Importance of Responding

To Competitor’s Price

Changes

© K.NirushanFaculty of Commerce & Management

Eastern University, Sri Lanka

Introduction

Competitors

Competitors are companies that satisfy the same customer needs.

Price changes

Competitor’s may change their prices under two conditions:

Why a firm should respond to competitor’s price

change?

1. Most customers are price-conscious

1 Lunch Box Rs.100 Ok.. Just Rs.80

Akka ShopPragash

Shop

2. There are several competitors with quality products.

3. Product features are easily copied and products are close substitute.

4. Can get information about the competitors cost structure.

5. Some competitors are financially strong.

6. Sealed-bid pricing conditions

Assessing and responding To

competitors price changes

No

Yes

No

Has competitor cut price?

Has competitor cut price?

Will lower price negatively affect our market share and profits?

Will lower price negatively affect our market share and profits?

Can/Should effective action be taken?

Can/Should effective action be taken?

Hold current price continue to monitor competitor’s

price

Hold current price continue to monitor competitor’s

price

Reduce priceReduce price

Maintain price add valueMaintain price add value

Improve quality and increase price

Improve quality and increase price

Launch lower-price “Fighter line”

Launch lower-price “Fighter line”

Yes

Yes

No

Limitations of responding to the competitor’s price

changes

Cost concentration – If a company’s cost is higher than competitors, it may not able to price at or below competition and survive.

Customer thinking - If a customer use price as an indicator of quality, they may avoid products priced below competition

Economic View : Importance of responding to the competitor’s price

change

P1

P2

Q1 Q2

P1

Q1Q2

Coca-colaPepsi

Price Price

Quantity Quantity

Suppose the price of Coca-Cola decrease from p1 to p2, this would cause people to consume more Coca-Cola (Quantity increase from Q1 to Q2) because people thing in price wise coca-cola is cheaper than pepsi, so they switch their consumption from pepsi to coca-cola. Therefore pepsi will lose their demand. At this time pesi should respond to the coca-cola’s price change.

Practical example

Jordan says that Gillette is adding a razor blade to their 4-pack. And raising the price $5.A couple of weeks ago, I was at Target, and I saw that all of their Mach 3 cartridges were on clearance. As a Mach 3 user, I was kind of concerned as to what was going on. I hoped that they weren't discontinuing the Mach 3 and Mach 3 turbo and forcing everyone to buy their newest razor.Last night I was at the grocery store and wandered down the shaving aisle, and lo and behold, Mach 3 razors now only come in a 5-pack. Not only that, the price has been jacked way up.

A 4-pack of Mach 3 turbo blades was about $8.99. The new 5-pack costs $13.99. So they give you one extra razor for extra 5 dollars. Thanks, Gillette. I am now switching to Schick.

(http://consumerist.com/2008/03/gillette-charging-an-extra-5-for-one-additional-razor-blade.html)

Conclusion