Price has operated as the main determinant component of the final buyer decision. However, in recent decades, non-price factors have become relatively more important in the consumer behavior. Moreover, price remains one of the most important elements for determining market share and profitability of the company.
Price is the only element of the trade that generates profits combination, the other elements generate costs. Also, the price is one of the most flexible combination of market elements, since it can change quickly, as opposed to product features and commitments pipeline. At the same time, the establishment and price competition are the main problems facing many marketing executives. On the other hand, many companies do not handle well the pricing. The most common errors are: pricing that are geared too much to the cost, not the price is revised as often as necessary to capitalize on changes in market prices separately from the rest of the company is established combination rather than as an intrinsic element of the strategy of commercial positioning, and not enough the price for different items, market segments and purchase occasions is varied.
How prices are set.
Pricing is a problem when a company must first determine them. This happens when you develop or purchase a new product, when you enter your regular product into a new market or a new distribution channel, as part of a tender.
The company must decide where to place your product in quality and price. You can place your product in the market midpoint or three levels below or above the midpoint. The levels are:
Comfort / convenience.
Me too, but cheaper.
Only the price.
In many markets there is one (the gold standard) supreme brand. Just below the supreme brands include luxury brands. Under these brands that meet a particular need are. In the middle there is a large number of brands. A step below the intermediate marks the brands that offer especially functional utility are located. Listed below are the cheapest you, however, present a satisfactory performance. At the bottom are the brands whose only attraction is price.
This pattern suggests that the seven levels of product placement do not compete, but only compete within each group. There may also be competition between price segments – quality.
The company must consider many factors when determining its pricing policy.
Procedure for the pricing:
1. Selecting the destination for pricing. The company must first decide what you want done with a particular product. If you selected your target market and your position in it, then your marketing mix strategy, including price, it will be quite simple. The pricing strategy is determined largely by the placing on the market.
The clearest are the objectives of a company, the easier it is to price. Every possible price will have a different effect on objectives and benefits, income from sales and market share.
A company can try any of the six fundamental objectives through pricing:
Survival: companies seek survival as the primary goal if they are saturated by excessive, intense competition or changes in customer requirements ability. The companies remain in business while prices cover variable costs and some fixed costs. However, survival is only a short-term goal. In the long term, the company must learn how to add value or face extinction.
Maximum current value: many companies estimate demand and costs associated with alternative prices and select the price that generates the current maximum value, cash flow or rate of return on investment. The maximization of utility displays the current problems. It assumes that the company knows its demand and cost functions; in fact, it is difficult to estimate. The company also emphasizes the current financial performance rather than long-term performance. Finally, the company ignores the effect of other variables of commodity combination, the reactions of competitors and legal restrictions on the price.
Maximum current gain: only requires calculating the demand function as intended only to maximize profits from sales.
Maximum sales growth: other companies believe that more sales will result in lower unit costs and higher long-term usefulness. Set the lowest in assuming that the market is price sensitive price. This is called pricing for market penetration. The following conditions favor the establishment of a low price: the market is very sensitive to price and a low price stimulates further growth of the market; the production and distribution costs decrease with cumulative production experience; and a low price discourages actual and potential competition.
Maximum market skimming: many companies favor setting high prices to “skim” the market. With every innovation, estimated the highest price that can be charged given the comparative utilities of its new product against available alternatives. The company sets a price that makes for certain segments of the market, worth adopting the new material. Whenever sales decrease, reduce the price to go down to the next layer of price-sensitive consumers. This way, you get a maximum amount of earnings of the various market segments. Market skimming makes sense under the following conditions: a sufficient number of buyers has a current high demand; unit costs of producing a low volume are not so high that nullify the advantage of loading the implications of traffic; the high initial price does not attract more competitors; the high price communicates the image of a superior product.
Leadership in product quality: a company may want to be the leading product quality in the market. The strategy of superior quality and higher price, in many cases, has provided a rate of return consistently higher than the industry average.
Other objectives: non-profit and political organizations can take many other objectives.
