Price Change and Impact on the Market
Price is the second important element of the marketing mix that needs to be properly determined. Although the price change always took place in the market due to various factors. It is general that the successfully determined price of any product or service also requires some change due to many factors. This price change or price changes may be due to the changing demand or as a result of inflation. Nor it may originate as a reaction to the competitor prices. Whatever the reason may be, the price changes are an essential part of the business operations.
Conditions for Price Change in the Market
Starting Price Change
When the management of a business organization decides to initiate price change in its products or services, then it has the following two options.
- Price Cut
- Price Increase
As the business originates the price changes, so it must also consider the reactions of customers and competitors in advance.
Price cut is related to lowering the existing prices of products or services. There are many situations that force a business to cut the price of its product or services. Following are some of these compelling conditions.
When a business produces too much quantity of its product then it faces overcapacity. In such a case it is almost impossible for the business to enhance the relative demand by product improvement or effective selling efforts. In this case there is only one option that it can cut its price to cover this excessive quantity. If the business adopts this strategy, then it lowers the price of its products in the market. In fact in order to attract more customers. In this way the organization can increase its sales. However this would be for a very short period of time. The competitors also judge the reduced price of the business. Then they would also lower their product prices. In this way the price cutting on the basis of overproduction becomes harmful for the businesses, because it facilitates the price wars.
Another condition promoting price cutting is the reduction in the market share of the business due to strict price competition. The business is also motivated to reduce the price of its product in order to capture more customers and increase market share. Hence this can lead the business towards lower cost of production due to increased volume of sales.
It is obvious that the price increase is related to the increase of the price of the product or service in the business. If price change is effective, it can be responsible for the extra proportion of profits. For example, if a business earns 30% profit on a specific amount of sales. Then it can earn 33% profit on the same proportion of sales. Simply by increasing the price of its product and services.
There are many factors that can lead a business towards price changes. Following are some of these factors that support a Business Organization towards price increase.
The major factor that forces a business to increase the price of its product or service is the cost inflation. When the costs of manufacturing products rise due to inflation, the profits of the business also reduce. So businesses are forced to pass these inflationary effects on the customers. Basically in the form of increase in the prices of their products or services.
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Another influential factor leading towards price increase is the increase in the demand of product in the market. When the demand of the product of the business is more excessive than its supply in the market, the business simply enhances its product’s price to limit increased demand.
There are two ways through which a business shows an increase in its price of the products.
- Addition of higher price units to the product line along with the dropping of discounts is one effective way of price change.
- In this method the business simply increases the prices of its products in the market. However business should be cautious to be considered as price gouging by the customers in the market.
Successful businesses make promotion efforts to tell the customers why the prices of the products have increased, so that they are timely informed about price changes.
Reaction of Customers to Price Changes
Whenever the price of a product changes, it would affect customers, competitors, suppliers, distributors and even in cases of government also. In case of customer reaction, it is not seen as straightforward responses; instead customers view price changes differently. For example, if a business is dealing with the VCR product and immediately reduces the price to half, then the customers do not consider it as a healthy sign. They may think that the business wants to change its product line completely or the VCRs are faulty. The customers can also believe that the quality of the VCR may be reduced by the business etc.
Similarly, in case of increase in price the customers may react differently in such a way that they may think that the quality of a specific product (VCR) is enhanced or new features are added to the models etc. So the management of the business should also take into account the expected reaction of the customers while making changes in the prices of its products or services.
Reaction of Competitors to Price Changes
The reaction of competitors also plays a significant role against the price changes. When the business changes the price of its products, the competitors also react quickly. Mostly competitors react immediately when the product is uniform. And customers are properly aware and there are a smaller number of businesses in the market.
The competitor reaction can be estimated fairly, when the competitor reacts in a set of standard responses. However when the competitor, especially a larger one reacts quite differently to the price changes. Then it is really hard for the business to forecast the reaction of competitors. However one way to tackle such a situation is that the business tries to consider the self interest aspect of the competitor. Although can conclude the expected reaction in the light of price changes.
The competitors also see the price changes in a different way. For example the competitors may think the price cut of a business as effort for increasing market share, poor operations. Or the business is trying to increase its or its desires to reduce the overall market price etc. Moreover, when there is the relatively large number of competitors, then it is essential for the business to consider their expected reaction separately. If all competitors react similarly than analysis of expected reactions of a single competitor is enough.
Hello everyone! This is Richard Daniels, a full-time passionate researcher & blogger. He holds a Ph.D. degree in Economics. He loves to write about economics, e-commerce, and business-related topics for students to assist them in their studies. That's the sole purpose of Business Study Notes.
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