pricing strategies

CHAPTER 4 PRICING DECISIONS

Copyright 2011 Pearson Education, Inc. Publishing as Prentice Hall 2-*

ARMANI, GAP, H&M

The black T-shirt for women looks pretty ordinary. In fact, it's not that different from the black T-shirt sold by Gap and by Swedish discount clothing chain, H&M. Yet the black Armani T-shirt costs $275.00, whereas the Gap item costs $14.90 and the H&M one $7.90.

Customers who purchase the Armani T-shirt are paying for a T-shirt made of 70% nylon, 25% polyester, and 5% Elastine, whereas the Gap and H&M shirts are made mainly of cotton.

True, the Armani T is a bit more stylishly cut than the other two and sports a "Made in Italy" label, but how does it command a $275 price tag?

A luxury brand, Armani is primarily known for its suits, handbags, and evening gowns that it sells for thousands of dollars. In that context, it can hardly sell its T-shirts for $15 or even $100.

And because there aren't many takers for $275 T-shirts, Armani doesn't make many, thus further enhancing the appeal for status seekers who like the idea of having a "limited edition" T-shirt.

Value is not only quality, function, utility, channel of distribution," says Arnold Aronson, managing director of retail strategies for Kurt Salmon Associates and former CEO of Saks Fifth Avenue; it's also a customer's perception of a brand's luxury connotations.


Pricing practices have changed significantly in recent years. Many firms are bucking the low-priced trend and have been successful in trading consumers up to more expensive products and services by combining unique product formulations with engaging marketing campaigns.

Even products in fiercely competitive supermarket categories have been able to enjoy price hikes for the right new offerings.

Procter & Gamble launched Crest Pro-Heal toothpaste at a 50% premium over other premium toothpastes.

In 2001,Whirlpool introduced the Duet, a front-loading washer dryer combo that retailed at $2,300 nearly four times the price of comparative models.


Internet allows sellers to discriminate between buyers and buyers to discriminate between sellers

Buyers can:Get instant price comparisons from thousands of vendors

Name their price and have it met

Get products free

Sellers can: Monitor customer behavior and tailor offers to individuals

Give certain customers access to special prices


What Is Price?

Price is the amount of money charged for a product or service. price is the sum of all the values that consumers exchange for the benefits of having or using the product or service.

Price is the only element in the marketing mix that produces revenue; all other elements represent costs10-4


11- *Price and the Marketing Mix:Only element to produce revenuesMost flexible elementCan be changed quicklyPrice Competition Common Pricing MistakesWhat is Price?


Many Names


What is pricing? Pricing is the function of determining product value in monetary terms by the marketing management of a company before it is offered to the target consumer for sale.


DETERMINANTS/FACTORS OF PRICING DECISIONS


INTERNAL FACTORS

Marketing objectivesBefore setting price, the company must decide on its strategy for the product. If the company has selected its target market and positioning carefully, then its marketing-mix strategy, including price, will be fairly straightforward.

When Toyota decided to produce its Lexus cars to compete with European luxury cars in the higher-income segment, this required charging a high price. Sleep Inn and Travelodge position themselves as motels that provide economical rooms for budget-minded travelers, a position that requires charging a low price.

Thus pricing strategy is largely determined by past decisions on market positioning.


Product quality leadership: Four Seasons starts with very high quality service, then charges a price to match.


11- *Factors to Consider When Setting PriceMarket positioning influences strategyOther pricing objectives:SurvivalCurrent profit maximizationMarket share leadershipProduct quality leadershipNot-for-profit objectives:Partial or full cost recoverySocial pricingMarketing objectivesMarketing mix strategiesCostsOrganizational considerationsInternal Factors


SURVIVALCompanies set SURVIVAL as their fundamental objective if they are troubled by too much capacity, heavy competition or changing consumer wants. To keep a factory going, a company may set a low price through periods of low demand, hoping to increase prices when demand recovers.As long as their prices cover variable costs and some fixed costs, they can stay in business.However, survival is only a short-term objective. In the long run, the firm must learn how to add value or face extinction.


Current profit maximizationFirms estimate what demand and costs will be at different prices and choose the price that will produce the maximum current profit, cash flow or return on investment. It is assumed that the firm has knowledge of its demand and cost functions; in reality, these are difficult to estimate. In emphasizing current performance, the company may sacrifice long-run performance by ignoring the effects of other marketing-mix variables, competitors' reactions, and legal restraints on price.


