Price Behaviour and Its Strategic Relevance

Price Behaviour and Its Strategic Relevance

By guest blogger: Christoph Meili at Input Consulting AG

In a price strategic context, price behaviour includes two key questions: How are prices adjusted along the product life-cycle and how should prices be managed in relation to changes in competitors’ prices?. Strategic guidelines on price behaviour can help companies to act with foresight. The following cases illustrate the importance of answering these two questions on strategic level.

Pricing along the product life-cycle:
The evolutionary logic in many industries, e.g. consumer electronics, is that customer’s willingness to pay is decreasing along the product life-cycle. Apple takes this into account when adjusting the prices of its iPhone. The US-market entry price for a new model is always between 600 and 700 dollars. After the go to market of a new version, Apple increases the prices by up to 10%. After the first hype a first small price reduction is conducted. As soon as the next generation is available, Apple reduces the price for the last version by more than 20%. The price reduction is executed step by step. By systematically reducing the price, Apple is able to reach different target customers with different willingness to pay. The graph (above) shows the price development of each iPhone generation (Asymco, 2014).

Price behaviour against competitors:

Due to increasing competition and price sensitivity, many companies seek their luck in reducing their prices, which usually leads to immediate responses from competitors, making price erosion even more severe. In Switzerland this development could be observed in the retail industry. Since Aldi and Lidl announced that they are going to enter the Swiss market, the traditional retailers like Migros and Coop immediately began to reduce their prices and started a price war against each other without even knowing the actual price level of the discounters. , By this overreaction, they both destroyed millions of franks in margin without sustainable impact on customer behavior. Instead of running a low-price strategy, Aldi and Lidl have listed many high quality products which are sold for a medium price. With a clear and binding strategy against competitors price changes, this price war might have been prevented.

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