Page 432 - Marketing Management

DEVELOPING PRICING STRATEGIES AND PROGRAMS | CHAPTER 14 409

Although there is always a chance a price increase can carry some positive meanings to
customers—for example, that the item is “hot”and represents an unusually good value—consumers
generally dislike higher prices. In passing price increases on to customers, the company must avoid
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looking like a price gouger. Coca-Cola’s proposed smart vending machines that would raise prices
as temperatures rose and Amazon.com’s dynamic pricing experiment that varied prices by purchase
occasion both became front-page news. The more similar the products or offerings from a company,
the more likely consumers are to interpret any pricing differences as unfair. Product customization
and differentiation and communications that clarify differences are thus critical. 85
Generally, consumers prefer small price increases on a regular basis to sudden, sharp increases.
Their memories are long, and they can turn against companies they perceive as price gougers. Price
hikes without corresponding investments in the value of the brand increase vulnerability to lower-
priced competition. Consumers may be willing to “trade down” because they can no longer con-
vince themselves the higher-priced brand is worth it.
Several techniques help consumers avoid sticker shock and a hostile reaction when prices
rise: One is maintaining a sense of fairness around any price increase, such as by giving
customers advance notice so they can do forward buying or shop around. Sharp price increases
need to be explained in understandable terms. Making low-visibility price moves first is also a
good technique: Eliminating discounts, increasing minimum order sizes, and curtailing
production of low-margin products are examples, and contracts or bids for long-term projects
should contain escalator clauses based on such factors as increases in recognized national price
indexes. 86
Given strong consumer resistance, marketers go to great lengths to find alternate ap-
proaches that avoid increasing prices when they otherwise would have done so. Here are a few
popular ones.
• Shrinking the amount of product instead of raising the price. (Hershey Foods maintained its
candy bar price but trimmed its size. Nestlé maintained its size but raised the price.)
• Substituting less-expensive materials or ingredients. (Many candy bar companies substituted
synthetic chocolate for real chocolate to fight cocoa price increases.)
• Reducing or removing product features. (Sears engineered down a number of its appliances so
they could be priced competitively with those sold in discount stores.)
• Removing or reducing product services, such as installation or free delivery.
• Using less-expensive packaging material or larger package sizes.
• Reducing the number of sizes and models offered.
• Creating new economy brands. (Jewel food stores introduced 170 generic items selling at
10 percent to 30 percent less than national brands.)

Responding to Competitors’ Price Changes
How should a firm respond to a competitor’s price cut? In general, the best response varies
with the situation. The company must consider the product’s stage in the life cycle, its impor-
tance in the company’s portfolio, the competitor’s intentions and resources, the market’s price
and quality sensitivity, the behavior of costs with volume, and the company’s alternative
opportunities.
In markets characterized by high product homogeneity, the firm can search for ways to en-
hance its augmented product. If it cannot find any, it may need to meet the price reduction. If the
competitor raises its price in a homogeneous product market, other firms might not match it if
the increase will not benefit the industry as a whole. Then the leader will need to roll back the
increase.
In nonhomogeneous product markets, a firm has more latitude. It needs to consider the fol-
lowing issues: (1) Why did the competitor change the price? To steal the market, to utilize excess
capacity, to meet changing cost conditions, or to lead an industry-wide price change? (2) Does
the competitor plan to make the price change temporary or permanent? (3) What will happen
to the company’s market share and profits if it does not respond? Are other companies going to
respond? (4) What are the competitors’ and other firms’ responses likely to be to each possible
reaction?
Market leaders often face aggressive price cutting by smaller firms trying to build market share.
Using price, Fuji has attacked Kodak, Schick has attacked Gillette, and AMD has attacked Intel.