Several companies have nowadays incorporated the introduction of new good and services into the market for public use. This can be attributed to very stiff competition as new products are emerging with the ever changing technology. This has thus led to the development for both the high as well as the low quality products so as to match the expanding market demand. It is thus very important for consumers to be very careful so as not to fall victim to these form of frauds. Companies also need to ensure that the quality of the products is of high enough quality so as to sustain the existing market. This will be very beneficial to them as they will not have to exit the market because of lower sales.
In this case, I have chosen one of the products that has been doing so well in the market since its recent introduction. This is the Philips compact fluorescent light bulbs (CFL). Most of us had been used to the normal bulbs which are high on energy consumption. High electricity bills were the order of the day. This was however changed with the introduction of this type of bulbs. The CFL bulbs are capable of providing energy-saving, high performance as well as long lasting lights. These bulbs combine the popularity and convenience of the incandescent fixtures as well as the energy of fluorescent lighting.
The Philips fluorescent bulbs have been designed to fit in most fixtures and utilize about 75% less energy(Khan, Abas, (2011). They are able to last about 6-15 times more than other bulbs are efficient and cost effective especially in the areas where lighting is mandatory or where the lights are left on for longer periods of time.
There are so many companies in the market at present that produce the same product that Philips produces. These come in different designs with different pricings. This thus leaves the buyers with the option of acquiring a product of their choice and thus competition is quite high in this sector. This thus depicts a perfect competition market structure. This is because there are no barriers to entry in the market (Helpman & Krugman, 1985). The number of producers are many in this case as well as consumers. The increasing number of consumers is attributed to the increasing development all around the world as needs are increasing and so are structures. The bulbs also do not have a permanent life span and thus may need replacement once in a while once they blow out or even when one needs to change them for a different use. This thus leads to a perfectly elastic demand curve. The demand curve for this product is likely to look close to something like the below diagram. This demand curve gives an illustration of the price of the commodity, in this case the CFL lamps and the amount of the commodity that the consumers are able to pay and willing to pay for at a particular price.
This demand curve is used to show the behavior that exists in the competitive market and a combination of the supply curve has been made so as to make an estimation of the equilibrium prize. The demand curve has the prize on the Y (vertical) axis and the quantity on the X (horizontal) axis. In this case, people are willing to purchase more of the Philips product as the prize decreases. When the prize decreases, the demand increases and thus the supply of the product increases. This thus leads to increased sales and increased profits by the company.
The Philips CFL bulbs come in different colors with different pricings. They are both economical but in most cases the colored bulbs are for luxurious purposes and is not a necessity as such. This thus are not highly sold compared to the normal bulbs used for lighting. This difference is attributed difference in use. The CFL colored bulbs are used in most cases for luxurious purposes or for the few selected purposes while the uncolored ones are mandatory mostly in home lighting, offices, retail stores and many more. Therefore, the elasticity of demand between the two types of bulbs varied since the colored ones are considered to be for luxurious use while the uncolored ones are a necessity.
As explained earlier, the pricing is directly related to the elasticity of demand for the product. This is because, according to the graph on figure 1, when the price of the commodity increases, the demand of the product as well decreases. This will mean that the consumer may be willing to buy the product but they may not be able to pay for it. On the other hand, when the prize of the commodity decreases, the demand will increase because at this point the consumer will be willing to pay and as well will be able to pay. This will as well translate to an increase in the supply of the goods.
When the company increases the cost of the product, this will result to a decrease in the quantity supplied to the market. This will thus lead to a decrease in the marginal cost as there will be no additional cost to produce more good to be supplied to the market(Shy, 2008). On the other hand, if the market price of the product is decreased, the supply will increase thus translating to an increase in the marginal cost of the product as they will need more money to produce more goods to the market. Likewise, the marginal revenue is likely to increase once the sale of the products increases. This will only occur after the decrease in the market price of the goods thus increasing the elasticity of demand of the goods. The marginal revenue on the other hand decreases when the market price increases and the demand of the product increases (Shy, 2008). The market share will also be related to the prize. The increase in the prize as explained earlier will lead to a decrease in the demand and thus the production volume will decrease. This will as well decrease the market share of the company at that period in time. If the prize decreases, the demand will increase and thus the production volume will increase (Anderson, Fornell & Lehman, 1994). This will thus lead to an increase in the market share at that particular time.
Most of businesses use several pricing strategies on the sale of the products and services. Mostly, organizations aim at the maximization of the profits for the units sold. These strategies can be used to increase the market share that they hold within the market, they can as well be used to defend the existing market from the new entrants as well as enter a new market. When the firm makes a decision on the marketing strategy, it creates a direct impact to the consumer as to whether they can purchase the product or not. When a company changes its pricing strategy, the other companies are likely to bring down their prices as well or keep the price constant and undertake promotions, coupons or advertisements. This will thus give them a competitive advantage.
There are several strategies that a company might use that will aid in product differentiation as well as market segmentation. For product differentiation, the company can look into the quality and performance of the product, the performance consistency, the product’s life cycle, the reliability of the product, the design and style of the product and the ease of repairing the product (Dickson & Ginter, 1987). The segmentation of a market will actually need one to make a decision on the best strategy that can be used for segmentation. There are several types of market segmentation. These include geographic segmentation, demographic segmentation, psychographic segmentation and finally behavioral segmentation (Dickson & Ginter, 1987). The geographic segmentation takes into priority the location of their customers in terms of climate, cultural differences, language differences and many more. The demographic segmentation is a very popular form of market segmentation. It provides the marketer with a chance of understanding who the consumers are. Psycho-demographic differentiation on the other handlooks at the question why one may be purchasing a commodity (Dickson & Ginter, 1987). Finally, the behavioral segmentation makes a division of the consumer groups basically basing on their responses, uses, attitude and knowledge towards the product or service.
There are several non-pricing strategies that can be used to increase profitability. These include enhanced service quality, advertising, extended warranties as well as longer opening hours. This can help in maximization of the consumer response and improve the performance of the market. Advertisement can be used as a non-pricing to increase barriers to entry. The more that a firm puts more efforts to cater for advertisement, the more they are likely to deter new entrants. A strong brand can as well create loyalty and it kind of ‘locks in’ the existing customers and thus deter new entries.
Producers can alter the mix of fixed and variable costs in order to support their pricing strategy. The decision as to whether to raise or lower the prize can be a really tough one. How to accomplish this change is however the main issue in this case. The alteration of fixed and variable costs can be implemented so as to deal with competition in most cases. When two companies reduce their prizes at the same time with the same amount, it is likely that one of the companies might experience a very different result than the other. Careful attention to timing is mandatory. It needs one to be in the loop on how to affect their customer’s perception of the inherent value of what they are selling.