Explain the key demand side drivers of price for a given good or service

Explain the key demand side drivers of price for a given good or service

The price of a product or service depends on a variety of factors which can lead either to the increase or decrease of price. In the contemporary business environment, the elasticity of demand often influences pricing strategies of companies, because they need to adapt their prices to the current situation in the market. In this respect, large automakers, such as GM, are particularly susceptible to the influence of demand on their pricing strategy. In fact, today, GM, as well as other automakers in the USA and other countries of the world, faces a problem of decreasing sales rates which force many companies to decrease the price for their products. However, in actuality, the reason why companies like GM reduce price is not as simple as that, instead, it is necessary to take into consideration factors which affect the company directly and indirectly and stimulate it to reduce prices.
First of all, it should be said that the current situation in the US and world economy is characterized by a strong trend to recession to the extent that it is possible to speak about a profound crisis. In such a situation, the demand naturally decreases and leading automakers, such as GM, face a problem of the fast distribution and sales of their products. In actuality, the financial crisis contributes to the accumulation of new cars which are not sold and which have to be stocked that naturally forces companies to reduce the production capacity as well as cut jobs. At the same time, one of the first measures, which GM and other companies used when they faced the problem of overproduction and decreasing sales rates, was the reduction of price (Van der Borght, 2000). This step was essential and determined by objective factors, such as a dramatic decline of demand for new cars. The economic crisis forces Americans to reduce the consumption and cars often come first in the line when people attempt to save money for essential, vitally important items, such as food, maintenance of households, etc. In such a context, the reduction of price can potentially stimulate customers to buy products, even their buying power decreases dramatically.
Another factor that affects the pricing policies of such companies as GM is the market situation, which also influenced by demand. To put it more precisely, the company can either increase or decrease its market share, but both increase and decrease of the market share is possible only on the condition that the demand either increases or decreases respectively. Obviously, if the demand increases consumers are ready to buy products of such companies as GM, therefore, the company can increase price since customers are ready to pay more. On the other hand, if the demand decreases, the company risks losing its share of the market because, if goods produced by a company are less competitive, customers are likely to prefer cheaper products of the same quality (Gomory, 2002). In this respect, it is quite natural that GM faced a problem of the decrease of its market share since its cars started being replaced by less expensive and more fuel-efficient cars produced by other companies, especially Japanese ones, such as Toyota, and others. Therefore, in such a situation, the shift of demand in favor of less expensive and more fuel-efficient cars forced GM to reduce price for its cars in order to maintain its market share or, at least, to slow down the rapid downfall of its market share not only in the USA but also worldwide.
At the same time, pricing strategies can influence customers’ behavior since it is possible to increase prices steadily in order to form the customers’ tolerance to permanent price rise. In fact, this strategy can be quite effective, especially if prices for raw material, which are used for the production of cars, for instance, increase or can increase in the future. In such a way, such companies as GM can offset higher costs of the production. In this respect, it is important to underline that the formation of customers’ tolerance to the change of price can, in a way, affect demand since, if customers get used to the steady price rise, the change of pricing policies in favor of substantial discounts can stimulate the demand and, therefore, increase sales rates (Siaroff, 1999).
In addition, the position and pricing strategies of competitors can also play an important role, but they are also influenced by the demand. What is meant here is the fact that competing companies should take into consideration interests, preferences and needs of customers, as well as their buying power to establish price. For instance, a foreign company can hardly succeed in the American car market, if it ignores traditions and preferences of American drivers. Consequently, they need to adapt to local customers and this trend can be traced in any country of the world. In such a situation, the orientation of competitors on the demands of customers leads to the development of specific pricing strategies, which such companies as GM cannot ignore (Ogbu, 1993). Therefore, the company needs to take into consideration prices of competitors in order to form its own competitive price in order to maintain its share of the market. At this point, it is worth reminding that demand is an important price forming factor.
Thus, taking into account all above mentioned, it is possible to conclude that many companies, including GM, heavily relies on demand, which can influence consistently their pricing strategies. In actuality, the demands decreases dramatically, especially in the automobile industry, that stimulates many leading companies reduce the price for their cars as well as introduce cars which meet expectations and needs of customers and which companies can sell at affordable prices. In fact, it is obvious that, when the crisis has struck, companies are forced to decrease their prices because they need to sell their products fast and price becomes secondary compared to potential losses which companies can expect in case of their failure to sell out their products.

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