How to be aware for competitive interaction when pricing products
When an organization is deciding on how to appropriately price their offerings there should be some emphasis placed on competitive interaction. This means giving attention to how your competitors might react to your pricing. Competitive interaction occurs when one organization sets a price that undercuts one of its competitors in order increase sales, unit volume, and profit (Kerin and Peterson 432). However, when a manager decides to undercut a competitor they must plan for a reaction from that competitor. Without proper planning and preparation, the once advantageous decision to lower prices can cause a price war between competing firms. When a competing firm chooses to match your lower price the potential increase in unit volume, sales, and profits are nulled and the result is that both firms see a loss in lowering their prices.
Marketing manager often overlooks competitive interaction when pricing offerings. Two things that may help marketing managers plan competitor moves, their own subsequent moves, and outcomes (Kerin and Peterson 432) are as follows: First, managers should focus on the long-term outcomes of their present decision. In order for managers to do this, they should learn to “look forward and reason backward” (Kerin and Peterson 432) using deductive reasoning. Second, should ask themselves some questions and answer them as if they were a manager at a rival company. The following questions are provided by “Strategic Marketing Problems” and the answers to these questions can make a significant difference in the long run.
1. What are the competitors’ goals and objectives? How are they different from our own goals and objectives?
2. What assumptions has the competitor made about itself, our company and offerings, and the marketplace? Are these assumptions different from ours?
3. What strengths does the competitor believe it has and what are its weaknesses? What might the competitor believe our strengths and weaknesses to be?
Bypassing these questions can lead a manager to make a choice without the necessary decision making information. That being a said a manager will cut prices and possibly cause a price war. A great example of a price war that has been going for years involves cell phone services. Sprint, AT&T, T-Mobile, and Verizon have been running marketing campaigns which indirectly target each other. In addition to their expensive marketing campaigns, they continue to issue price cuts as an incentive for users to use their services. To analyze their situation we will use industry characteristics and the risk of price wars provided by “Strategic Marketing Managers”.
After analyzing the risk chart we can see that a number of these apply to the cell phone service price war. The four large players previously mentioned are undifferentiated, the price visibility to competitors is extremely high, and buyer sensitivity is high. The four main cell phone service providers can make claims regarding the best service in the most areas; however, most buyers cannot personally make this observation. Therefore, the firms should be considered undifferentiated in terms of usability of their offering. Second, the visibility of each firm’s prices are extremely visible as you can view each service provider’s costs and plans simply by visiting their website. Third, the population continues to grow and people will at some point in time need to choose a service provider causing the market growth rate to be relatively high. However, Buyer sensitivity is high for cell phone service providers’ customers. Considering that there are competitors out there and customers will need to choose one and the quality if undifferentiated the next step is to look at price.
Now, since all of the firms are cutting their prices each firm has been seeing decreases year over year and some greater than 8%.1 Considering the fact that all of the firms are still open they may have placed heavy emphasis on competitive reaction. I believe the price war will continue until the companies reach a bare minimum necessary to continue operation by reaching an equilibrium, or some of these firms will be forced out of the market.