Initiating price changes
Businesses may either introduce a price cut or price increase expecting a possible customers and rivals reaction (Zeepedia). In case a business has excess capacity and they cannot improve on the offering, it may introduce a price cut in order to increase sales. However, in some instances, a decrease in the price may introduce a price war as rivals try to maintain market share.
Falling demand may also cause a price cut by businesses in an attempt to increase sales.
In a stable market, the business may decide to increase the price in order to increase the profit margin. Sometimes business faces increasing cost and in order to maintain the current profit margin they pass the cost to the consumer by raising the price. In other cases, the demand is high and an increase in price will not bring about a fall of the demand.
Businesses can apply low visibility price technique through the removal of discounts, raising minimum order sizes and/or limiting production of the low-profit-margin offering.
- Buyers reaction
A price decrease may be interpreted to mean that a product has a fault, low sales, the business is dropping the line, reduced quality or introduction of newer features (disposal of old models). On the other hand, a price increase may be viewed as improved quality, low production or high demand.
- Rivals reaction
Rivals react differently. Some may tend to follow specific patterns brought about by price changes but others treat every change as a new challenge and making a prediction on such competition is harder to figure out.
For example, price cuts may be interpreted as business attempt to increase market share, trying to improve sales or wants rivals in the industry to reduce the price in order to total demand.
Responding to price change
The main question here is “why did the rival change the price?”
- Was it to increase market share
- Was it to utilize on excess capacity
- Was it to meet shifting cost situation
- Will it be permanent or temporary
- Are other players in the industry going to respond to the change
In answering the questions, the business needs to consider the stage in the product lifecycle the business is operating in, the importance of the change in the product mix, objectives and resources available to the rival, and the likely consumer response to the variation in price.