I own a local business that provides Internet access to individuals and businesses, my business is one of four businesses in the local market that provide internet access to both individuals and businesses. Each of the four businesses charges the same price of twelve dollars a month for unlimited dial up services. My businesses breakeven price is seven dollars per customer, so no matter what I must charge it least seven dollars per package in order to cover all my costs.
Recently my business and the other three businesses have begun to enter into a price war, to ensure that my business isn’t destroyed I will have to develop specific pricing strategies based on certain situations brought upon by my competitors. Demand for my businesses service is often fluctuating because of the constant price changing between my competitors and I.
Demand for my service is affected by changes in prices because people are drawn more toward the lowest priced Internet service providers The provider that offers the most bonuses and upgrades along with a strategically low priced internet service, will most likely succeed in bringing in the most customers. Dramatic price drops by my competitors would make it hard for my business to stay afloat because my breakeven price is seven dollars per person, so if they drop their prices to seven dollars or less, then my business would probably have to close because of insufficient profits.
My business has three competitors selling the same service as I am, and most any of their business decisions can affect my business in either a positive or negative way. If those businesses are able to drop their prices and offer more extras with their Internet service than my business is able to, it could result in a dramatic loss of business for me and a gain of business for my competitors. The opposite could also occur, my competition could start losing profits and have to raise their prices to maintain operations.
In this instance some of their customers might switch to my Internet provider so they wouldn’t have to pay higher prices. My customers who were previously thinking about switching to one of my competitors will now decide to stay with my business rather than switching to a provider with fluctuating prices. Having too many of the same kinds of businesses (such as an internet service provider) in the same area, results in a loss of business for everyone because now consumers have so many options of which business to choose form.
Where as if my business was in an area where it was the only Internet service provider or it had only one business competing for consumers, I would have a much larger amount of customers. Other than price changing, there are many other methods I could use to attract new customers and retain current customers. One method which some of my competition has used to gain new customers is by offering extras with their service. Extras such as, free personal web pages, free e-mail services, and answering machine services so that dial up users won’t have to worry about missing important calls.
Another way of attracting new customers would be to use different marketing techniques or perfecting the current marketing techniques that my business uses. I could use different kinds of media to attract specific target markets by using market segmentation. I could use Internet media to my advantage by having a sufficient website promoting my business, Internet marketing would be extremely helpful to my business in particular because anybody who goes to my website would be using some form of Internet which would make them a potential customer to my service.
Other ways of attracting new customers would be to target certain groups, for instance my business could market in college campuses that for a certain time period all college students can have their first six months of service at seven dollars rather than the original twelve dollars per month. By doing this I open up the door to potential long-term customers because college students are going to need the Internet for the rest for their lives.
By targeting them at a young age my business could try and fulfill their current internet needs that way they stick with us when the get older rather than switching to one of the businesses competing along side me. When the following situations occurred with my competition, my decisions to keep my business a float were as follows. A month after dropping the price of their Internet service to ten dollars per month, one of my competitors then raised it back to twelve dollars per hour.
In this case my strategy was to drop my price from twelve dollars per month, down to ten dollars per month. My reason for doing this was because I wanted my customers to be happy that prices were going down, which would most likely cause my current customers to retain their service with me. Also by dropping my prices down to ten dollars per hour, my competitor who raised his rates will now lose a lot of his customers to my business because those customers would rather continue to pay the same rate as they were before, even if it means switching service providers.
Even though I’ll lose profits because of the two-dollar drop in my rate, I’ll be able to make up that profit and hopefully more, by gaining my competitions customers because of their poor business choice. Two of my competitors recently dropped their prices even further- to eight dollars per month. As a result of the price dropping, my business falls off by twenty-five percent. In this instance my pricing strategy was to leave my price where it was, I chose to do this because my business can’t make enough profits at eight dollars per month.
Not only that but, no one is going to go through the hassle of switching over to my service provider unless I offer less than eight dollars per hour. If I charge less then eight dollars an hour I won’t be making any profits, and I’ll eventually have to close the business. One of my competitors who offer free web pages announced that the service would become optional for an extra two dollars a month. In this event my decision was to leave the price of my service provider at its current level, however I did decide to provide free web pages with my service.
The reason I chose to leave my price where it was and to provide free web pages was because now a lot of the customers, who previously had the service for free, can still have it for free if they switch services. Now those clients can avoid paying an extra two dollars a month for a service that my company provides for free. Two of my competitors announced that they would charge individual users eight dollars a month, but will charge a higher price (not yet announced) for businesses.
In this situation my decision to keep my business going was to, lower my prices to eight dollars a month for both individuals and businesses, and to offer free personal web pages to both individuals and businesses. I chose to do this because I feel that businesses will now most likely choose my service provider over my competitors, because they already know what they’ll have to pay (unlike with my competitors), and they know that it’s going to be a lower price than what my competition is charging.
Also, when employees go to their jobs and find that their businesses are using my service provider and they’ll see how great it is, then those employees will want to have that same great service when they go back home. All four service providers (including myself) are now charging eight dollars a month. One of my competitors went out of business, and I know another is in poor financial health.
In this instance my decision to stay in business and try to be the only Internet service provider in the area was to, leave my prices at eight dollars a month for my current customers. To try and get customers from my competition I decided to drop my rates from eight dollars to seven dollars a month, for the first eighteen months. I chose to do this so that I could take customers from my failing competitors, hoping that this move would cause them to lose most of their business, thus having to close down, leaving me the sole Internet service provider after the price war.
Various inducements other than price can play major roles in affecting supply and demand in this market. A surplus or shortage of products can play a major role in supply and demand, and the way a company has to price it’s products. When a shortage of goods or a surplus of goods occurs, a company must then price their products according to that shortage or surplus. The market price and the equilibrium price are also factors that can affect supply and demand in this market.
It is always in a company’s best interest to price their products strategically, for a company to succeed, and to surpass the level of their competitors that company must price their products according to the successes and failures of not only their own company but also that of their competitors. It is not always in a company’s best interest to feature the lowest prices among their competitors, because potential customers often look at the lowest priced products as being the worst quality.
Having the lowest priced products can also mean bringing in the least profits, which could eventually lead to a company having to close down. A business must set itself as being a high quality company and can then begin to price their products at a lower level, after the public knows that that company has high standards among their products. There are very few sellers in this particular market and a large amount of buyers, attempting to purchase what the sellers are trying to sell, which in this case is Internet service.
Sellers are trying to make their Internet Service Provider differ from that of their competitions service provider, although the different service providers seem to be very similar. The businesses are small and they are able to easily enter and exit the market whenever they choose, to most likely resulting from low profits and bad business. In the end a monopolistic competition will most likely characterize this market, all the traits of the firms that reside in this market are that of a monopolistic competitive market.