Competitive Pricing Strategies and Market Dynamics
Competitive Pricing Strategies
Competition-oriented pricing: The first thing to consider is the stage of the market or industry in its life cycle and the company’s position within it. This will directly affect what is called “price architecture” and may cause a loss of control in the face of competitors’ or distributors’ decisions.
In this case, a firm ensures that the prices it sets are in keeping with those charged by competitors, often referred to as the going-rate price. This kind of pricing is frequently used in homogeneous product markets where the market structure ranges from pure competition to pure oligopoly. In a purely competitive market, the firm has little choice in setting its price. In the case of pure oligopoly, it has more choice; firms can charge the same price as competitors. Given that there are only a few firms, each one knows the other’s price, and buyers are also well-informed about prices.
The Leader’s Strategy in Relation to the Product Life Cycle Stage
If the market is in the growth stage of the product life cycle, then extra sales volume is available. The leader will want to take a major share of new business and keep competitors’ actions under control, persuading other firms not to enter the market. By keeping the unit margin of profitability low, the leader can make progress towards this end. As volume sales of a market increase, the effects of the experience curve are felt, and product unit costs should decline.
The dilemma facing the market leader is whether to reduce prices and, if so, the speed with which this should be done. The answer is found in the leader’s plans for the next stage in the product life cycle—the maturity stage. If it is the market leader’s intention to lead in this phase, then it will have to maintain its leadership through the transition phase. It must ensure that its prices move downwards as the volume moves ahead and unit costs decline. If it does not, there is always a chance that competitors will take advantage of the position and increase capacity and market share.
It is usually advantageous for the leader to maintain its position since the additional volume of sales generated can mean that total margins will increase despite the lower selling prices. Other firms will not enjoy the same cost advantages as the leader, and as they are operating on tight profit margins, they are not in a position to achieve great improvements in differentiation. A potential entrant, seeing this situation, may feel deterred from entering the market.
During the market maturity or the decline phases, the horizon for the market leader can be altogether different. There will be little chance of a new competitor entering the market, and brand loyalty will have been established. In such circumstances, the leader should be able to take higher margins without taking excessive risks.
Firms with a lower level of market share should follow the leader when it comes to changes in prices. Marketers of low-share brands do not want to engage the leader in direct price competition. Direct and indirect costs of production for these competitors are higher than the leader’s, and the price to the trade is probably lower.
Price Wars
Price wars arise from time to time and involve general price cutting within a market. Sometimes, it may occur due to a promotional trend (and a rise in competition), distribution decisions and strategies, or maybe by unintentional decisions taken by the companies with other strategic objectives (e.g., if you give a gift to the consumer with samples for penetration and trial aims, and it turns into a price war).
In neither case does the end result improve any of the parties involved. Once in a while, a price war can work to the aggressor’s advantage. It is clearly an advantage in a price war to have lower unit costs than competitors. In such a position, the aggressor may fare well from the experience.
Normally, the main advantage is on the consumer’s side because it will drive a margin loss for manufacturers and distributors, generating huge workloads.
Factors Influencing the Marketing Mix
The proportion of a firm’s marketing communications budget spent on each of these activities varies somewhat across organizations and industries. For example, in industrial and business goods, more effort is put into personal selling, whereas advertising features prominently in fast-moving consumer goods.
Despite these broad generalizations, considerable variation exists within product classes. In advertising, there is also the complicating factor that there are a number of advertising vehicles that can be used to communicate about the product: television, radio, newspapers, magazines, mobile phones, posters, etc.
The most appropriate marketing mix for a product will be influenced by a number of factors:
- The available budget: The amount of money available for expenditure on promotion is obviously a critical factor. Small firms have comparatively small budgets for promotional expenditure and hence have to select the most cost-effective means of communicating with the market. TV advertising for such firms, for example, may be prohibitively expensive.
- The promotional message: The nature of the message, as influenced by the objectives set for the communication, will exert considerable influence over the choice of mix. Where a product is to be demonstrated, either face-to-face selling or a visual medium such as television or cinema advertising will be most appropriate. In addition, if we consider the hierarchy of effects communication model, then it will be recalled that at the various stages of the step-by-step process, different messages are deemed appropriate.
- The complexity of the product or service: In some cases, a large amount of service support is required, and in this case, the only appropriate communication method is personal selling. Where this kind of support is not required, as is the case in fast-moving consumer nondurables, then advertising is more appropriate.
- Market size and location: Large dispersed markets tend to favor mass communication coverage, such as advertising. Local markets or small numbers of buyers may favor direct mail, specialist press, or even personal selling.
- Distribution channels: The key to successful marketing of a product often lies in obtaining suitable distribution for the product. Distributors, therefore, can exert considerable influence over the choice of promotional medium used to communicate with the ultimate customer. Remember the distributor is legally completely free to set the retail sales price level in the market (so the ‘Price’ in the marketing mix perceived by the consumer is out of company control).
- Life cycle: In the same way that application of the hierarchy of effects models suggests that different messages may be appropriate, so too does the stage in the life cycle a product has reached. If the service or product is in the introductory stage of the life cycle, building awareness is the main aim. If it is in the growth stage, the requirement is to persuade customers to change their buying patterns and switch brand loyalty.
- Competition: Matching or beating competition is obviously a key component in determining the strategy behind the formulation of the promotional mix. Where a firm does not have the financial resources to match competitors in terms of expensive promotional campaigns, for example, it must find some other mechanism.