Companies often face situations where they may need to cut or raise prices. Inîtiating Price Cuts
Several circumslEtnces might lead a firm m cut prices. One is excess plant capacity: The firm needs additional business and cannot generate it through increased sales cflott, product improvement, or other measures. H may resort to aggressive pricing, but in initiating a price cut, the company may iriggera price war.
Companies sometimes initiate price cuts in a drive to dominate ¡he market ffirough lotver costs. Either the company si arts with I cuver costs than iis competitors or ii initiates price cuts in the hope of gaining market share and lower costs. \ price-cutting strategy involves possible traps:
■ boot-quality ttiap. Consumers will assume lhat tile quality is lot1'.
sa Fragile-market-share trap, A low price bLiys market share but not market loyally. The same customers will shift to any lower-priced firm that comes along, a Shrtlloiv*packets trap. The higher-priced competitors may cut their prices and may have longer staying power because of deeper cash reserves.
A successful price increase can raise profits considerably. I:cir example, if the company's profit margin is 3 pcrcenL of stiles, a I percent price increase will increase profits by 33 per-cem if sales volume is unaffected, This situation is illustrated in Table 14.5. The assumption is that a company charged S10 and sold 1 GO units and had cosis of S970, leaving a profit of >30, or3peretint nnsriEes. lïy raising its price liy It) cLints it percent price increase), it boosted its profits by 33 percent, assuming the same sales volume.
A major circumstance provoking price increases is cost inflation, il i sing costs unmatched by productivity gains squeeze profit margins and lead companies to regular run Ltd s of price increases. Companies often raise their prices by more than the cost smart pricing takes off
Stefas Haji-kHJinou has. made a lortuiie wilh easyJel. the eigfit-year-old aifre tiiat offers dynamics^ priced diswit fares, in a nuisiieii, passengers pay less lor a seal Ihe «¿uli^r t'iuy Dvy. Slehos, as ns's wiiver-sally known, has applied ine sartieyieid management lormuia witri vaty-ing (fegnecs of success to car rentals, tfedft cards, and even flnfeniet cafés. Mow he's taking Ihe concept 10 the mnuieis. In 20Ú3 he faiiiched easyCinenra, a 2,000-seat, lQ-screen cooiplcn outside Lortoon. It is founded on the premise (hai 90 percent o( cinema seals nevei see a bottom. Ai easyCmema tickets stai at about 30 cents and rise wiiti demand, rewarding patrcrts who book in advance or er¡joy oil peak screenings. But the same system thai netted a fortune lor easyJet is iaeing I)vt0e£ Bi item's big movie SstttXJlors tlnn'i like [jetting a hir.ji sum from Stelios rather than creaming off a high percentage of box office revenue in Ihe list weeks of a lilm's run (the least revenue'pro' ÚuCing for Stelios). Still. Stehos isn't giving up.and under Ihe umbrella of easyGroup, Hie enlrepteneur atso plans tú launch a cruise ship (easyCruise). a hotel chain (easyDorm). and even fast feed ieasyPina)!
Stelio$'$ easyGroup leads the field in what has teen alWfitety called revenue management or yiefd management—pricing a perish-afc'e resource in accordance wl(i demand Iron muHiple customer seg-medj io maxima revenue or prolit, Rices are adjysied dynamically as a function of Inventory level and lime tell m the selling season, vet. "dynamic pricing" (or "srnarl pricing" or 'sciemilic pricing") is not only 'he province d those witn perishable invenlcxy, such as (he girt'ne and hospitality industries. With the atlvent of Hentet technology, there has been an explosion oF information about customers and their preferences Combine Ibis capacity with businesses' pressing needs and you can see why tve are entering a new era of pricing. In a sluggish economy, companies haven't been abte (o raise prices tor years, tike easyGraup. they are taking a page from the amines, which have been using revenue managemenl techniques lor 25 years file new dynamic pricing systems, produced by SAP and slart-ups like Demandfecand ProftLoglc inc.. sill through massive databases available on a corporate intranet. These databases include up-to-date in'ormaSioo abou! orders, promotions, product revenue, and slock levels in warehouses. Early adopters using Web-based pricing tools include Saks. Best Buy. Ford Motet Co.. The Home DepcW. JC Penney. Safeway and General Electric. Here are two success stories:
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