Initiating Price Changes

Companies are bound to face market situations where they are required to initiate price changes. It means, either they are to cut the prices or increase the present prices to survive, maintain status quo or further growth. Initiating price changes involves two possibilities of price cuts and price increases.

Initiating Price Cuts:

There are good many circumstances where a firm is to resort to price cuts.

There are genuine reasons for cutting prices:

First may be existence of excess capacity. In such situation the firm is badly in need of additional business and cannot generate it through increased sales efforts, product improvement or even price rise.

It may resort to aggressive pricing, but in initiating price out, the company may trigger a price war. Second reason for initiating price cut is a drive to dominate the market through lower costs.

Here, either the company starts with lower costs than its competitors or it initiates price cuts in the hope of gaining the market share and lower costs to price cutting policy involves the following possible traps:

1. Low-quality trap:

Consumers will assume that quality is low.

2. Fragile-market share trap:

A low price buys market share but not market loyalty. The same customers will shift to any lower- priced firm that comes along.

3. Shallow-pockets trap:

The higher priced competitors may cut their prices and may have longer staying power because of deeper cash resources.

Initiating Price Increases:

Price increase is a source of maximising the profit or maintaining it if done carefully. Say a company earns 3 percent profit on sales, and one percent price increase will increase profits by 33 per cent if sales volume is not affected.

The factors leading to price increase can be:

1. Increase in cost inflation. That is rising costs unmatched by productivity gains squeeze profit margins and lead companies to regular rounds of price increases. Companies often raise their by more than the cost hike, in anticipation of further inflation or government price controls, in a practice called anticipatory pricing.
2. Over demand can be another cause that leads to price increase. When the company cannot supply all of its customers, it can raise its prices, ration or cut supplies to customers or both.

The price can be increased by at least four ways:

1. Delayed quotation pricing:

Here, the company does not set final price until product is finished or delivered. This pricing is prevalent in industries with long production lead times like construction and heavy industrial equipment’s.

2. Unbundling:

The company under this plan maintains its price but removes or prices separately one or more elements that were part of the former offer, such as free delivery or installation.

Automobile companies, sometimes, add antilock brakes and passenger-side air-bags as supplementary extras to their whiles.

3. Escalator clauses:

Under this, the company asks the customer to pay today’s price and all or part of any inflation increase that takes place before delivery. This hike based on specified price index. These escalation clauses are quite common in construction line whether it is a house or industrial project or air-craft and ship building.

4. Reduction of discounts:

The company asks the sales force to offer its normal cash and quantity discounts at reduced rate. To gain four such attempts, the company must avoid looking like a price gouger. Companies also think of who will bear the brunt of the increased prices.

It is so because, customer memories are long, and they can turn against the company which is perceived as price gauger.

Reactions to Price Changes:

Naturally any price change provokes response or reaction from customers, competitors, distributors and suppliers and even the government. Here, we shall touch only the reactions of consumers and competitors.

Customer Reactions:

Consumers are more interested in knowing the cause or causes of price change.

A price cut can be interpreted in several ways:

1. The item or product is about to be replaced by a new model.
2. The item is faulty and it is not selling well.
3. The firm’s financial position is badly affected.
4. The price will come down further.
5. The quality has been reduced.

A price hike may have some positive meanings:

1. The items is ‘hot’
2. It has a high value because of quality.

Competitor Reactions:

Competitors are most likely to react when the number of firms is few, the product is homogeneous, and buyers are highly informed. Competitor reactions can be a special problem when they have a strong value proposition. The price hike them to take steps based on objectives of such price hike where they will resort to advertising and product improving efforts.

In case of price cuts, they have different interpretations:

1. That the company’s trying to steal the market
2. That the company is doing poorly and trying to boost its sales
3. That company wants the whole industry to reduce prices to stimulate total demand.