Market share leadershipFirms believe that a higher sales volume will lead to lower unit costs and higher long-run profit. They set the lowest price, assuming the market is price sensitive. Texas Instruments (TI) practiced this market-penetration pricing for years. TI would build a large plant, set its price as low as possible, win a large market share, experience falling costs, and cut its price further as costs fell.


Penetration PricingP1Q1The product is immediately introduced at a relatively low price. The seller sacrifices the higher margins that would have resulted from selling to some customers at a higher price, but, in return gains immediate sales. Fewer competitors are attracted into the market since the apparent profits are not as high. Because of economies of scale and experience curvesthe tendency of production costs to decline with the cumulative productioncosts are reduced.


IKEA IKEA is using market-penetration pricing to get a lock on China's surging market for home furnishings.

When the Swedish home furnishings giant opened its first store in Beijing in 2002, shoppers would come in mainly to take advantage of the air-conditioning and the decorating ideas on display. Outside the store, shops were selling copies of IKEA's furniture designs at a fraction of IKEA's prices.

The only way for IKEA to lure China's price sensitive and frugal customers was to drastically slash its prices.

By stocking its Chinese stores With Chinese made products, IKEA has been able to slash prices as low as 70% below its own prices outside China. The move has worked.

Customers are taking their low-priced goods to the check-out counters in droves, and IKEA is building its largest store in the world-aside from the flagship store in Stockholm-in Beijing. Western brands in China usually price products such as makeup and running shoes 20% to 30% higher than in their other markets, both to make up for China's high import taxes and to give their products added cachet.


Maximum Market SkimmingCompanies unveiling a new technology favor setting high prices to maximize market skimming. Sony is a frequent practitioner of market-skimming pricing, in which prices start high and slowly drop over time. When Sony introduced the world's first high-definition television (HDTV) to the Japanese market in 1990, it was priced at $43,000. So that Sony could "skim" the maximum amount of revenue from the various segments of the market, the price dropped steadily through the years-a 28-inch Sony HDTV cost just over $6,000 in 1993 and a 40-inch Sony HDTV about $1,200 in 2007. This strategy can be fatal, however, if a worthy competitor decides to price low. When Philips, the Dutch electronics manufacturer, priced its videodisc players to make a profit on each player, Japanese competitors priced low and succeeded in building their market share rapidly, which in turn pushed down their costs substantially.


Skimming PricingP2P3Q3The product is introduced at a high price, P1. Very few customersonly the least price sensitive onesbuy at this price. When the price is later lowered to P2 and then to P3, other customers who value the product less will start to buy.

The least price sensitive customers pay a premium for quick access to the new product.


Product Quality LeadershipMany brands strive to be "affordable luxuries"-products or services characterized by high levels of perceived quality, taste, and status with a price just high enough not to be out of consumers' reach. Brands such as Starbucks coffee, Aveda shampoo, Victoria's Secret lingerie, BMW cars, and Viking ranges have been able to position themselves as quality leaders in their categories, combining quality, luxury, and premium prices with an intensely loyal customer base.Grey Goose and Absolut carved out a super premium niche in the essentially odorless, colorless, and tasteless vodka category through clever on-premise and off-premise marketing that made the brands seem hip and exclusive.


Jaguars limited edition XJ220 sold for 400,000 (A600,000) each,but had wealthy customers queuing to buy one.

Pitney Bowes pursues a product-quality leadership strategy for its fax equipment. While Sharp, Canon and other competitors fight over the low-price fax machine market with machines selling at around 450, Pitney Bowes targets large corporations with machines selling at about 4,000. As a result, it captured some 45% of the large-corporation fax niche.

Less exotically, at the height of the1990s baked bean price wars, Heinzs strategy was to set the price at 2p above the price of supermarket own-label baked beans. As retailers slashed prices, so did Heinz. At one point, retailers cheapest can of beans cost as little as 3 pence.

Heinz realised that this was crazy. So, it decided to price up rather than down. The company invested in the quality of the product; it added ring-pull ends on the cans for easy opening and reinvested in TV advertising. Heinzs market share went up.


It can set prices low to prevent competition from entering the market or set prices at competitors levels to stabilise the market.

Leading UK grocery retailers Sainsbury and Tesco used Essentials andEveryday super value range campaigns to counter the attack of discounters Aldi and Netto on the UK market.

Originally projected to take 20 per cent of the grocery market by 2000, forecasters later predicted the discounters would take only 12 per cent.


