TOPIC 5

PRICE CHANGE ADJUSTMENT

5.1 Price Change
■ Companies are bound to face market situations where
they are required to initiate price changes.
■ Initiating price changes involves two possibilities; price
cuts and price increases
■ Companies cut the prices or increase the present prices is
intended to survive, maintain status or further growth.
■ Price changes should be done right to lead to success.
■ Price changes without considering possible buyer and
competitor reactions can be a regretful mistake.
Initiating price cuts may appear easier
than imitating price changes.

In fact, customer response to price cuts

is normally better than to price
increases.

On the other hand, price cuts reduce the

profit margin for the company.
Several situations may lead a firm to consider cutting
its price
■ Excess capacity
■ Falling sales or market share – demand issues
■ Lower production/service costs
■ Dominate the market through lower cost
■ Respond to competitor’s price drop
■ Consumers have less purchasing power
A successful price increase can raise profits
considerably
Factors that influences price increases
■ Cost inflation - Rising costs squeeze profit
margins and lead companies to pass cost
increases along to customers.
■ Over-demand - When a company cannot
supply all the customers’ need, it may raise
its prices
■ Match competitor’s increase
■ Market leadership
5.3 Reaction Of Consumers & Competitors Price Changes
1. Buyer/customer Reactions to Price Changes
■ Consumers are more interested in knowing the cause or causes of price change.
■ A price cut can be interpreted in several ways:
1. The item or product is about to be replaced by a new model.
2. The item is faulty and it is not selling well.
3. The firm’s financial position is badly affected.
4. The price will come down further.
5. The quality has been reduced.

■ A price raised may have some positive meanings:

1. They might think that the item is very "hot" and may be unobtainable unless you buy it soon
2. It has a high value because of quality.
Responding to Price Changes
■ Customer response to price changes may be different and not always
straight forward.
■ All depends on how price sensitive (or insensitive) the customers are
for specific products/ services.
■ It also depends on their understanding of the relationship between the
price of the product & the amount of their expenses
■ Buyers are very sensitive to expensive items & often purchase items.
■ Buyers are generally less interested in the selling price of goods than
the total cost to get the products, handle & maintain it.
2. Competitor Reactions to Price Changes

■ Competitors are most likely to react when the number of firms is few,
the product is homogeneous, and buyers are highly informed.
■ Competitor reactions can be a special problem when they have a strong
value proposition. The price hike them to take steps based on objectives
of such price hike where they will resort to advertising and product
improving efforts.
■ In case of price cuts, they have different interpretations:
1. That the company’s trying to steal the market
2. That the company is doing poorly and trying to boost its sales
3. That company wants the whole industry to reduce prices to stimulate
total demand.
Responding to Price Changes
If the company decides that effective action can and should be taken, it might
make any of four responses.
■ First
– Company could reduce its price to match the competitor’s price.
■ Second
– Company might maintain its price but raise the perceived value of its offer.
■ Third
– Company might improve quality and increase price, moving its brand into a
higher price-value position.
■ Fourth
– Company might launch a low-price “fighter brand” ─ adding a lower-
price item to the line or creating a separate lower-price brand.
Price Adjustment Strategies

■ Companies must adjust their basic prices to account for differences in customers and
situations.
■ There are seven price adjustment strategies:
i. Discount and allowance pricing
ii. Segmented pricing
iii. Psychological pricing
iv. Promotional pricing
v. Geographical pricing
vi. Dynamic pricing, and
vii. International pricing
Discount and Allowance Pricing
■ is applied in a large share of businesses.
■ Most companies adjust their basic price to reward customers for certain responses, such as
the early payment of bills, volume purchases and off-season buying.
■ Discount pricing can take many forms:
– Discounts can be granted as a cash discount - a price reduction to buyers who pay
their bills promptly
– Quantity discount - price reduction to buyers who buy large volumes.
– Seasonal discount - price reduction to buyers who buy merchandise or services out of
season.
■ Allowances refer to another type of reduction from the list price
Segmented Pricing

■ companies adjust their basic prices to allow for differences in customers, products and
locations.
■ In segmented pricing, the company sells a product or service at different prices in
different segments
■ For instance, museums and theatres may charge a lower admission for students and
senior citizens.
Segmented Pricing
Segmented Pricing
Segmented Pricing
MH basic Non endorsable  non transferable and non refundable
 Seats are limited and are subject to
availability of the relevant booking
class
 If you are unable to fly on the date,
the whole ticket is gone

MH Smart  Can choose the seats with fees

 Can change the date with fees
MH Flex  Choose the seats for free
 Can change the date for free
Psychological Pricing