2. Determination of the demand. Each price the company can charge lead to a different level of demand and, therefore, have a different effect on your marketing objectives. The relationship between the current price charged and the current resulting demand is captured in the common demand program. The demand program denotes the number of units that the market will buy in a given period to alternative prices which could be charged during that period. In the normal case, demand and price are inversely related, ie, the higher the price, the lower the demand, and vice versa.
In the case of prestige goods, the demand curve is sometimes a positive slope. However, if too high a price is charged, the level of demand will be lower.
Factors affecting price sensitivity: the demand curve shows the rate of market purchases to alternative prices. Add the reactions of many individuals who have different price sensitivities.
Factors affecting this sensitivity are:
· Effect of single value: buyers are less price sensitive when the product is more original.
· Effect of awareness substitutes.
· The difficult comparison effect: Buyers are less price sensitive when they can not easily compare the quality of substitutes.
· Effect of total spending: the buyers are less price sensitive when lower the cost of admission.
· Final utility effect: Buyers are less price sensitive when lower the cost of the total cost of the finished product.
· Effect of comparative cost: buyers are less price sensitive when other hand absorbs a percentage of the cost.
· Effect of sunk investment: buyers are less price sensitive when the product is used with previously acquired assets.
· Effect of price 2 quality: Buyers are less price sensitive when the product is supposed to have more quality, prestige and exclusivity.
· Inventory effect: Buyers are less price sensitive when you can not store the product.
Methods of estimating the demand programs: research program demand, the researcher needs to make assumptions about competitive behavior. There are two ways to estimate demand. One is to assume that the prices of competitors remain constant without having importance the price the company charges. The other is to assume that competitors charge a different price for each price the company might establish.
To measure a program demand requires changing the price. You can conduct a study in a lab environment by asking subjects to indicate how many different possible prices buy units.
If a company increases its advertising spending while decreasing the price, we would not know how much of the demand was a result of the lower price compared to higher advertising expenses. Economists demonstrate the impact of non-price factors on the demand by changing the demand curve rather than by movements along the demand curve.
Price elasticity of demand: marketers need to know how demand would respond if there is a change in the price. If demand hardly varies with a slight change in price, it is said to be inelastic. If demand changes considerably, it is elastic. The price elasticity of demand is obtained by dividing the percentage change in quantity demanded and the percentage change in price.
How much less elastic demand is, the more profitable it is for the seller to increase the price.
Demand is likely to be lower in the following conditions:
-There are few or no competitor or substitute.
-Consumers do not perceive easily the highest price.
-Buyers are slow to change their buying habits d and seek lower prices.
-Buyers think that higher prices are justified by the quality increments, inflation and other relevant factors.
If demand is elastic, sellers will consider lowering the price. A lower price will generate a higher total return. This makes sense as the costs of producing and selling more units does not increase disproportionately.
The price elasticity depends on the magnitude and direction of change in price referred. It may be negligible with a slight change of the price with a significant and substantial change in price. It may differ for a reduced price against a price increase. The difference between the elasticity in the short and long term implies that sellers do not know the full effect of the price change until you spend time.
3. Cost estimate. Demand is largely a ceiling on the price the company can charge for their product. And the company d costs represent the minimum limit. The company wants to charge a price that covers the cost of production, distribution and sale of the product, including a fair return for their effort and risk.
Types of costs: fixed costs (also called overhead) do not vary with production or sales gains. Variable costs vary directly with the level of production, tend to be constant per unit produced. Total costs are the sum of fixed and variable costs for any level of production.
Behavior of costs at different levels of production per period: behavior occurs in the U-shaped average cost curve in the short term. The unit cost is high if few units are produced. As production increases, the average cost decreases. The reason is that fixed costs are spread over more units, with a lower fixed cost. The average cost increases after a certain number of units, because the plant becomes inefficient.
It costs behavior as a function of cumulative production: the average cost tends to decrease with cumulative production experience. That reduction is an experience curve (sometimes learning curve). The pricing of the experience curve presents significant risks. The aggressive pricing could provide a cheap product image. The strategy also assumes that competitors are weak and unwilling to fight. Finally, the strategy takes the company to build more plants to meet demand, while a competitor could innovate technology at a lower cost and get lower costs than the market leader, now it stuck with old technology .
