What is Price Change?
In marketing, when various internal and external factors force business organizations to make changes in their products or services prices, it is called price change. In other words, the price change is an alternation of the previous price of any product or service.
In the general concept, the price of a product or service remains stable but due to factors such as customers’ demand, customers change preferences, competition, government regulations, profit objectives, cost of raw materials, and so on, the price asks to change.
The forces of business firms are inevitable whether they are internal or external, however, the internal ones are controllable. These are the forces that compelled firms to play with their price.
Here we will understand, the definition (already discussed), initiators of price changes, and how to react or respond to such factors appropriately.
Price Initiators (Circumstances that Lead Price Changes)
The following circumstances can lead to price changes to the firm’s offerings.
Initiating Price Changes
Several circumstances lead a firm to initiate a price change. It may be of two ways wherein one hand it has to cut off the prices of its offerings and on the other hand increase prices. They are as follows:
i. Initiating Price Cut: A firm often faces where it is compelled to initiate a price cut of its offerings (products and services). The major events that led to price cuts are mentioned below:
- Excess capacity,
- Vigorous price competition triggering a price war,
- Drive for dominance through lower costs,
- Demand for the product is price elastic,
- Consumers assume the low quality of products,
- Reduction in service level.
ii. Initiating Price Increment: Increment in the price of a product is an attractive scenario for a firm as it brings a positive windfall in revenue and profit. However, it must be ensured that sales volume is not affected.
The major circumstances that are crucial to the increment of price are listed as follows:
- Cost inflation
- Demand for the product
- Adding free service delivery or installation facility to the consumer
- Reduction in discounts
- Scarcity of the product
- Anticipation of further inflation and change in government policies.
Response To Price Change Initiated by Competitors
A firm faces a crucial strategic decision when its competitors change the price of products and services. Responding to price cuts as well as price increments is a difficult proposition.
It is thus extremely important that the firm understands the two crucial aspects related to the price change by competitors. They are:
- The objective of price change – Reasons behind the change in price.
- Time frame – How long will the price changes will last?
Once the firm gets the answers to the above-mentioned two aspects, it will be able to respond better. Some probable reasons a competitor might be changing price is listed as follows:
- A price may be cut to utilize the excess capacity of the firm or to cover the increasing operating costs,
- A price cut may be just temporary to clear old stocks,
- A price change may be long-term and dominate the market.
It is all the firm’s compulsory task to respond to price changes. A firm can prefer the following four primary strategies to respond to the price change done by competitors.
i. Maintaining the Price: The first strategy is that the company may maintain its price. The company adopts this strategy because it thinks that:
- The reduction of price may reduce profit margin,
- Reduction of price does not affect the market share of the company,
- By maintaining its price the company may regain the market share in the future.
ii. Price Maintaining with Non-Price Counter-Attack: In the next strategy a firm may maintain its offerings price by providing non-price services to the customers such as quality goods or service, warranty, after-sales service, good hospitality, good communication, etc. which may attract customers more efficiently.
iii. Price Reduction: In the third strategy a company may reduce its offering price because it may think that now the market is more price-sensitive, or its costs will fall with rising volume, or it would be difficult to rebuild its market share once it is lost, and so on.
iv. Price Increase with the Product Counter Attack: In the fourth strategy, the company instead of lowering or maintaining its price, the company may raise its price by introducing some brands, redesigning the product, or adding new utilities to the product, or providing quality services than competitors, etc.
However, the best implementation and selection of these four strategies depend upon the depth of study of the particular situation.
Read More: What is Price Lining?
Reaction To Price Change
When the price of a product or service is changed, it is sure to affect buyers, competitors, distributors, and suppliers, and may interest the government as well. The success of the move depends critically on how major parties, particularly buyers and competitors’ respond to it.
Buyer’s Reaction To Price Changes
Buyer’s reaction or response to price change can be analyzed from two angles – price elasticity of demand and perceptual factors in buyer’s response.
i. Price Elasticity of Demand: This is a traditional analysis of buyer’s reactions. This term refers to the ratio of the percentage change in demand caused by a percentage change in price. In other words, it measures the change in demand due to a change in the price of the product.
This concept analyses that the price is too high if demand is elastic and too low if demand is inelastic. This concept is analyzed from the viewpoint of revenue maximization.
Different techniques have evolved, but none is completely appropriate or satisfactory in all circumstances. The company could proceed to estimate the likely reactions of the ultimate customers, by one of the following four methods:
- Direct Attitude Survey,
- Statistical analysis i.e., A historical or a cross-sectional analysis of the relationship between price and quantity,
- Market test i.e., to offer a representative sample of potential users,
- Analytic inference i.e., to analyze how many additional families or customers would like to find the additional product.
ii. Perceptual Factors in Buyer’s Reaction: It means bringing people closer to an understanding of the correct price would be tantamount to a price reduction. Perceptual factors constitute an important intervening variable in explaining market response to price changes.
Different customers respond differently to price reductions. Some customers react positively while some may react negatively. Similarly, different customers may react differently to price increases. They are more price-sensitive to products that cost a lot and are frequently bought, whereas they hardly notice higher prices on small items that they buy infrequently.
In addition, buyers are normally less concerned with the product’s price than its total cost, where the costs include obtaining, operating, and servicing the product. A seller can charge a higher price than a competitor and still get the business if he or she can convince the customer that the total costs are low.
Competitor’s Reactions to Price Changes
Competitor’s reactions are of particular importance where the number of firms is small, the product offering is homogeneous, and the buyers are discriminating and informal. There may be one or more competitors reacting similarly or differently.
In such a case, a question may arise as to how to estimate the likely reaction of its competitors. This is a crucial question for analysis and is analyzed in two scenarios:
i. When there is only One Large Competitor: When there is only one large competitor, the likely behavior of this competitor can be approached from two quite different starting points; first, to assume that the competitor treats each price change as posing a fresh challenge and the second is that each assumption has different research implications.
ii. When there is more than One Competitor: When there is more than one competitor, the company must estimate each competitor’s likely reaction. If all competitors behave similarly, this amounts to analyzing only a typical competitor. If the competitors cannot be expected to react uniformly because of critical differences in size, market shares, or policies, then separate analyses are necessary. If it appears that a few competitors will also match the price change, then there is good reason to expect the rest will also match it.
Read Next: Factors Affecting Product/Service Pricing