Price reduction strategy and market effects

Pricing Strategy

Price Reduction Strategy

What are the implications for revenue and profits of implementing the price cut?

The implications for revenue and profits are dependent on the demands and supply of the product. If there is not enough demand for the product, a reduction in the price of the product by 10% is unlikely to boost the demand of the product. On the other hand, if there is sufficient demand of the product, a 10% reduction in the price of the product will have direct effect on the revenue and profits of the company. The reasoning behind is that the price elasticity of the product is 2.5%, higher than 1. Therefore, a reduction of 10% in the price will have about 2.5 times effect in the demand of the product. As far as meeting the target by the marketing managers, the managers would find it easier to meet its revenue, as price reduction is going to increase the sales of the product (McConnell, 2001).

Change in profit without Competitors' Response

Change in the profit can be calculated from the following formula:

Price elasticity of demand = % change in the demand

Change in the price

So from the given question we can find:

2.5 = % Change in quantity demanded

So % change in demand = 25%

Change in the profit will be = 125*90-100*100 = (1125-1000)/100 = 125/100

1.25 times the profit.

Competitors' Reaction to Price Strategy

Market demands often set a ceiling and costs as for pricing. Competitor set prices based on the market demands. However, the competitors can also set price through price comparison. If the demand of the product is high, the competitors are unlikely to reduce their prices. However, when the market is mature and demand for the product is declining in the foreseeable future, the competitors might also decrease their prices for ensuring high level of revenues (Kotler, 1991).

Change in Profit with Competitors' Response

Calculating profit in response to competitors' reactions on price strategy is not so straightforward.

The profit will rather depend on the demands of the products and competitors' reactions. If competitors reduce the price of the product more than the firm, the firm is unlikely to gain the benefit. On the other hand, if the competitors do not reduce the cost in response of the firm's price strategy, the profit of the firm might go up. The profit in this situation is likely to be higher than 1.25, as a share of the market from the competitors will be pulled by the firm.