11- *Factors to Consider When Setting PricePricing must be carefully coordinated with the other marketing mix elementsTarget costing is often used to support product positioning strategies based on priceMarketing objectivesMarketing mix strategiesCostsOrganizational considerationsInternal Factors


Marketing-mix strategy

Price decisions must be coordinated with product design, distribution and promotion decisions to form a consistent and effective marketing programme.

Decisions made for other marketing-mix variables may affect pricing decisions.

For example, producers using many resellers that are expected to support and promote their products may have to build larger reseller margins into their prices.

The decision to position the product on high-performance quality will mean that the seller must charge a higher price to cover higher costs


Many firms support such price-positioning strategies with a technique called target costing, a potent strategic weapon.

Target costing reverses the usual process of first designing a new product, determining its cost and then asking Can we sell it for that?. Instead, it starts with a target cost and works back.

Costs change with production scale and experience.

They can also change as a result of a concentrated effort by designers, engineers, and purchasing agents to reduce them through target costing.

Market research establishes a new product's desired functions and the price at which the product will sell, given its appeal and competitors' prices.

Deducting the desired profit margin from this price leaves the target cost the marketer must achieve.

The firm must examine each cost element-design, engineering, manufacturing, sales and consider different ways to bring down costs so the final cost projections are in the target cost range.


Swatch

To keep costs down, Swatch designed fashionable simpler watches that contained fewer parts and that were constructed from high-tech but less expensive materials.

It then developed a revolutionary automated process for mass-producing the new watches and exercised strict cost controls throughout themanufacturing process.

By managing costs carefully, Swatch was able to create a watch that offered just the right blend of fashion and function at a price consumers were willing to pay.

As a result of its initial major success, consumers have placed increasing value on Swatch products, allowing the company to introduce successively higher-priced designs.


COSTS

Costs set the floor for the price that the company can charge for its product.

The company wants to charge a price that both covers all its costs for producing, distributing and selling the product, and delivers a fair rate of return for its effort and risk.

A companys costs may be an important element in its pricing strategy.

Many companies work to become the low-cost producers in their industries.

Companies with lower costs can set lower prices that result ingreater sales and profits.


12.*CostsFixed costs: costs that do not vary with productionVariable costs: costs that vary directly with the level of productionTotal costs: sum of fixed and variable costs


11- *Factors to Consider When Setting PriceWho sets the price?Small companies: CEO or top managementLarge companies: Divisional or product line managersPrice negotiation is common in industrial settingsSome industries have pricing departmentsMarketing objectivesMarketing mix strategiesCostsOrganizational considerationsInternal Factors


Organisational considerations

Management must decide who within the organisation should set prices.

Companies handle pricing in a variety of ways.

In small companies, prices are often set by top management rather than by the marketing or sales departments.

In large companies, pricing is typically handled by divisional or product line managers.

In industrial markets, salespeople may be allowed to negotiate with customers within certain price ranges.


11- *External factors must also be considered when planning pricing strategy.


11- *Factors to Consider When Setting PriceTypes of marketsPure competitionMonopolistic competitionOligopolistic competitionPure monopolyConsumer perceptions of price and valuePrice-demand relationshipDemand curvePrice elasticity of demandNature of market and demandCompetitors costs, prices, and offersOther environmental elementsExternal Factors


Distinguishing Features of the Four Market Structures*


Pricing in different types of markets: Pure Competition

The market consists of many buyers and sellers trading in a uniform commodity such as wheat, copper or financial securities.

No single buyer or seller has much effect on the going market price.

A seller cannot charge more than the going price because buyers can obtain as much as they need at the going price. Nor would sellers chargeless than the market price because they can sell all they want at this price.

If price and profits rise, new sellers can easily enter the market.

In a purely competitive market, marketing research, product development, pricing, advertising and sales promotion play little or no role.

Thus sellers in these markets do not spend much time on marketing strategy.


Monopolistic Competition

The market consists of many buyers and sellers that trade over a range of prices rather than a single market price.

A range of prices occurs because sellers can differentiate their offers to buyers.

Either the physical product can be varied in quality, features or style or the accompanying services can be varied.

Each company can create a quasi-monopoly for its products because buyers see differences in sellers products and willpay different prices for them.

Sellers try to develop differentiated offers for different customersegments and, in addition to price, freely use branding, availability, advertising and personal selling to set their offers apart.

