ABDT5104 PRICING STRATEGYTutorial 5 Answer Monday, 20 June 2011
What are the likely effects on the company?
Price wars can lead to a severe
loss of profits
. Unless there is a significant costadvantage, for the company introducing the price cut, a price reduction will lead toretaliation by competitors. So dropping prices normally does not lead to an increase inmarket share. Instead it leads to a sharp drop in profits.Price wars also
shape customer expectations
. Research indicates that the lowest pricepeople pay for a product or service is
, and becomes their
. Driving down prices to unreasonable levels has a dramatic influence on a customer'sperception of what is a "reasonable" price long after the war ends. Price wars also divert theattention of customers away from product benefits towards price. That is usually bad for theindustry.
What step can management take to prevent one?
i. Senior managers
must not yield quickly
when frontline sales people call for pricecuts. Top management must be on their guard when sales personnel tell them that acompetitor has cut its price and plead for an immediate matching price cut. Senior managers
to get additional information about the price cut.ii.
Misreading competitor moves
can trigger off an avoidable price war. Companiesmust keep their cool and
not react until they understand the reason
behind acompetitor's price cut. It often makes sense to delay the response until one is sureabout the need to respond. Indeed, the best response to a price cut by a competitor is usually to
have a big influence on price wars. Advertisementsshould not keep drawing customer attention to prices.iv.
Price communications should be carefully drafted
to minimize the chance of misinterpretation by customers or competitors. Companies must ensure their actionsare not seen by competitors as price undercutting.v.
Sign long-term contracts with key customers.
vi. Use the art of
I. Value in usea. Monetary worth of a product¶s set of benefits actually received by thecustomer as a result of using the product/services.b. Actual values of product to customer.c. E.g. what the user value is of a car? If you went without, it would be worth thecost of paying transportation fees. i.e. taxi, train, bus as well as number of taking public transport per day in a year, plus some estimated probability of medical costs of seeing a doctor for heat stroke due to hot weather inMalaysia.II. Economic valuea. Use value adjustable for the availability of competitive substitute product.