Competitors’ reactions also influence pricing decisions. A competitor’s aggressive pricing may force a business to lower its prices to be competitive. On the other hand, a business without a competitor can set higher prices.
Since a perfectly competitive firm must accept the price for its output as determined by the product’s market demand and supply, it cannot choose the price it charges. In other words, the price is already determined in the profit equation, so the perfectly competitive firm can sell any number of units at exactly the same price.
Philip Morris’s price cut on Marlboro cigarettes was matched by R.J. Reynolds. But competitors’ reactions may not be limited to price moves; one company’s price cut may provoke a response in advertising or in another element of the marketing mix.
Needles, Anderson and Caldwell have suggested external factors and internal factors to be considered for setting a price by a business firm. i. Total demand for product or service and its elasticity
They include discounts for early payment, rebates based on annual volume, rebates based on prices charged to others, and negotiated discounts. As M.V. Marn and R.L. Rosiello discuss in their article “Managing Price, Gaining Profits,” (HBR, September–October 1992), while a product has one list price, it may have a wide array of final prices. The real net revenue earned by a product can also be heavily influenced by factors such as returns, damage claims, and special considerations given to certain customers. Yet although it is this “real” price (invoice plus any other factors) that ends up paying the bills, most companies spend 90 % of their pricing efforts setting list figures. Treating the real price so casually can cost a company substantial forgone profits, especially in an intensely competitive marketplace.
Surveys show that for most companies, the dominant factor in pricing is product cost. Determine the cost, apply the desired markup, and that’s the price. The process begins inside the company and flows out to the marketplace.
An eight-step process can help you make better decisions. Pricing is managers’ biggest marketing headache. It’s where they feel the most pressure to perform and the least certain that they are doing a good job.
Fitting a pricing policy to a marketing strategy and considering the relevant information in a coordinated manner are broad goals. The following eight steps deal with the essentials of setting the right price and then monitoring that decision so that the benefits are sustainable.
Pricing is managers’ biggest marketing headache. It’s where they feel the most pressure to perform and the least certain that they are doing a good job. The pressure is intensified because, for the most part, managers believe that they don’t have control over price: It is dictated by the market. Moreover, pricing is often seen as ...
Marketing Strategy. A company’s pricing policy sends a message to the market—it gives customers an important sense of a company’s philosophy. Consider Saturn Corporation (a wholly owned subsidiary of General Motors). The company wants to let consumers know that it is friendly and easy to do business with.
Price elasticity, a key concept in economics, is defined as the percent change in quantity sold given a 1 % change in price. If a company raises its price on a given product or service by 1 %, how will the quantity of sales be affected? On average, the answer is that the quantity will drop by about 2 %, but an “on average” answer is not very useful for managers trying to set price. Elasticities vary widely across product categories and even across brands within a category. Therefore, companies should analyze each individual situation. The most sophisticated pricing managers use market research procedures such as conjoint analysis to measure elasticities, but a good first step is simply to examine the important factors influencing price sensitivity in three broad areas: customer economics, customer search and usage, and the competitive situation.
As a perfectly competitive firm produces a greater quantity of output, its total revenue steadily increases at a constant rate determined by the given market price.
A perfectly competitive firm has only one major decision to make—what quantity to produce. To understand why this is so, let's consider a different way of writing out the basic definition of profit:
A perfectly competitive firm can sell as large a quantity as it wishes, as long as it accepts the prevailing market price. If a firm increases the number of units sold at a given price, then total revenue will increase. If the price of the product increases for every unit sold, then total revenue also increases.
As a perfectly competitive firm produces a greater quantity of output, its total revenue steadily increases at a constant rate determined by the given market price.
Using the data in the table below, determine what would happen to this firm’s profits if the market price of their product increased to $6.
Your company operates in a perfectly competitive market. You have been told that advertising can help you increase your sales in the short run. Would you create an aggressive advertising campaign for your product?