Tys Beanie Babies have cultivated a distinctive appeal that has both stimulated demand and seen the price of some Beanies rocket.


Oligopolistic Competition

The market consists of a few sellers that are highly sensitive to each others pricing and marketing strategies.

The product can be uniform (steel, aluminium, cement) or non-uniform (cars, computers).

There are few sellers because it is difficult for new sellers to enter the market.

Each seller is alert to competitors strategies and moves.

If a steel company slashes its price by 10 per cent, buyers will quickly switch to this supplier. The other steel makers must respond by lowering their prices or increasing their services.

An oligopolist is never sure that it will gain anything permanent through a price cut. In contrast, if an oligopolist raises its price, its competitors might not follow this lead. The oligopolist would then have to retract its price increase or risk losing customers to competitors.


Pure Monopoly

The market consists of one seller.

The seller may be a government monopoly (a postal service), a private regulated monopoly (a power company) or a privatenon-regulated monopoly (Microsoft Windows).

Pricing is handled differently in each case.

A government monopoly can pursue a variety of pricing objectives: set price below cost because the product is important to buyers who cannot afford to pay full cost; set price either to cover costs or to produce good revenue; or set price quite high to slow down consumption or to protect an inefficient supplier.

In a regulated monopoly, the government permits the company to set rates that will yield a fair return, one that will let the company maintain and expand its operations as needed.

Non-regulated monopolies are free to price at what the market will bear.


Demand Curves


11- *Demand curves sometimes slope upward Gibson learned that its high-quality guitars didnt sell as well at lower prices


Copyright 2011 Pearson Education, Inc. Publishing as Prentice Hall 18-*Consumer perceptions of price and value

When consumers buy a product, they exchange something of value (the price) to get something of value (the benefits of having or using the product).

Marketers must therefore try to understand the consumers reasons for buying the product and set the price according to consumer perceptions of the products value.

Because consumers vary in the values they assign to different product features, marketers often vary their pricing strategies for different segments. They offer different sets of product features at different prices.

Philips offers a $250 small 41 cm portable TV models for consumers who want basic sets and a $1,200 68 cm 100-Hz Nicam stereo models loaded with features for consumers who want the extras.


11- *Factors to Consider When Setting PriceConsider competitors costs, prices, and possible reactions when developing a pricing strategy Pricing strategy influences the nature of competitionLow-price low-margin strategies inhibit competitionHigh-price high-margin strategies attract competitionBenchmarking costs against the competition is recommended

Nature of market and demandCompetitors costs, prices, and offersOther environmental elementsExternal Factors


Competitors costs, prices and offers

Competitors costs and prices, and possible competitor reactions to the companys own pricing moves.

A consumer who is considering the purchase of a Canon camera will evaluate Canons price and value against the prices and values of comparable products made by Nikon, Minolta, Pentax andothers.

In addition, the companys pricing strategy may affect the nature of the competition it faces.

If Canon follows a high-price, high-margin strategy, it may attract competition.

A low-price, low-margin strategy, however, may stop competitors or drive them out of the market.


Canon needs to benchmark its costs against its competitors costs to learn whether it is operating at a cost advantage or disadvantage.

It also needs to learn the price and quality of each competitors offer.

Once Canon is aware of competitors prices and offers, it can use them as a starting point for its own pricing.

If Canons cameras are similar to Nikons, it will have to price close to Nikon or lose sales.

If Canons cameras are not as good as Nikons, the firm will not be able to charge as much.

If Canons products are better than Nikons, it can charge more.

Basically, Canon will use price to position its offer relative to the competition.


PC marketing has become extremely price competitive.

Knowledge of competitive prices, offers, and costs is key to pricing strategy.


11- *Factors to Consider When Setting PriceEconomic conditionsAffect production costs Affect buyer perceptions of price and valueReseller reactions to prices must be consideredGovernment may limit or restrict pricing optionsSocial considerations may be taken into accountNature of market and demandCompetitors costs, prices, and offersOther environmental elementsExternal Factors


Other external factors

Economic conditions can have a strong impact on the firms pricing strategies. Economic factors such as boom or recession, inflation and interest rates affect pricing decisions because they affect both the costs of producing a product and consumer perception of the products price and value.

The company must also consider what impact its prices will have on other parties in its environment.

How will resellers react to various prices? The company should set prices that give resellers a fair profit, encourage their support and help them to sell the product effectively.

The government is another important external influence on pricing decisions.