Most of the pricing of the experience curve has focused on the behavior of the manufacturing costs. But all the costs, including marketing, are subject to improvements in learning.
Focusing objective costs change with the scale of production and experience. They may also vary as a result of a concentrated by designers, engineers and purchasing agents Company efforts to reduce it. The Japanese use a method called target costing. Market research used to set the desired functions of a new product. Then they determine the price at which the product must sell given its attractive and competitive prices. Deducted from the price desired profit margin and this leaves the cost target to be achieved. After examining each element of cost (design, engineering, manufacturing, sales and other) break it down into simpler components. Consider ways to reverse engineer components, remove features and lower costs from suppliers.
Costing goal is an improvement of a normal method of developing new products, which is designing the product, estimate costs and then determine its price. Instead, target costing focuses on making preserves the product during the planning and design stage, rather than trying to change the costs after entering the product.
2. Analysis of prices, costs and competitive offerings. While market demand could set a ceiling and costs the company a floor for pricing, costs of competitors, prices and possible reactions help the company identify where costs could be set. The company can send buyers compared to price and evaluate the bids of competitors. You can purchase price lists of competitors and buy the product from them and disarm. You can ask buyers how they perceive the price and quality of each competitor’s offer.
Whenever the company is aware of the prices and competitors d, you can use as a point of orientation for their own pricing. However, the company must be aware that competitors may change their prices in response to price of the company. In basic form, the company will use the money to place his hand over hand supply with competitors.
3. Select the method for pricing. Given the three “C” (the program of consumer demand, the cost and prices of competitors), the company is now ready to set a price. The price will be positioned somewhere between one which is too low to generate a profit and one that is not too high to produce any demand.
Companies solve the aspect of pricing by selecting a method including one or more of these three considerations:
Fixing higher prices: the most basic method is to add a surcharge to the cost of standard product. Any method that ignores current demand, perceived value and competition is not likely to reach the optimal price. Setting higher prices works only if the price actually provide the expected level of sales.
Companies that introduce a new product often valued very high in the hope of recovering their costs as soon as possible. But a strategy of higher premiums could be fatal if a competitor offers a lower price.
Setting higher prices remains popular for several reasons. First, sellers are more certain about costs than about demand. Secondly, where all companies in an industry using this method, prices tend to be similar. Third, many people think that pricing based on costs is fair to both buyers and sellers.
Pricing based on profitability target: the company sets the price that would generate the rate of return on investment target. But much of this profit depends on the price elasticity and competitors’ prices. Pricing based on profitability target tends to ignore these considerations. The manufacturer must consider different prices and estimate their likely effects on the volume of sales and profits. You should also look for ways to reduce its fixed costs or variable, because the lower costs will reduce its volume required balance point.
Pricing based on the perceived value: a growing number of companies see the value perceptions of buyers, not the cost to the seller, as the key factor for pricing. Non-price variables used in combination to create commercial perceived in the minds of buyers value. The price is set to capture the perceived value. Pricing based on perceived value fits well the thought of product placement. A company develops a product concept to a particular target market with quality and planned price. Then, the management estimates the amount it expects to sell at that price. The estimation indicates the ability of the plant investment and the required unit costs. Then, management considers whether the product will generate a satisfactory profit price and unplanned costs.
Sometimes this operation is referred pricing based on value of the components. The customer may end finding out some but not all the added values.
The key to pricing based on the perceived value is to determine accurately the market’s perception of the value of the offer. Sellers with an inflated view of their bid value sobrevaluarán your product. Vendors with a view underestimated charge less than they could. Market research is needed to determine the market’s perception of value as a guide to setting effective prices.
Pricing based on the value: Several companies have adopted pricing based on value, by which give low price for a high quality offer (pricing philosophy more for less). Pricing based on the value is not the same as pricing based on perceived value. The latter, in fact, is a philosophy of pricing “more for more”. It indicates that the company must set its prices at a level that captures what the buyer thinks it is worth the product. Moreover, pricing based on the value indicates that the price should represent an extraordinary bargain for consumers.
