Lecture11 Oct16

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Pricing Strategy & Tactics BUS 424 University of Idaho These course slides are original works prepared by Steven R. Shook. The use of these slides without express written permission of the author is strictly prohibited. [shook@uidaho.edu] © Steven R. Shook

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A company’s pricing strategy should involve the determination of how their pricing action(s) or reactions will affect their competition. How should your firm react to price competition? Ask these questions: Is there a response that would cost your company less than the preventable sales volume loss? What price changes will competition likely make, and how does your company respond to these changes? Chapter 10 – Pricing and Competition © Steven R. Shook

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How should your firm react to price competition? Ask these questions: Is there a response that would cost your firm less than the preventable sales volume loss? If no, then: Aim your price cut only on those customers likely to be attracted by your competitor’s offer. Resegment. [flanking strategy; flanker brand; flanker product] Focus your price cut on only the incremental volume that could be lost to your competitor. Focus your price cut on a particular geographic area or product line where your competitor has the most to lose (relative to your company) from lowering the price. Raise your competitor’s cost of discounting (e.g., price-matching strategy). Leverage competitive advantage(s). The cost to leverage these advantages must be lower than the cost that your competitor would incur by matching your company. © Steven R. Shook

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How should your firm react to price competition? Ask these questions: If your company responds to price competition, will your competitor be willing and able to cut price again to reestablish the price difference? If yes, then: Focusing on price will more than likely lead to reduced margins and reduced profitability. This is especially true when your competitor has low market share and significant sunk costs that reduce the its ability to quickly exit the market.. © Steven R. Shook

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How should your firm react to price competition? Ask these questions: Will multiple responses to match your competitor cost less than the avoidable sales loss? To understand this means that you have to estimate what the total sales loss would be in a price war with your competitor (not simply the loss incurred by a first response in a price war). © Steven R. Shook

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How should your firm react to price competition? Ask these questions: Is your company’s position in other markets (geographic or product) threatened if a competitor is successful in gaining share? Does the value of the markets at risk justify the cost of a response? If retaliation through price cuts is necessary, then your company should estimate the long-term strategic benefits and risks. © Steven R. Shook

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Pricing - Systematic Philosophy Price competition is a negative sum game. There are usually no winners in a market that competes on price. Setting price should be viewed as a diplomatic process rather than warfare against competitors. Companies should establish clear pricing policies. Pricing policies should be formulated along with the overall marketing strategy – exploiting competitive advantages. Price is not an island. When setting price, the long-term impact of the pricing decision should always be considered. Short-term gains can have extremely serious effects on long-term performance. © Steven R. Shook

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Plan for Managing Competition The matrix below exhibits the most general format to assess the interrelationships between segments, competitors, and prices. Unfortunately, a majority of companies do not track this very basic but extremely valuable information. © Steven R. Shook

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Managing Competition Each company decision must be rationalized internally with what the company hopes to achieve. But the decision should also be rationalized externally with what competitive conditions will permit it to achieve. In price-competitive industries, like food products, companies can choose to adapt to competition, to change it, or to eliminate it to minimize its adverse effects on long-term profits. The best choice in handling competition, however, is based on the competitions’ anticipated response. © Steven R. Shook

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Factors that Increase the Intensity of Price Competition High interbrand price sensitivity among consumers. Price cuts will increase sales at the competitors’ expense. Low competitive barriers to entry or growth. New firms with low incremental costs can enter the industry and build market share. Consumers perceive very few differences between the products available in the marketplace (low differentiation). Manufacturers in a particular industry fall into the commodity trap, believing that price is the determinant of sales. © Steven R. Shook

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Factors that Reduce the Intensity of Price Competition Differentiated brands with low interbrand price sensitivity. Firms that have a sustainable low cost advantage (low cost producer). There is only one low cost producer in any particular industry and/or geographic region. Presence of factors listed above that favor or reduce the intensity of price competition Mitigating circumstances Communication of intentions (price signaling) Intensity of price competition is a function of: © Steven R. Shook

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Factors that Mitigate the Intensity of Price Competition Stability of the industry environment Relative market positions of companies in the industry Management philosophies of companies in the industry Companies objectives and goals Relative strengths and weaknesses of companies in the industry Price history of the various products and services offered by companies in the industry © Steven R. Shook

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Types of Competitive Pricing Behavior © Steven R. Shook

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Characteristics of Firms Under Different Types of Competitive Pricing Behavior © Steven R. Shook

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Communicating Price Policy Intentions Communicating price intentions allows: [1] a company’s employees to work toward a common goal, [2] allows a company to gauge competitor’s reactions to their announced pricing intentions, and [3] allows for greater ease of pricing policy implementation and execution. What can be done? Preannounce price increases Show a willingness and ability to defend a change in price Back up an opportunistic price cut with information; readjust © Steven R. Shook

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Responding to Pricing Competition Do not fall into the market share trap. In most markets and industries, the cost to increase market share is greater than the gain resulting from a higher market share. Think of gaining market share as “buying market share.” Is the investment in a market share gain yielding an acceptable return? Compete from higher ground. This can be done by tilting the current competitive landscape so that competitors price actions are reduced, neutralized, and/or eliminated. Use a nonprice defense that leverages company strengths. © Steven R. Shook