■ It refers to pricing that considers the psychology of prices

■ Indeed, the price says something about the product or use price to judge quality
■ For eg: A bottle of RM100 perfume may have a smell similar to the perfume of RM30,
but people will be willing to pay RM100 because of the high price indicates that the
product is something special.
Promotional Pricing
■ Promotion pricing calls for temporarily pricing products below the list price, and
sometimes even below cost, to increase short-run sales
■ The companies try to create buying excitement and urgency
■ Promotional pricing could take the form of
– discounts from normal prices to increase sales and reduce inventories,
– special event pricing in certain seasons to draw more customers
– low-interest financing
– longer warranties, or
– free maintenance
Geographical Pricing
■ In geographical pricing, the company sets prices for customers located in different parts of
the country or world
■ There are five geographical pricing strategies:

– FOB-origin pricing: goods are placed free on board a carrier, the customer thus pays
the freight from the factory to the destination. Price differences are the consequence.
– Uniform-delivered pricing: the company charges the same price plus freight to all
customers, regardless of their location. Thus, there are no geographical price
differences.
– Zone pricing: the company sets up two or more zones. All customer within a zone pay
the same total price, the more distant the zone, the higher the price.
– Base-point pricing: the seller designates some city as a base point and charges all
customers the freight cost from that city to the customer. This can level the
geographical price differences if a central base-point is selected.
– Freight-absorption pricing: the seller absorbs all or part of the freight charges to get
the desired business. Price differences are thus eliminated.
Dynamic Pricing
■ Dynamic pricing refers to adjusting prices continually to meet the characteristics and
needs of individual customers and situations.
■ Dynamic pricing - prices were normally set by negotiation between buyers and sellers.
Thus, prices were adjusted to the specific customer or situation.
■ Instead of using fixed prices, prices are adjusted on a day-by-day or even hour-by-hour
basis, taking many variables into account, such as current demand, inventories and
costs.
■ In addition, consumers can negotiate prices at online sites.
International Pricing
■ Companies decide what prices to charge in the different countries in which they operate.
■ The price charge in a country depend on many factors,
– economic conditions,
– competitive situations,
– laws and regulations, and
– the development of the wholesaling and retailing system.
■ Costs play an important role in setting international prices.
– Higher costs of selling in another country, which is the additional costs of
operations, product modifications, shipping and insurance, import tariffs and
taxes, and exchange-rate fluctuations may create a need to charge different
markets in the various markets.
 Price Adjustment Strategy
Discount and allowance pricing
Segmented pricing
Psychological pricing
Promotional pricing
Geographical pricing
Dynamic pricing
International pricing
Description
Reducing prices to reward customer responses
such as paying early or promoting the product
Adjusting prices to allow for differences in
customers, products or locations
Adjusting prices for psychological effect
Temporarily reducing prices to increase short-
run sales
Adjusting prices to account for the geographic
location of customers
Adjusting prices continually to meet the
characteristics and needs of individual
customers and situations
Adjusting prices for international markets
5.6 External Factor influencing price change adjustment

Government
control

The Market Economic

and Demand conditions

External
Factor

Technology Suppliers
1. Government control
■ Government rules and regulation must be considered while fixing the
prices.
■ In certain products, government may announce administered prices, and
therefore the marketer has to consider such regulation while fixing the
prices.
■ Price-control by the government through enactment of legislation, also
affect in prices of certain products.
■ The prices cannot be fixed higher, as government keeps a close watch on
pricing in the private sector.
2. Economic conditions
■ The marketer may also have to consider the economic condition
prevailing in the market while fixing the prices.
■ At the time of recession, the consumer may have less money to spend, so
the marketer may reduce the prices in order to influence the buying
decision of the consumers.
■ The inflationary or deflationary tendency affects pricing.
■ In recession period, the prices are reduced to a sizeable extent to maintain
the level of turnover.
■ On the other hand, the prices are increased in boom period to cover the
increasing cost of production and distribution to meet the changes in
demand, price etc.
3. Suppliers
■ Suppliers of raw materials and other goods can have a significant effect
on the price of a product.
■ In other words, the price of a finished product is intimately linked up
with the price of the raw materials.
■ If the price goes up, the increase is passed on by suppliers to
manufacturers and manufacturers will pass it on to consumers.
■ Scarcity or abundance of the raw materials also determines pricing.
4. The Market and Demand

■ Lower limits of price are determined by the costs incurred but the
upper limits are determined by the demand and market elements.

■ Price is balanced by the benefits of owning the relative product or

service by consumer and industrial customers.

■ For this purpose the price and demand relationship for a product is
essential to be understood before setting its price.
5. Technology

■ Technology plays a critical role in everything from manufacturing to the sale of

the final product
■ The Internet can provide information about a product 24 hours a day seven days
a week - Both customers and competitors can use this information to evaluate
your pricing strategy.
■ Firm can also use information available on the Internet about competitors’
products to properly price the new product.
■ Firm can also use advanced technologies such as computerized pricing models to
help business gauge the demand of a product and set the optimum sale price.