Pricing based on the value is something that is based only on set lower prices compared to those of competitors. It is to change the operations of the company to become a reality in a producer with low cost without sacrificing quality and to reduce prices to a considerable extent in order to attract value-conscious customers.
Pricing based on the current rate: bases its price largely on competitors’ prices, paying less attention to their own cost or demand. The company could charge the same, more or less than their (s) principal (s) competitor (s). Oligopolistic industries, usually, charge the same price. Smaller companies follow the leader. Price change leader when prices change only when its own demand or cost changes. Some companies may charge a minimum premium or offer a small discount, but keep the amount of difference.
Where it is difficult to measure the costs or competitive response is uncertain, companies think that the current price represents a good solution. It is thought that the current price reflects the collective wisdom of the industry in relation to the price that would generate a fair return and would not jeopardize industrial harmony.
Pricing based on the closing bid: oriented pricing competitiveness is common in companies bidding jobs. The company bases its price on expectations of how competitors set their prices rather than a rigid relation to costs or demand for the company. The company wants to win and win the contract, generally required to submit a lower price than competitors. In addition, the company can not set its price below a certain level. You can not fix below costs without affecting their position. On the other hand, the higher the price is fixed with respect to costs, the lower your chances of winning the contract. The net effect of the two opposing forces can be described in terms of expected utility (expected utility x probability of winning) of the tender. A logical approach would tender the tender price that would maximize expected utility. Use the expected utility as a criterion for pricing makes sense for a company that participates in many tenders.
Selecting the final price! The pricing methods reduce the range which you can select the final price. Selecting the final price, the company must consider additional factors.
Fixing psychological prices: sellers should consider the psychology of its economic aspects. Many consumers use price as an indicator of quality. Pricing based on image is especially effective with sensitive ego, as perfumes and expensive cars products.
Sellers often manipulated reference prices when setting the price of their product. Buyers have in mind a price tag to search for a particular product. The reference price may be formed to meet current, past price or the context of purchase. For example, the seller can place your product between expressing very expensive products belonging to the same class. The thought of the reference price is also created to set a high price suggested by the manufacturer or to indicate that the product was valued much higher originally or stating the price of a competitor.
Many sellers think prices should end in odd numbers. One explanation is that the odd endings cover the notion of discount or bargain. But if a company wants an image of high price instead of an image of low price, you should avoid tactics terminations in odd numbers.
The influence of other elements of the trade combination on the price: the final price should take into consideration the quality of the brand and the publicity associated with the competition.
Brands relatively average quality but high advertising budgets are able to charge on higher prices.
Brands with relative quality and high advertising budgets for the higher prices obtained.
The positive relationship between high prices and high advertising budgets remains more firmly in the later stages of the product life cycle, in the case of the market leaders and the products with low costs.
Pricing policy of the company: the price set must be consistent with the pricing policies of the company.
Price effect on other parts management must also consider the effects of the price referred elsewhere: distributors and sellers, the sales force of the company, competitors and government.
The companies did not set a single price but a pricing structure that reflects geographic variations in demand and costs, the requirements of market segments, programming purchases, order levels and other factors. As a result of the offer of discounts, rebates and promotional support, a company rarely perceived as useful for each unit of product sold.
1. Pricing by geographic area. It implies that the company decide how to price their products to customers in different locations or countries. You should charge higher prices to more distant customers to cover the cost of freight? You should be involved in countertrade proposals?
2. Discounts and rebates in prices. Most companies change their basic price to reward prompt payment, volume purchases and purchases off-season.
Cash rebates: a cash discount is a price reduction to buyers who pay their bills on time. This discount should be granted to all buyers who meet the terms imposed. Such discounts serve to increase the liquidity of vendors and reduce the costs of debt collection and debt difficult.
