Responding to Price Changes

Here  we  reverse  the  question  and  ask  how  firm  should  respond  to  a  price  modification  by  a competitor. The firm require considering the several issues: Why did the competitor change the cost? Was it to take more market share, to utilize excess capacity, to meet changing cost conditions, or to lead an industry wide price change? Is the price change permanent or temporary? What will happen to the company's profits and market share, if it does not respond? Are other companies is going to respond? What are the competitor's & other firms' responses to each potential reaction likely to be?

Besides these all issues, the company has to make a broader analysis. It must be consider its own product's stage in the life cycle, the product's significance in the company's product mix, the resources and intentions of the competitor, and the probable consumer reactions to price changes. However, the company cannot always make an extensive analysis of its alternatives at the time of a price change. The competitor may have spent much time preparing this decision, but the company can have to react within or days or hours. About the just a way to cut down reaction time is to plan ahead for both possible competitor's price changes and possible responses.

There are different ways a company may assess and respond to a competitor's price cut. Once the company has find out that the competitor has cut its price and that this price reduction is probable to harm company sales and profits, it might simply decide to hold its current price and profit margin. The company may believe that it will not lose too much market share, or that it would lose too much revenue if it reduced its own price. It may decide that it have to wait and respond when it has more information on the effects of the competitor's price change. For now, it may be willing to hold on to excellent customers, while giving up the weaker ones to the competitor. The argument against this holding schema, however, is that the competitor can obtain stronger and more confident as its sales increase and that the company may wait too long to act.

If the company decides that effective action may and should be taken, it may make any of four responses. Primary, it could reduce its price to match the competitor's price. It can decide that the market is price sensitive and that it would lose too much market share to the lower-priced competitor. Or it may worry that recapturing lost market share afterwards would be too hard. Cutting the price will decrease the company's profits in the small run. Some companies may also reduce their product quality, services, and marketing communications to receive profit margins, but it will ultimately hurt long-run market share. The company should attempt to maintain its quality as it cuts prices.

Alternatively, the company may maintain its price but go up the perceived quality of its offer. It could improve its stressing, communications the relative quality of its product over that of the lower-price competitor. The firm can discover it cheaper to maintain price and spend money to enhance its perceived value than to cut price and operate at a lower margin. Or, the company may improve quality and increase price, by moving its brand into a higher-price position. The higher qualities justify the higher price, in turn, which preserves the company's higher margins. Or the company may hold price on the present product and introduce a fresh brand at a higher-price position.

At last, the company may launch a low-price "fighting brand."  Frequently, one of the best responses is to add up lower-price items to the line or to make a separate lower-price brand. This is essential if the specific market segment being lost is price sensitive and will not be responding to arguments of higher quality.