Competitive Pricing

Prices may be set in reaction to competition. As in penetration pricing, a firm may keep prices low to inhibit competition from entering. Or it may set prices close to those of lower-priced competitors to avoid losing sales. Price competition occurs most often when the competing brands are very similar, or when differences between brands are not apparent to prospective buyers.

ITT Sheraton’s simplified pricing system, modeled on the airlines’ pricing approach, has been criticized by competitors as “rate cutting”. The Sheraton pricing structure involves one room rate for business travelers, another for 14-day advance reservations, and a third for weekend rates. Sheraton also lowered its standard price. Not surprisingly, Hilton and Hyatt spokespeople warned that price competition would hurt the industry.

Price competition may result in price wars, with prices spiraling downward in succeeding rounds of price cuts. They may lead to such low prices that all competitors operate at a loss in the short run. Price wars are frequent in the airline and computer software industries. Recent price wars over software in Europe may reduce the sizable margines U.S. companies once obtained for their products, margines once justified by the costs of translation.

In nonprice competition, the firm attempts to develop buyer interest in benefits such as quality, specific product features, or service. For this to work, customers must view the distinguishing attributes as desirable. Finally, focusing on unserved target markets in which competition is minimal may allow a firm to charge higher prices. For example, Charles Schwab uses its technological communications advantages to offer low competitive prices for financial services.

Competitive strategies have been described as being arrayed on a continuum labeled the competitive strategy-positioning continuum. This continuum is anchored by “low-cost leadership” on one end and “differentiation” on the other. For example, one furniture store may emphasize low costs of overhead and operation, a “no frills” warehousing positioning. Alternatively, a competing store may emphasize a more luxurious atmosphere with extensive decorations that appeals to more sophisticated customers. This latter store is more likely to compete on attributes other than price, while the former retail outlet attempts to attract consumers largely by low prices.

Comprehension questions:

1. How can prices be set?

2. When does price competition occur?

3. What occurs in nonprice competition?

4. How have competitive strategies been described as?

Дата добавления: 2015-11-16