Quantity discounts: a quantity discount is a price reduction to buyers by purchasing large volumes. They should be offered equally to all customers and should not exceed the cost savings for the seller associated with the sale of large quantities. These savings include lower costs of sales, inventory and transportation. They can be offered on a non-cumulative basis (every order is done) or on a cumulative basis (on the number of units requested in a given period). The discounts provide an incentive for the customer to ask for more from a private seller instead of buying several sources.
Functional discounts (also known as trade discounts). They offered by the manufacturer to marketing channel members if they perform certain functions such as sales, storage and recording. Manufacturers can offer different discounts to different channels functional because of its variable functions, but must offer the same functional discounts on each channel.
Seasonal discounts: is a price reduction to buyers who buy merchandise or services out of season. Allow the seller to maintain a more stable production during the year.
Sale: upcoming changes are price reductions are awarded for returning an item used to acquire a new one. Promotional rebates are reductions in payments or price to reward dealers for participating in advertising programs and sales support.
3. Promotional prices. They are valued products companies temporarily below list prices and sometimes even below cost.
Fixed price items of propaganda supermarkets and department stores reduce the price of brands to stimulate traffic in stores. But manufacturers usually disapprove of their brands used for propaganda.
· Pricing for special events: the vendors fix special prices in certain seasons to attract more consumers.
· Cash rebates: offer cash rebates to consumers to encourage them to buy the product from the manufacturer in a specific period. Rebates can help manufacturers to move inventory without reducing the list price.
· Low-interest financing: instead of lowering the price, the company can offer customers low-interest financing.
· Warranties and service contracts: companies can boost sales by adding a range of warranty or a service contract. It offers free or reduced price if the customer buys.
· Psychological Discount: involves assigning an artificially high price for a product and then offer substantial discounts.
Companies should investigate these pricing instruments and make sure they are legal in the particular country. If they work, the problem is that competitors will copy quickly and with the consequent loss of effectiveness for the company. If not work, wasting company funds that could have been spent on marketing tools with a more durable, and increase product quality and service and enhance the image of the product through advertising effect.
· Discriminatory pricing. It occurs when a company sells a product or service with two or more prices that do not reflect a proportional difference in costs. There are several ways:
· Pricing of customer segments: different prices are charged to different segments of customers for the same product or service.
· Pricing based on the shape of the product: are valued differently different versions of the product, but not in proportion to their respective costs.
· Fixing based on image: some companies be valued the same product at two different levels based on differences in image (for example: different packaging for different images).
· Pricing based on location: the towns are different prices even though the cost of providing in each location is the same. Pricing based on time: prices vary by season, day and time.
In order that the discriminatory pricing function, certain conditions must occur:
a). The market should be divided into segments and they have different intensities of purchase.
b). Members of the lower price segment should not have the right to resell the product to the segment with the highest price.
c). Competitors should not be able to sell the product at a lower price in the segment with the highest price.
d). The cost of segmentation and market legislation should not exceed the additional revenue derived from price discrimination.
e). The form of price discrimination should not be illegal.
Prices product mix.
The company seeks a set of prices that maximizes the profits of the entire product mix. Pricing is difficult because all products have interrelationships of demand and cost and are subject to different degrees of competition.
Pricing based on the product line: usually, companies develop product lines rather than individual products. Price ranges should consider the cost differences, customer evaluations of the various features and prices of competitors. In many business lines, sellers use well-established points for their online products prices. The task of the seller is to set differences in perceived quality to justify the price differences.
Pricing based on additional features: many companies offer additional products or features along with its main product. What items to include in the price and which offer as options to decide.
Pricing captives products: Some products require the use of subordinated or captive products. The manufacturers of many products (razors and cameras) often lower valued and set high premiums on their parts. However, there is a risk in setting too high a price for captive product: “pirates” which mirror those parts and sell them can arise.
Pricing of two parts: service companies often charge a fixed fee plus a variable usage fee (phone users). The flat rate should be low enough to induce the purchase of utility service and can be obtained from user fees.