Finally, social concerns may have to be taken into account. In settingprices, a companys short-term sales, market share and profit goals may have to be tempered by broader societal considerations.


11- *Major Considerations in Setting Price


Pricing Approaches


11- *Cost-Based Pricing: Cost-Plus PricingAdding a standard markup to costIgnores demand and competitionPopular pricing technique because: It simplifies the pricing process Price competition may be minimized It is perceived as fairer to both buyers and sellersGeneral Pricing Approaches


11- * Cost-Based Pricing Example

Variable costs: $20 Fixed costs: $ 500,000Expected sales: 100,000 units Desired Sales Markup: 20%

Variable Cost + Fixed Costs/Unit Sales = Unit Cost$20 + $500,000/100,000 = $25 per unit

Unit Cost/(1 Desired Return on Sales) = Markup Price$25 / (1 - .20) = $31.25General Pricing Approaches


11- *Cost-Based Pricing: Break-Even Analysis and Target Profit PricingBreak-even charts show total cost and total revenues at different levels of unit volume.The intersection of the total revenue and total cost curves is the break-even point.Companies wishing to make a profit must exceed the break-even unit volume.General Pricing Approaches


11- *Break-Even Chart for Determining Target Price


11- *Cost-Based Versus Value-Based Pricing


BUYER BASED PRICINGCertain Companies base their pricing on the products perceived value. They see the buyers perception of value, not the sellers cost, as the key to pricing. Here, seller use non-price variables in the marketing mix to build up perceived value in the buyers minds.For example a cup of coffee in a self service restaurant is charged at Rs.5/-, in a restaurant with service at Rs.8/-, in a family restaurant at Rs.12/-, in a posh area a/c room at Rs.15 and in 3 star hotel at Rs.20 and in 5 star hotel may be Rs.25/-. So each successive restaurant can charge more because of the value added by the atmosphere.


11- *Value-Based Pricing:Uses buyers perceptions of value rather than sellers costs to set price.Measuring perceived value can be difficult.Consumer attitudes toward price and quality have shifted during the last decade.Introduction of less expensive versions of established brands has become common.General Pricing Approaches


11- *Perceived value reflects more than just the functional benefits of a product. The pen at left costs $185.00


11- *Value-Based Pricing:Business-to-business firms seek to retain pricing power Value-added strategies can helpValue pricing at the retail level Everyday low pricing (EDLP) vs. high-low pricingGeneral Pricing Approaches


11- *Competition-Based Pricing:Also called going-rate pricingMay price at the same level, above, or below the competitionBidding for jobs is another variation of competition-based pricing Sealed bid pricingGeneral Pricing Approaches


COMPETITION BASED METHODSGoing-rate Pricing: In this case company bases its price largely on competitors prices, with less attention paid to its own costs or demand.b) Sealed-bid Pricing: Pricing to bid for jobs is sealed bid pricing. The firm bases its price on expectations of how competitors will price rather than on a rigid relation to the firms costs or demand. The purpose is to win the contract and therefore pricing, is lower than others. However firm cannot set the price below a certain level. E.g.: Indian Oil Corporation


Principles of Marketing, Sixth Canadian Edition12.*New-Product PricingMarket skimming pricing: setting a high price to skim maximum revenues layer by layer from the segments willing to pay the high priceMarket penetration pricing: setting a low price for a new product to attract a large number of buyers and achieve a large market shareFigure 7.7Skimming price drops in steps


Product Mix Pricing Strategies

Product Line Pricing: Setting price steps between various products in a product line based on cost differences between the products, customer evaluations of different features and competitors and service line items.

Optional Product Pricing: Pricing optimal or accessory products sold with the main product. (e.g., ice maker with the refrigerator)

Captive Product Pricing: Pricing products that must be used with the main product. (e.g., replacement cartridges for Gillette razors)

By - Product Pricing: Pricing lowvalue by-products to get rid of them. (e.g., animal manure from zoo).

Product Bundle Pricing: Pricing bundles of products sold together. (software, monitor, PC, and printer).


