When should a company initiate price change

3. • Circumstances leading to price cuts:
– Excess plant capacity
– Declining market share
– Attempt to dominate the market via lower
costs
• Price cutting traps:
– Price/quality perceptions
– Low prices don’t create market loyalty
– Competition may match or beat price cuts

4. Strategic OptionsStrategic Options ReasoningReasoning ConsequencesConsequences
1. Maintain price and1. Maintain price and
perceived quality.perceived quality.
Engage in selectiveEngage in selective
customer pruning.customer pruning.
Firm has higher customerFirm has higher customer
loyalty. It is willing to loseloyalty. It is willing to lose
poorer customers topoorer customers to
competitors.competitors.
Smaller market share.Smaller market share.
Lowered profitability.Lowered profitability.
2. Raise price and2. Raise price and
perceived quality.perceived quality.
3. Maintain price and raise3. Maintain price and raise
perceived quality.perceived quality.
Raise price to cover risingRaise price to cover rising
costs. Improve quality tocosts. Improve quality to
justify higher prices.justify higher prices.
It is cheaper to maintainIt is cheaper to maintain
price and raise perceivedprice and raise perceived
quality.quality.
Smaller market share.Smaller market share.
Maintained profitability.Maintained profitability.
Smaller market share.Smaller market share.
Short-term decline inShort-term decline in
profitability. Long-termprofitability. Long-term
increase in profitability.increase in profitability.

5. • Circumstances leading to price increases:
– Cost inflation
– Over demand
• Methods of dealing with over demand:
– Delayed quotation pricing
– Escalator clauses
– Unbundling
– Reduction of discounts

6. 16-6
Table 16.4: Profits Before and After a Price Increase
BeforeBefore AfterAfter
PricePrice $ 10$ 10 $10.10$10.10 (a 1 percent price increase)(a 1 percent price increase)
Units soldUnits sold 100100 100100
RevenueRevenue $1000$1000 $1010$1010
CostsCosts -970-970 -970-970
ProfitProfit $ 30$ 30 $ 40$ 40 (a 33 1/3 percent profit(a 33 1/3 percent profit
increase)increase)
Initiating and Responding to Price Changes

7. Thank You.Thank You.