Fixing prices derived: in the production of processed meats, petroleum products and other chemicals, there is often derived. If these have little value and indeed is expensive to dispose of them, this will affect the pricing of the main product. The manufacturer must accept any price that covers most of the cost of disposing of the products. If derivatives are valuable for a group of clients, then you must set a price based on that value. Any income earned by the derivatives for the company will make it easier to charge a lower price for the main product if it is forced by the competition.
Package pricing of products sellers often accumulate their products at a fixed price. Since consumers may not have planned to buy all the components, the price package savings should be substantial enough to induce them to compare accumulation.
Some consumers want less of the complete package, ie, asked the seller to “disintegrate” the offer. The seller, in fact, may increase its usefulness to disintegrate your offer if you save more on cost reduction than the price offered to the customer for particular items are eliminated.
Home of price change and responses to them.
After developing their pricing strategies, companies will face situations involving decrease or increase in prices. Home reductions in prices.
Several circumstances can lead to a company reduce its price. One is overcapacity; Company needs additional business without you can increase them through increased sales effort, product improvement or other measures.
You can leave the pricing of “follow the leader” and resort to fixing “aggressive” in order to promote their sales prices.
But to start a price reduction, the company can turn a war of these, as competitors try to maintain its market share. Another circumstance is a decline in market share.
The companies also initiate price cuts in a bid to dominate the market through lower costs. But this strategy also involves high risks:
1.- consumers will mean that the quality is lower.
2.- Participation in the trap fragile market: a low price achieved market share, but not market loyalty.
3.- Trap underworld: competitors with higher prices may have a greater ability to stay thanks to its more substantial monetary reserves.
It is likely that companies should reduce their prices because the economic recession period. Fewer consumers are willing to buy the most expensive versions of a product.
Home price increase.
Many companies need to increase their prices. A price increase can successfully increase revenue considerably.
One of the main conditions causing price increases is the cost inflation. Increase Prices not adjusted for productivity gains reduced profit margins and the company takes regular rounds in price increases. Companies often raise their prices by more than the increase in cost, anticipating higher inflation or government price controls; this is known as pricing in advance. Businesses doubt whether to make long-term commitments, fearing that cost inflation affects their profit margins.
Another factor leading to price increases is excessive demand. You can increase the “real” price in many ways, each with a different effect on buyers:
• Adopting pricing Delayed quote: the company does not set final prices or delivery until the end product. Predominates in industries with extensive production periods.
• Using proportional adjustment clauses: the company requires the customer to pay the current price and all or part of any inflationary increase occurring before delivery.
Adjustment clauses based on any specific price index, as the cost of living index (contracts involving long-term industrial projects).
• Disintegration of goods and services: the company maintains its price but valued separately or eliminates one or more elements that were part of the previous offer, such as free delivery or installation.
• Reduction of discounts: the company instructs the sales force not to offer their normal cash rebates or quantity.
It is also likely that a company has to decide whether the price increases sharply on a single database or increases in small increments repeatedly. Price increases should be accompanied by communication the company explaining why prices rise. The sales force is to help customers save.
Other ways that the company can respond to high costs or demand without increasing prices are:
• Reducing the amount of product instead of increasing the price.
• Replacement for cheaper materials or ingredients.
• Reduction or elimination of product features to reduce cost.
• Reduction or elimination of services such as delivery, installation or extended warranties.
• Using cheaper materials packaging or promotion of larger package sizes to reduce the cost of packaging.
• Decrease in number of sizes and models offered.
• Creating new economic model.
Consumer reactions to price changes.
Any price changes may affect customers, competitors, customers, distributors and suppliers can also cause reactions of the government. Consumers do not always give a direct interpretation to price changes.
- It is possible to interpret a price reduction in many ways:
– item is replaced by a new model;
– item is defective and not selling well;
– company is in financial trouble and may not remain in business to provide part in the future;
– price will fall further and worth the wait;
– or to reduce item quality.
A price increase, which usually deteriorate sales, can have some positive meanings for customers: the article is fashionable and perhaps can not be achieved if you do not buy soon; Article represents an unusually good value; or seller is greedy and take advantage of the customers.
Customers are more price sensitive products that cost much and / or are purchased frequently, while hardly perceive prices higher in low-cost items or who buy infrequently.