Captive Product Pricing


12.*Price Adjustment StrategiesDiscount andAllowance pricingSegmentedpricingPsychologicalpricingPromotionalpricingGeographicalpricingInternationalpricingReducing prices to reward customerresponses such as paying earlyAdjusting prices to allow for differencesin customers, products, or locationsAdjusting prices forpsychological effectTemporarily reducing pricesto increase short-run salesAdjusting prices to account forgeographic location of customersAdjusting prices forinternational markets


Six price-adjustment strategies Discount And Allowance Pricing

Segmented Pricing

Psychological Pricing

Promotional Pricing

Geographical Pricing

International Pricing


Discount And Allowance Pricing Cash discount

Quantity discount

Functional discount

Seasonal discount

Allowances


Segmented Pricing

Customer Segmented pricing: Museums, for example, will charge a lower admission for young people, the unwaged, students and senior citizens. In many parts of the world, tourists pay more to see museums, shows and national monuments than do locals.

Product form pricing:

Location pricing


9-*Psychological PricingConsiders the psychology of prices and not simply the economics.Consumers usually perceive higher-priced products as having higher quality.Consumers use price less when they can judge the quality of a product by examining it or recalling experiences.


Consumer Psychology and PricingReference PricesInternalExternalPrice-Quality InferencesModerated by category/product knowledgePrice CuesPsychological PricingOdd PricingUnit Pricing


9-*Promotional PricingCash RebatesSpecial-Event PricingLoss Leaders

Low-Interest FinancingLonger WarrantiesFree Maintenance


Geographical Pricing

Companies also charge different prices from the customers living in different parts of the country or world. If the customers are living in distant areas, Companies have to charge higher prices to cover the cost of shipment but this will result in the losing of customers to competitors . Therefore it becomes difficult for the company whether to charge the uniform prices through out the country or change prices according to the geographical conditions in which the customers


12.*Geographical PricingFOB-origin pricing: goods are placed free on board a carrier; the customer pays the freight from the factory to the destination Uniform-delivered price: the company charges the same price including freight to all customers, regardless of their locationZone pricing: the company sets up two or more zones, all customers within a zone pay the same price, the more distant the zone, the higher the price


IndiaUSA


9-*Initiating Price ChangesPrice Cuts:Excess capacityFalling market share: cars, consumer electronics, cameras, watches and steel lost market share to Japanese competitors who offered high-quality products at lower pricesDominate market through lower costsPrice Increases:Cost inflationOver demand


Excess capacity

In this case, the firm needs more business and cannot get it through increased sales effort, product improvement or other measures.

It may drop its follow-the-leader pricing charging about the same price as its leading competitor and aggressively cut prices to boost sales.

But as the airline, construction equipment and other industries have learned in recent years, cutting prices in an industry loaded with excess capacity may lead to price wars as competitors try to hold on to market share.


9-*Responses to Price ChangesBuyer reactions to price changesCompetitor reactions to price changesFirm responses to price changes:Reduce price to match competitionRaise the perceived quality of its offerImprove quality and increase priceLaunch a low-price fighting brand


Buyer reactions to price changes

What would you think if Sony were suddenly to cut its DVD player prices in half? DVDs are about to be replaced by newer models or that they have some fault and are not selling well.

You might think that Sony is in financial trouble and may not stay in the business long enough to supply future parts.

You might believe that quality has been reduced. you might think that the price will come down even further and that it will pay to wait and see.

What would you think if Sony raises the price of its latest DVD model?

you might think that the item is very hot and may be unobtainable unlessyou buy it soon.

you might think that the recorder is unusually good value.

you might think that Sony is greedy and charging what the traffic will bear.


Competitor reactions to price changes

It might think that the company is trying to grab a larger market share.

That the company is doing poorly and trying to boost its sales.

That the company wants the whole industry to cut prices to increase total demand.


12.*Responding to Price Changes


GENERAL MILLS

General Mills ran into some trouble by not responding to competitors' price changes.

While both private-label cereals and name-brand competitors, such as Kellogg, decreased package sizes and either lowered cereal prices or kept them static, General Mills banked on its brand-name reputation for quality and innovation and kept its prices at premium level.

But many customers were reluctant to pay above $4.00 for a box of Cheerios or Lucky Charms.

As a result, Kellogg took the lead in the cereal category in terms of dollar share, with 33.8% compared to General Mills' 29.7%.

Finally, in 2007, General Mills announced its "right size, right price" strategy, adjusting package sizes downward (as its rivals already had) and lowering its pricesl


16-*Initiating and Responding to Price Changes Possible responses to higher costs or overhead without raising prices include:Shrinking the amount of product instead of raising the priceSubstituting less expensive materials or ingredientsReducing or removing product featuresRemoving or reducing product services, such as installation or free deliveryUsing less expensive packaging material or larger package sizesReducing the number of sizes and models offeredCreating new economy brands


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