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Abdt5104 Pricing Strategy Tutorial 5 Answer

Abdt5104 Pricing Strategy Tutorial 5 Answer

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Published by: Chia Kong Haw on Jun 20, 2011
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ABDT5104 PRICING STRATEGYTutorial 5 Answer Monday, 20 June 2011
Question 1
Its competitor is a national chain store, and Mighty Midget is just an independent grocerystore which operates on a very limit geographic area. IfMighty Midget decides to reduceprice, most properly the
national chain will not follow the price cut
. Because pricedecision had to be made by top management, and once the decision made, very store willfollow the price cut decision, and reduce the price nationwide. The overall profit of thenational chain store will be affected. Hence at the national chain store point of view, reduceprice to match just a small grocery store is irrational.However, if the national chain matches the price change, Mighty Midget will be hit badly,and worst to worst face the threat of close shop. This is because, national chain have thecapability to reduce cost much lower than an independence grocery can do. National chainhas the economics of scale, where they able to buy in a very large quantity, hence their cost are lower and have the ability to reduce the price. As a result, it is suggested that, Mighty Midget keep their price unchanged, and valueadded by extend its operation hours, in order to stay profitable.
Question 2
Should management be concerned about a price war?
Yes, management should concern about the price war, once they identify the price war,management
must avoid it
. It is because price war is a
negative sum game
, which bothcompetitors and the company wills loss at the end. Price war always has no winner but onlylosers, the effect are not only
severe but also enduring
. This is because customer will hasa
low price perception
, and will act as
reference point
, which company difficult to raise itprice back to normal level.
What factors make one likely?
i. If a company enjoy a substantial incremental cost advantage or can achieve one withlow-price strategy model, its competitors may be unable to match its price cuts.Example like Wal-Mart and Dell.ii. If the company¶s product offering is attractive to only small share of the marketserved by competitors, mean competitors will unwilling to follow the price cut.iii. If a company can effectively subsidize losses in one market because of the profits itcan earn by selling complementary products. For example, Microsoft window sellingat low price where charge higher price in their MS Office.iv. Price competition expands market sufficiently. Mean although its fall into price war,but sometime the explanation of the market growth will eventually make profit to thecompany. But this is too risky to try, because every market has different pricesensitivity.
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
remembered longest
, 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
mustdig further 
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
do nothing
Marketing communications
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 
Question 3
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.

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