Strategy of price breakthrough, Neutral pricing strategy - Pricing

The strategy of a price breakthrough

The strategy of price breakthrough presupposes the establishment of prices substantially below the level that is perceived by most buyers as the corresponding economic value of the goods. At the same time, the price set in the framework of such a strategy does not need to be low in absolute value. It is low only in relation to the economic value of the goods. Accordingly, this strategy ensures the expansion of the range of potential buyers due to the loss of the opportunity to sell goods with a large amount of specific profit.

The implementation of the price breakout strategy is most effective for the firm under certain conditions that are on the side of customers, costs and competitors.

The first condition for the successful implementation of the strategy of a price breakthrough is the availability of a large number of buyers who are ready to switch immediately to the purchase of goods from the new seller, as soon as he offers a lower chain. But this does not always happen, the reaction to the price difference is not automatic at all. That is why firms that have chosen such a strategy fail and financial difficulties. This is especially dangerous for firms that produce goods of prestigious demand and are oriented toward the most affluent buyers. For them, it is essential that the possession of goods of this brand is available only to people with a certain level of income. And if a firm under the same brand is trying to sell cheap goods to seize a wider market segment with less affluent buyers, it risks losing its former customers. Low prices seem to discredit the image of the prestige of this product, and it ceases to be attractive to them.

The strategy of price breakthrough is ineffective also for cheap goods of daily demand - even a large relative reduction in price here will be expressed in an absolutely small amount, which buyers may not pay attention to. It also yields a small return for products whose properties are difficult or impossible to compare in advance, before consumption.

The strategy of price breakthrough has better chances for success in relation to those goods, in the price of which the incremental costs make up a small fraction, and the specific gain is substantially greater. This means that even a small increase in the number of goods sold will lead to a noticeable increase in the total mass of profits.

The strategy of a price breakthrough can be successful only if competitors for some reason can not (or do not want to) respond with a similar price drop. This can be due to one of the following situations:

1) the initiator of price reduction has such a great advantage in the possibility of reducing costs or the amount of available financial resources, that competitors do not risk entering a price war for fear of losing their own, and are looking for other ways to save sales;

2) the firm only enters the market and is still so small that its possible success on the basis of price reduction will still affect so small a segment of the market that it does not make sense for large firms to even react to it;

3) Demand is highly elastic, and at the same time, buyers do not show a special commitment to these or other brands of goods, which means that a policy of reduced prices can lead to a general expansion of the market boundaries, so that competitors will not lose, even if they are forced go after the price reduction.

A special case of acceptability and even the preference of a price breakout strategy is a market where there is still no significant competition, but it may soon become more acute. If in this situation, the old company will go to reduce prices and achieve a sharp increase in sales, it will make it possible to achieve a significant reduction in the price of goods due to a reduction in the value of unitary fixed costs. Thus, a barrier for the protection of the market will be erected in front of competitors.

In order to overcome this barrier, new competitors will have to start immediately with the organization of production on the same scale as those achieved by the old-timers of the market, which will require large investments from beginners (unless they initially have a different, more efficient production technology). In addition, the sudden fall of the chain will confuse all calculations of potential competitors in terms of profitability, and this can deprive them of interest in this market.

Neutral Pricing Strategy

The essence of the neutral pricing strategy is not only the refusal to use prices to increase the seized market sector, but also to prevent the price in any way contributing to the reduction of this sector.

In practice, firms choose a neutral pricing strategy more often than not, "by default", because they do not see opportunities to implement a premium pricing strategy or a price breakthrough.

The strategy of neutral pricing often becomes a compelled strategy for firms operating in the market, where buyers are very sensitive to the price level (which does not favor premium pricing), and competitors are rigidly responding to any attempt to change the prevailing sales ratios (which makes the price breakthrough strategy dangerous ).

Carrying out a strategy of neutral pricing is sometimes associated with the firm's desire to maintain a certain price range, thus ensuring the preferred positioning of one or another of its products.

Following the strategy of neutral pricing does not mean that the company should simply copy the prices of its competitors or adhere to the average level of prices prevailing in the market.

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