Multimedia Marketing/Marketing.iso/market/chapter8.4p

Text File | 1996-08-22 | 18KB | 373 lines

SECTION 8.4  Competition Based Pricing Strategies

INSTRUCTIONS Think about how marketers might evaluate their competition when
they set their prices. Then go into this section to expand your conceptualization of the impact of competition.

EXAMPLE

In the automobile industry, manufacturers tend to pay close attention
to the behavior of their competitors when they set prices. Often,
price leadership is apparent, where one company (usually one of the
larger ones) raises or lowers prices and this is followed by
similar behavior by other firms.

Price leadership is not automatic, however. Sometimes a company will
raise its price, expecting others to quickly follow suit. If this
does not happen, the intended leader may be forced to roll back the
increase or make some other compensation, such as granting rebates
or lowering interest rates.

In some industries, price leadership behavior is popular among
members of the industry. They know that if everyone follows the leader
this will reduce their risk, because they do not have to guess as
to what the others will do. There is always an element of doubt,
however--if price leadership breaks down, industry prices may take
unexpected and abrupt changes.

DETAILS

Competitor prices play a dominant role in influencing the pricing
practices of some firms. Generally, the less differentiated items
are within an industry, the greater is the need to determine prices
in relation to those of competitors. Thus, as personal computers
have become increasonly standardized, price has become a strong
weapon and cutthroat competition has forced some into bankruptcy
or near bankruptcy. At an extreme, the lack of differentiation
forces firms to adopt prevailing market prices.

Probably no industry completely satisfies the conditions of perfect
competition. But some closely approximate this condition. Consider
the wheat industry. With some minor exceptions, the wheat produced
by one farmer is essentially the same as that produced by another.
The product is undifferentiated. No farm would raise its price
above the market level, because no-one would buy the wheat. And
there is no incentive to sell at a price below the market level,
because that would only lower profits.

But often there are some differentiation possibilities, such as
through delivery schedules, location, or some other variation
in the marketing mix. The greater the differentiation, the more
a firm is able to price independently from competitors. Nevertheless,
many companies try to avoid price wars, if possible, by at least
keeping their prices generally in line with competitors. Manufacturers
of personal computers have enjoyed little success in this regard,
as price competition is severe in that industry.

If a marketer wants to differentiate its offering, but the product
is a standardized commodity, there are ways to change the situation.
One is to deliver faster or on a more reliable basis than competitors.
This may be especially useful in appealing to customers who employ
just-in-time inventory strategies. The package can differentiate
the product. Producers of bottled water use this technique extensively.

Promotion can be an effective device for convincing consumers that the
company's product is superior to those of other firms. The promotion can
create a brand image that develops meaning in the minds of consumers
and leads to their loyalty.

Retail firms have a number of opportunities to differentiate themselves.
They can locate in sites that are convenient to large numbers of
consumers, such as near offices and factories. Their personnel can be
more knowledgable or more helpful than competitors' employees. Their
stores can be more attractive, cleaner, or more convenient.

PROBLEM 1

Which of the following is not a useful method for a lumber yard to
differentiate itself from competitors and thereby obtain price
independence?

A. Hiring salespersons who have experience as a professional or
   do-it-yourself carpenter.
B. Training salespersons in how to apply the marketing concept.
C. Training salespersons in how to perform their duties efficiently.
D. Using piped in music to create a pleasant atmosphere.

WORKED

In order to differentiate itself from competitors and thereby obtain
price independence, a lumber hard could hire salespersons who have
experience as a professional or do-it-yourself carpenter, train
salespersons in how to apply the marketing concept, or use piped in
music to create a pleasant atmosphere. If consumers tend to feel
that all lumber yards are boring one-and-the-same units, these
steps may be valuable in creating an image of being different.

Unfortunately, many lumber yards are still dominated by the production
concept and do not take steps to differentiate themselves in the
mind of the consumer. They are forced to price at market levels,
since they have not given consumers any reason to pay higher prices.
And if they price below market level they run the risk of starting
a price war.

ANSWER  C
INSTRUCTIONS Think about how marketers might evaluate their competition when
they set their prices. Then go into this section to expand your conceptualization of the impact of competition.

EXAMPLE

In the automobile industry, manufacturers tend to pay close attention
to the behavior of their competitors when they set prices. Often,
price leadership is apparent, where one company (usually one of the
larger ones) raises or lowers prices and this is followed by
similar behavior by other firms.

Price leadership is not automatic, however. Sometimes a company will
raise its price, expecting others to quickly follow suit. If this
does not happen, the intended leader may be forced to roll back the
increase or make some other compensation, such as granting rebates
or lowering interest rates.

