6.14:
Price Changes
To remain competitive, businesses must proactively manage prices by initiating price changes or responding to those of competitors.
These adjustments can take the form of price cuts or increases.
Price cuts are driven by low-cost strategies to dominate the market.
Additionally, fierce competition or excess capacity, where increased sales efforts or product improvements fail to generate business, necessitates price cuts to stimulate sales.
Price reductions may also risk consumer perceptions of poor quality.
Conversely, price hikes are driven by cost inflation, in which profits are squeezed, and the price increase is passed on to the consumers.
It is also driven by over-demand, where the company cannot fulfill them, increasing consumer prices.
In response to price changes, competitors may choose one of the four potential strategies.
First is reducing prices for price-sensitive markets.
The second is maintaining the price but boosting the product's perceived value through promotions.
Third is repositioning the brand by enhancing quality and price.
And fourth, a lower-priced brand or product is introduced for the unresponsive, price-sensitive segments.
6.14 Price Changes
Price cuts and increases are significant business strategies influencing profitability, market share, and customer perception.
Price Cuts:
Price cuts are often used to stimulate demand, increase market share, and utilize excess production capacity. This strategy can be effective in price-sensitive markets or during economic downturns. Companies like Walmart have built their entire business model around offering lower prices than competitors. In the technology sector, companies often reduce prices on older models when new versions are released.
Price Increases:
Price increases can reflect rising raw material costs, labor, or other operational expenses. They may also occur when demand exceeds supply, as seen in the housing or ticket resale markets. Companies may also raise prices to position their product as premium or luxury, enhancing perceived value. For instance, luxury fashion brands like Gucci or Chanel often have high price points to create an exclusive image.
However, both strategies need careful execution. Excessive price cuts can devalue a product, while drastic increases can alienate customers. Understanding the target market, competition, and overall economic conditions is crucial to effective pricing decisions.