In addition, some buyers are less concerned about the price of the product that total costs to obtain, operate and service the product in your lifetime.
Competitors reactions to price changes.
Is more likely to react consumers where the number of companies is reduced, the product is homogeneous and buyers are very informed. You can estimate the reaction of competitors from two points of view.
One is to assume that the competitor in a certain way responds to changes in prices. In this case, it is possible to anticipate his reaction. The other is to assume that treats each change in prices as a new challenge and react according to their self-interest at the time. In this case, the company must define what interest competitor itself. You should investigate the current financial situation of the competitor, along with recent sales and capacity, customer loyalty and corporate objectives.
If the competitor has a target market share, it is likely to adjust to changing prices. If you have a goal of increasing profits to the maximum, it can react with another strategic front, as the advertising budget increase or improve the quality of the product. The challenge is to read the mind of the competitor to use the fonts internal or external information.
The problem is complicated because the competitor may give different interpretations, for example, reduce the price of the company. Can assume that the company tries to steal the market, which has a poor performance or trying to increase your sales, or you want the whole industry to reduce prices in order to stimulate demand. When multiple competitors, the company can estimate the likely reaction of each closest competitor. If all competitors have a similar behavior, this estimate is added to a common analysis of a competitor. If competitors do not react uniformly as a result of considerable differences in the size, market share or policies, then it is necessary to conduct an independent analysis. If some competitors adapt to changing prices, there are good reasons to expect that others also comply.
Response to price changes.
In markets characterized by a high homogeneity of the product, company has few options to face a price reduction competitor. The company must find ways to encourage increased its product, but if you can not find any, you will face price reductions.
When a competitor’s price increases in one product market homogenous, the other companies may not fit.
They will act as if the corresponding increase in the price benefits the industry as a all. But if a company does not think she can win or industry, its lack of acceptance can be the leader and others to rescind increases in prices. In the markets of non-homogeneous products, a company has more freedom to react to change in price of a competitor. Buyers select the vendor based on multiple considerations: service, quality, reliability and other factors. These factors desensitize buyers to minor differences in prices.
Before reacting, the company needs to consider the following:
1.- Why did the price of the competitor? It is to steal the market, use excess capacity, meet conditions of variable costs, to lead to a price change the entire industry?
2.- The competitor plans that the price change is temporary or permanent?
3.- What will happen with the market share and profits of the company if it is not answered? Are there other companies that will respond?
4.- What are the likely responses of competitors and other companies every possible reaction?
Market leaders often face aggressive price reduction by trying to create smaller market share companies. When the company product is comparable to attacking the leaders, their price will reduce the participation of the leader. The leader has several options:
• Keep the price: the leader thinks that could keep good customers and give less important to the competitor. The argument against the price remains is that the attacker gains more confidence as sales increase, the sales force is demoralized and the leader loses more participation than expected. The leader panics, lowers the price to recover participation and is more difficult and costly than expected.
• Increase the perceived quality: the company could find cheaper to keep the price and invest funds in improving their perceived quality to reduce the price and working with lower margin.
• Reduce the price: I could do it because their costs decrease with volume, lose market share as it is sensitive to price, and it would be difficult to regain market share once lost.
• Increase the price and increase the quality: the leader could increase its price and launch marks to enclose the attacking brand.
• Launch battle lines with low price: one of the best answers is added to the product line with lower price or to create a separate brand with lower price. This is necessary if the particular market segment that is lost is price sensitive, since not respond to arguments of higher quality.
The best answer varies with the particular situation. The company is attacked should consider the stage of the product life cycle, its goods portfolio, intentions and resources of the competitor, the sensitivity of the market price and quality, the behavior of costs with volume and alternative opportunities for the company.
When the attack occurs, an extensive analysis is not always feasible alternatives for the company. About the only way to reduce the time Prices reaction is to anticipate possible changes in prices competitors and prepare contingency responses. Programs reaction to adapt to changes in prices are the main application in the industries in which price changes occur with some frequency and where it is important to react quickly.