In some industries, price leadership behavior is popular among
members of the industry. They know that if everyone follows the leader
this will reduce their risk, because they do not have to guess as
to what the others will do. There is always an element of doubt,
however--if price leadership breaks down, industry prices may take
unexpected and abrupt changes.

DETAILS

The most common competition-based pricing method is that of adjusting
a firm's price to reflect existing or anticipated competitor prices.
In the largely undifferentiated aluminum market, for example,
some of the larger firms constantly try to maintain their prices
on a par with other companies in the industry, including foreign
rivals. Provided that all competitors have similar cost structures,
this practice may result in an acceptable profit for all. Common
prices tend to favor large companies, since they are generally
better able to take advantage of economies of scale. Thus, common
prices often give companies an added potential for substantial
profits.

Common prices are frequently found in oligopolistic industries. Most
companies prefer not to lower prices, at least not substantially,
because this would set off a price war. Some firms, especially if
they are price leaders, raise prices from time to time. They know
that if rivals fail to raise their prices, the firm may suffer loss
of market share. On the other hand they may feel (based on past
experience and judgment) that if they raise their prices others
will follow. This has been the general pattern in the automobile
industry for many years.

Precisely where management should price an item in relation to
competitive products depends upon the firm's overall marketing
strategy. Some upscale ice cream producers  price their ice
cream at a high level to signify quality and prestige image. Some
mass merchandiser retailers price lower than competitors, as
reduced services and lower prices are part of their marketing
strategies. Similarly, several airlines have pursued no-strings,
low fare strategies.

Many managers have the philosophy that if their company offers
superior product quality, services, reputation, and brand loyalty,
premium prices can be justified. If they have high prices but fail
to delivery acceptable levels of utility, however, they will not
be competitive in the marketplace.

PROBLEM 2

In the steel industry, what type of company would most prefer to
have all producers charge common prices?

A. Companies which produce very high quality steel.
B. Companies staffed by managers who are highly experienced.
C. Large companies.
D. Small companies.

WORKED

In the steel industry, large companies would  prefer to have all
producers charge common prices. Large firms are best able to take
advantage of economies of scale. If all firms charge similar prices,
the large firms can sell substantial volumes of steel without cutting
their prices. This protects their profit margin. Further, if they
had to cut prices to attain economies of scale, this might set off
price wars in the industry that would damage all companies. If
the price wars damage small companies more than they do large, the
federal government is likely to step in with charges of monopolizing
or unfair methods of competition. Large firms, for obvious reasons,
want to avoid these consequences.

ANSWER  C
INSTRUCTIONS Think about how marketers might evaluate their competition when
they set their prices. Then go into this section to expand your conceptualization of the impact of competition.

EXAMPLE

In the automobile industry, manufacturers tend to pay close attention
to the behavior of their competitors when they set prices. Often,
price leadership is apparent, where one company (usually one of the
larger ones) raises or lowers prices and this is followed by
similar behavior by other firms.

Price leadership is not automatic, however. Sometimes a company will
raise its price, expecting others to quickly follow suit. If this
does not happen, the intended leader may be forced to roll back the
increase or make some other compensation, such as granting rebates
or lowering interest rates.

In some industries, price leadership behavior is popular among
members of the industry. They know that if everyone follows the leader
this will reduce their risk, because they do not have to guess as
to what the others will do. There is always an element of doubt,
however--if price leadership breaks down, industry prices may take
unexpected and abrupt changes.

DETAILS

Regardless of the pricing strategy used, management should maintain
some flexibility in its pricing structure to enable reaction to
competition. If rivals such as discounters continually reduce their
prices and carve away portions of the market, a company may have to
change its stragegy, at least for a time. No pricing structure should
be so rigid that it is impossible to change.

Small firms tend to be more flexible in their pricing than do their
larger counterparts. This is largely due to the bureaucratic nature
of large firms where change can take place only after considerable
study and completion of bureaucratic procedures, such as processing
documents. Smaller companies do not suffer under this burden, however.
The owner of a pet shop can change his prices tomorrow, if necessary.

Whenever demand is highly price-sensitive, competitors discount
willingly, and customers are agressive bargainers, there is a
need to be flexible in pricing to permit price adjustments in
response to competitive pressures. The management of an airline once
found it necessary to slash its prices by up to 70 percent in
more than 2,400 markets because of tight fare competition from discount
airlines.

One way to retain flexibuility in pricing is to involve sales
representatives in any price changing decision making. These
individuals are often in a good position to judge when adjustments
in prices are needed to obtain orders. Of course, management must use
discretion in evaluating the inputs of sales representatives in
these decisions, as they are inherently motivated to lower prices
to push volume.

