Competitive Dynamics and Pricing

Price Competition

With competition pricing, a firm will base what they charge on what other firms are charging.

Learning Objectives

Discuss price as a competitive strategy in marketing

Key Takeaways

Key Points

  • Price is a very important decision criteria that customers use to compare alternatives. It also contributes to the company’s position.
  • The pricing process normally begins with a decision about the company’s pricing approach to the market.
  • In general, a business can price itself to match its competition, price higher, or price lower.

Key Terms

  • off-price retailer: firms that purchase goods below wholesale cost and sell below normal retail price
  • price war: Price war is a term used in the economic sector to indicate a state of intense competitive rivalry accompanied by a multi-lateral series of price reductions. One competitor will lower its price, then others will lower their prices to match. If one of them reduces their price again, a new round of reductions starts.
  • strategy: a plan of action intended to accomplish a specific goal
  • competitor: A person or organization against whom one is competing.

Price Competition

Once a business decides to use price as a primary competitive strategy, there are many well-established tools and techniques that can be employed. The pricing process normally begins with a decision about the company’s pricing approach to the market.

Approaches to the Market

Price is a very important decision criteria that customers use to compare alternatives. It also contributes to the company’s position. In general, a business can price itself to match its competition, price higher, or price lower. Each has its pros and cons.

Pricing to Meet Competition

Many organizations attempt to establish prices that, on average, are the same as those set by their more important competitors. Automobiles of the same size that feature equivalent equipment tend to have similar prices. This strategy means that the organization uses price as an indicator or baseline. Quality in production, better service, creativity in advertising, or some other element of the marketing mix are used to attract customers who are interested in products in a particular price category.

The keys to implementing a strategy of meeting competitive prices are an accurate definition of competition and a knowledge of competitor’s prices. A maker of hand-crafted leather shoes is not in competition with mass producers. If this artisan attempts to compete with mass producers on price, higher production costs will make the business unprofitable. A more realistic definition of competition for this purpose would be other makers of hand-crafted leather shoes. After defining this competition, knowing their prices would allow the artisan to put this pricing strategy into effect. Banks shop with competitive banks every day to check their prices.

Pricing Above Competitors

Pricing above competitors can be rewarding to organizations, provided that the objectives of the policy are clearly understood. The marketing mix must also be used to develop a strategy that enables management to implement the policy successfully.

Pricing above competition generally requires a clear advantage on some nonprice element of the marketing mix. In some cases, it is possible due to a high price-quality association on the part of potential buyers. Such an assumption is increasingly dangerous in today’s information-rich environment. Consumer Reports and other similar publications make objective product comparisons much simpler for the consumer. There are also hundreds of dot.com companies that provide objective price comparisons. The key is to prove to customers that your product justifies a premium price.

Pricing Below Competitors

While some firms are positioned to price above competition, others wish to carve out a market niche by pricing below competitors. The goal of such a policy is to realize a large sales volume through a lower price. By controlling costs and reducing services, these firms are able to earn an acceptable profit, even though profit per unit is usually less.

Such a strategy can be effective if a significant segment of the market is price-sensitive and or the organization’s cost structure is lower than competitors. Costs can be reduced by increased efficiency, economies of scale, or by reducing or eliminating such things as credit, delivery, and advertising. For example, if a firm could replace its sales force in the field with telemarketing or online access, this function might be performed at a lower cost. Such reductions often involve some loss in effectiveness, so the tradeoff must be considered carefully.

Historically, one of the worst outcomes that can result from pricing lower than a competitor is a price war. Price wars usually occur when a business believes that price-cutting produces increased market share, but does not have a true cost advantage. Price wars are often caused by companies misreading or misunderstanding competitors. Typically, price wars are overreactions to threats that either are not there at all or are not as big as they seem.

Another possible drawback when pricing below competition is the company’s inability to raise price or image. A retailer such as Kmart, known as a discount chain, found it impossible to reposition itself as a provider of designer women’s clothes. In keeping with this idea, can you imagine Swatch selling a 3,000 dollar watch?

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Kmart: Kmart had a hard time selling upscale items because it’s known as a discount chain.

How can companies cope with the pressure created by reduced prices? Some are redesigning products for ease and speed of manufacturing or reducing costly features that their customers do not value. Other companies are reducing rebates and discounts in favor of stable, everyday low prices (ELP). In all cases, these companies are seeking shelter from pricing pressures that come from the discount mania that has been common in the US for the last two decades.

Nonprice Competition

Non-price competition involves firms distinguishing their products from competing products on the basis of attributes other than price.

Learning Objectives

Differentiate price competition from non-price competition tactics

Key Takeaways

Key Points

  • Non- price competition can be contrasted with price competition, which is where a company tries to distinguish its product or service from competing products on the basis of a low price.
  • Firms will engage in non-price competition, in spite of the additional costs involved, because it is usually more profitable than selling for a lower price and avoids the risk of a price war.
  • Although any company can use a non-price competition strategy, it is most common among oligopolies and monopolistic competition, because these firms can be extremely competitive.

Key Terms

  • generic: Not having a brand name.
  • oligopolies: An oligopoly is a market form in which a market or industry is dominated by a small number of sellers (oligopolists). Because there are few sellers, each oligopolist is likely to be aware of the actions of the others.

Introduction

Since price competition can only go so far, firms often engage in non-price competition. Non-price competition is a marketing strategy “in which one firm tries to distinguish its product or service from competing products on the basis of attributes like design and workmanship. ”

The firm can also distinguish its product offering through quality of service, extensive distribution, customer focus, or any other sustainable competitive advantage other than price.

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Non-price Competition: Amazon.com makes shopping and researching products, prices, and seller reliability quick and easy for its customers. Its prices are low, but not necessarily the lowest.

The idea is to try to convince consumers that they should buy these products, not just because they are cheaper, but because they are in some way better than those made by competitors.

It can be contrasted with price competition, which is where a company tries to distinguish its product or service from competing products on the basis of a low price.

The Benefits of Non-price Compeition

Non-price competition typically involves promotional expenditures (such as advertising, selling staff, the locations convenience, sales promotions, coupons, special orders, or free gifts), marketing research, new product development, and brand management costs.

Firms will engage in non-price competition, in spite of the additional costs involved, because it is usually more profitable than selling for a lower price and avoids the risk of a price war. For example, brand-name goods often sell more units than do their generic counterparts, despite usually being more expensive. Non-price competition may also promote innovation as firms try to distinguish their product.

Although any company can use a non-price competition strategy, it is most common among oligopolies and monopolistic competition, because these firms can be extremely competitive.