232 CHAPTER12 DESIGNINGPRICINGSTRATEGIES ANDPROGRAMS
Reactions to Price Changes
Any price change can provoke a response from the firm’s stakeholders. Savvy mar-
keters pay close attention to customers’ reactions, because customers often question
the motivation behind price changes.^26 Customers are most price sensitive to products
that cost a lot or are bought frequently; they hardly notice higher prices on low-cost
items that they buy infrequently. Some buyers are less concerned with price than with
the total costs of obtaining, operating, and servicing the product over its lifetime. So a
seller can charge more and maintain sales if customers are convinced that total life-
time costs are lower.
Competitors are most likely to react to a price change when there are few firms
offering the product, the product is homogeneous, and buyers are highly informed.
Anticipating competitive reaction is complicated because each rival may have different
interpretations of a company’s price cut: One may think the company is trying to steal
the market, while another may believe that the company wants the entire industry to
reduce prices to stimulate total demand. Still, a firm will be unable to interpret com-
petitors’ price changes or other marketing-mix adjustments unless it continuously
monitors and analyzes its rivals’ activities.Responding to Competitors’ Price Changes
How should a firm respond to a price cut that is initiated by a competitor? In markets
characterized by high product homogeneity, the firm should search for ways to
enhance its augmented product, but if it cannot find any, it will have to meet the price
reduction. If the competitor raises its price in a homogeneous product market, the
other firms might not match it, unless the price increase will benefit the industry as a
whole. By not matching it, the leader will have to rescind the increase.
In nonhomogeneous product markets, a firm has more latitude to consider the
following issues: (1) Why did the competitor change the price? Is it to steal the market,
to utilize excess capacity, to meet changing cost conditions, or to lead an industrywide
price change? (2) Does the competitor plan to make the price change temporary or
permanent? (3) What will happen to the company’s market share and profits if it does
not respond? Are other companies going to respond? (4) What are the competitor’s
and other firms’ responses likely to be to each possible reaction?
Market leaders often face aggressive price cutting by smaller competitors trying
to build market share, the way Amazon.com has attacked Barnes and Noble. The
brand leader can respond by:➤ Maintaining price and profit margin,believing that (1) it would lose too much profit if
it reduced its price, (2) it would not lose much market share, and (3) it could
regain market share when necessary. However, the risk is that the attacker may get
more confident, the leader’s sales force may get demoralized, and the leader can
lose more share than expected. Then the leader may panic, lower price to regain
share, and find that regaining market share is more difficult and costly than
expected.
➤ Maintaining price while adding valueto its product, services, and communications.
This may be less expensive than cutting price and operating at a lower margin.
➤ Reducing priceto match the competitor’s price, because (1) its costs fall with volume,
(2) it would lose market share in a price-sensitive market, and (3) it would be hard
to rebuild market share once it is lost, even though this will cut short-term profits.
➤ Increasing price and improving qualityby introducing a new product to bracket the
attacking brand.