Page 114 - Marketing the Basics 2nd

106 Marketing: the Basics
forcing the company to split the earnings with the new entrants. What’s more, demand is difficult to predict accurately. If a firm that pursues this strategy over-estimates demand, and realizes they’re going to miss their profit targets, cost-cutting measures follow. The casualties of cutbacks are always research and development budgets, training programmes and labour enrolment levels, which ironically are the source of future corporate revenue. Many firms, in an effort to punch up this quarter’s or year’s results, will scrimp on marketing budgets; this is most often the exact wrong thing to do if you are trying to build brand and customer loyalty.
MAXIMIzE CURRENT MARKET SHARE
To accomplish this objective, which is sometimes called market- penetration pricing, the corporation sets out to price its product such that it captures the highest amount of market share. Pricing low is an effective means of entering into a new market and building volume. The higher the volume, the lower per unit cost which eventually leads to a higher long-term profit. This objective is most successful in markets that are highly sensitive to price changes and require large-scale operations. Japanese firms had often used this approach in the past to gain market share in a country; they take a loss today in order to be in a much better position in a few years. Japan’s more patient capital is very helpful in that it is willing to wait for these long-term results. You may also take this approach if you fear a fast follower, that is a competitor that will quickly jump into the market after it hears of your success. By quickly capturing market share you make it tougher for that competitor to earn a number two position.
The drawback of a maximizing the current market share strategy is while a low price is great for consumers, short-term profit levels get hit. Unless costs are declining as volume increases, investors will tolerate low stock prices for only so long. Worse still, deliberately keeping the price at a low level for extended periods of time creates a perception that the price should be always low, making it difficult to raise prices in the long term. Such a strategy is also illegal in some markets. In markets where it takes years to start an operation (for example building an oil refinery), dumping a large supply of