Some companies utilize selling agents (wholesalers). These agents
have the authority to set prices and terms of sale of the items
that they handle. Many are willing to change prices when circumstances
dictate. They are generally more familiar than is the producing
company with the markets they serve and the need to alter prices in
accordance with changes in the environment.

PROBLEM  3

There is a need for a producer of machine tools to be flexible in pricing
when:

A. Demand is not highly price sensitive.
B. Competitors avoid discounting.
C. Customers are aggressive bargainers.
D. Most competitors fear a price war

WORKED

There is a need for a producer of machine tools to be flexible
in pricing when customers are aggressive bargainers. In some industries,
especially machine tools, buyers conduct extensive negotiations with
vendors before they make purchases. The buyers sometimes play one
vendor off versus another, getting a concession from one and then
trying to get a better one from another. This makes it very important
to be in a position to alter prices, as the situation dictates. A
number of companies grant to sales representataives the authority
to negotiate over price. Buyers like dealing with a sales representative
who has this authority. Many dislike arrangements where sales reps
receive offers from buyers and then have to clear any agreements with
management. Many industrial goods markets follow this pattern.

ANSWER  C
INSTRUCTIONS Think about how marketers might evaluate their competition when
they set their prices. Then go into this section to expand your conceptualization of the impact of competition.

EXAMPLE

In the automobile industry, manufacturers tend to pay close attention
to the behavior of their competitors when they set prices. Often,
price leadership is apparent, where one company (usually one of the
larger ones) raises or lowers prices and this is followed by
similar behavior by other firms.

Price leadership is not automatic, however. Sometimes a company will
raise its price, expecting others to quickly follow suit. If this
does not happen, the intended leader may be forced to roll back the
increase or make some other compensation, such as granting rebates
or lowering interest rates.

In some industries, price leadership behavior is popular among
members of the industry. They know that if everyone follows the leader
this will reduce their risk, because they do not have to guess as
to what the others will do. There is always an element of doubt,
however--if price leadership breaks down, industry prices may take
unexpected and abrupt changes.

DETAILS

Government, custom machinery and equipment, and building construction
purchasers often require interested sellers to competitively bid on
a contract. These bids are formal proposals made to the buying
organizations and stating a specific price, terms of sale, product
specifications, and other important characteristics of the product
offering.

Sometimes buyers insist that bidders submit their bids in a sealed
envelope, called a "sealed bid", so that competitors remain unaware
of the prices and terms of sale proposed by each other. Under this
practice, the lowest bidder generally receives the contract, although
the buyer often evaluates other aspects of a proposal, such as the
buyer's ability to deliver, reputation, and factors other than
price alone.

The competitive bidding process poses difficult decision choices for
a bidder. On the one hand, bidders would like to propose high prices.
On the other hand, the higher the price, the greater is the chance
that competitors will bid lower, meaning that the contract will be
lost. Several quantitative analysis techniques have proven useful in
helping managers assess these probabilities and potentials for
profits in bidding.

Most important to continued success, however, is past experience in
bidding against competitors and understanding both their cost
structures and pricing practices. Experience provides a manager with A
"gut feeling" of how badly competitors want a contract and,
consequently, what prices they are likely to propose.

Governmental procurement agencies forbid collusion among bidders.
Further, collusion is prohibited by federal and state antitrust laws.
There is temptation for vendors to get together and fix bids. One
vendor would bid low for one project and another vendor for another.
This would reduce competition and help each one get its "fair share".
Despite the regulations which prohibit it, collusion still exists,
especially in particular industries, such as construction. Regulatory
authorities do not have the resources to detect every occurrence
of this violation of the law.

PROBLEM 4

A contractor for governmental work is bidding for a contract. One
important area that the firm should gather information on, as input
to the bid is:

A. Competitors' cost structures.
B. Competitors' advertising campaigns.
C. Competitors' sales force structure.
D. Competitors' channels of distribution.

WORKED

A competitor for governmental work is bidding for a contract. An
important area that the firm should gather information on, as input
to the bid is competitors' cost structures. This information usually
is not readily available, but can be estimated. The company can begin
by analyzing its own costs. Then it can compare the factors that
produce costs, such as size of the work force, wage scale, quality
and quantity of fixed assets, suppliers, and other factors to
estimate the costs of rivals. These may not be exact but do reveal
something about these costs.  With experience, management can forecast
what profit levels rivals want. If it is possible to estimate costs,
then, price forecasts can be developed.


ANSWER  A