Price Changes

After developing their pricing strategies and structures, companies frequently face situations in which they has to initiate price changes or respond to price changes by competitors.

Initiating Price Changes

In some of the cases, the company can find it desirable to initiate either a price cut or a price increase. In both cases, it has to anticipate possible buyer and competitor reactions.

i.   Initiating Price Cuts

Several situations can lead a firm to consider cutting its price. One of such circumstance is excess capacity. In this particular case, the firm require more business and cannot obtain it through increased sales attempt, product improvement, or other measures. It can drop its "follow-the-leader pricing"-charging regarding the same price as its leading competitor-and insistently cut prices to boost sales. But as the construction equipment, airline, fast-food, and other industries have learned in current years, by cutting prices in an industry loaded with excess capacity can lead to price wars as competitors attempt to hold on to market share.

Another situation leading to price changes is declining market share in the face of strong price competition. Either the company begin with lower costs than its competitors or it cuts prices in expect of gaining market share that will cut costs further through larger volume.

ii.   Initiating Price Increases

A successful price increase may greatly increase profits. For instance, if the company's profit margin is 3 % of sales, a 1 % price increase will increase profits by 33 % if sales volume is unaffected. An important factor in price increases is cost inflation. Grown up costs squeeze profit margins and lead companies to pass cost rise on to the customers. Another important factor leading to price increases is demand in excess: When a company cannot supply all its customers' needs, it may raise its prices, ration products to customers, or both.

Companies may increase their prices in a number of ways to keep up with go up costs. Prices may be raised almost unnoticeably by dropping discounts and adding higher-priced units to the line. Or prices may be pushed up frankly. In passing price increases on to customers, the company has to avoid being perceived as a price gouger. Companies also require thinking of who will tolerate the brunt of increased prices

There are some of techniques for ignoring this problem. One is to maintain a sagacity of fairness surrounding any price increase. Cost increases should be supported along a company communication program telling customers why cost are being increased and customers would be given advance notice so they may do forward buying or shop around. Creation of low-visibility price moves first is also a good way: Increasing minimum order sizes, eliminating discounts, curtailing production of low-margin products are some instance. Contracts or bids for long-term projects should have escalator clauses based on such type of factors as increases in identifying national price indexes. The company sales force should help business customers discover ways to economize. Where possible, the company should consider ways to meet higher costs or demand without go up prices. For instance, it can consider more cost-effective ways to manufacture or distribute its products. It may shrink the product rather than raising the price, as candy bar manufacturers frequently do. It may substitute less costly ingredients or remove sure product features, packaging, or services. Or it may "unbundle" its products and services, separately and removing pricing elements that were formerly part of the offer.