change by the competitor?
• Is the price change permanent or temporary?
•  What will happen to the company if the change in price will not take effect? Are other companies will respond to price change?
•  What will be the reaction of other competitors and firms?

A price reaction program is used if a competitor cuts the prices. According to Kotler, reaction programs for meeting price changes find their greatest application in industries where price changes occur with some frequency and where it is important to react quickly. below Fig shows a price reaction program.