Discuss Price Changes by an organisation and how organisations respond to competitor’s price changes.

To counter the competitor’s strategy by making changes to the marketing mix elements like product, place and promotion is a difficult task for an organisation. Hence, organisations usually respond to their competitors by making changes to the price. As price element can be easily countered by the competitors, it is in the best interest of the marketing managers to formulate strong marketing strategies based on 3P’s – product features and quality, place (strong and effective distribution network), and promotion activities.

There are many reasons that force an organisation to make price changes. These could be market penetration, market skimming, fall or increase in costs, entry of competitors or a substitute product, economic condition of the target market, laws and regulations, product life cycle, etc.

Before initiating a price change, an organisation should consider the following –
1) Reaction of customers – The buyers may think that a deceased price is because of low quality or the product is about to become obsolete. For example, the Nexus 6 model of the mobile phone from Google Nexus was lowered to half of its price in May 2016 on ecommerce sites in India. Some customers thought that it is not a successful handset as compared to earlier Nexus series phones, and the company is just trying to sell the stock lying in warehouses. The product’s success sometimes depends on the customer’s perception in the target market. In the following months the product was eliminated. It can work to the advantage as well as disadvantage to the organisation. A careful analysis of the situation is needed about the reaction of buyers, and the organisation should be ready with a plan B to meet any challenges arising due to price change.

2) Reaction of the competitors – It is not always easy to understand the response and interpretation of competitors to price change. Keeping a cordial relation with the distributors and constantly surveying the customers is key to getting information on competitor’s strategy. A price decrease can result in profits by economies of scale and increase in market share. But it can also prove detrimental because of entry of competitors because of which the organisation can lose market share. A competitor with vast experience and product lines in the market can match the price cut over a longer period. It depends on the demand and economic condition of the target market. The organisation should carefully assess the current market share and current marketing strategy of competitors before making a price cut.

Depending on the marketing strategy like maintaining market share, the competitor may match the price cut. If it wishes to increase customer loyalty and brand image, it may go for product improvements supported by strong promotion activities.

If the competitor is a market leader or has high cash reserves, its response by reducing the price may be for a longer period. It may sustain in the market with a low prices product for a longer period and can get into a price war.

Customers who respond by buying the products due to price decrease, mostly switch to competitor products depending on their perception of quality, brand image, strong advertising activities, etc. It is difficult to anticipate the reaction of competitors, and the marketing managers should be ready with contingency plans before the price cuts are rolled out in the market.

Responding to competitor’s price changes –
Anticipating competitor’s price change strategy is a challenging task. The competitor may have opted for price reduction to gain market share, to increase sales, product may be in decline or maturity stage, reduction in costs because of learning experience or cheaper raw materials from different suppliers, etc. The price cut could be for a longer or short period.

An organisation facing price cuts from competitors can respond in the following ways-
1) No changes to price but making changes to the other marketing mix elements – The organisation should invest in promotion activities to buy customer loyalty. The promotion activities should highlight the product features, brand image, quality, after sales service, etc.

2) No changes to price and no changes to other marketing mix elements – The organisation can continue with its current pricing strategy as part of its marketing program. If the firm is a market leader with strong brand image, firms opt for this strategy to convey that the product provides the best value as compared to others in the market. Other reason could be to keep the profit margin same relative to the costs. It doesn’t wants to risk of losing profits. If the firm is not a market leader, and the competitor which is a market leader reduces the price, the firm by maintaining price sends a confident signal which may force the market leader to revisit the pricing strategy as the distributors are also affected by reduced price.
The firm needs to make a very careful decision by analysing all the situations in the market.

3) Reduce price – Considering that it may lose market share if price is not reduced to competitor’s price, the firm may lose market share. It becomes very difficult regain lost market share, and requires investments in product modifications, promotion, etc. to retain it. The firm can reduce the price for a short period or long period depending on the attractiveness of the market. It may see increase in profits because of decrease in costs because of the learning curve of its various production functions, marketing functions, etc.

4) Increase price and make changes to other marketing mix elements as well – The firm may increase the price of the product by adding new features to the product. The firms invests in promotion activities highlighting the product features and additional services like warranties, guarantees, free services for certain period, buy back options, etc. For example, there is always a competition between Apple iPhone and Samsung mobiles by launching a more efficient and better device like iPhone 6s and Galaxy S7.

The firm has to arrive at any of the above decisions basis the experience and expertise of the management. A firm should always be ready with contingency planning well ahead of the competitor’s moves.