A firm has to decide how to price its goods in order to achieve its goal of making a profit. Pricing depends on what sort of competition and market conditions the firm faces. In a market that has a number of competitors producing a product that is not unique, such as the U.S. cereal market, one common pricing strategy is status quo pricing.
Avoiding Price War
By setting a price that is in a similar range to that of its competitors, the firm that goes in for status quo pricing aims to maintain the industry status quo. If the firm prices its goods lower than its competitors, it faces the risk of starting a price war. If other firms also decide to cut down their prices, a price war might ensue that will likely not benefit anyone except the consumer.
Another objective of status quo pricing is assuring steady profit from the sales of the product. By not pricing above or below its competitors, the business gets a steady stream of customers and is assured of a steady profit. This is likely, given that competitors too opt for the same strategy and don’t upset the status quo by lowering their prices.
Considering that the firm that engages in status quo pricing doesn’t have much control in terms of setting its price, the way to achieve status quo pricing is to focus on cost control. The firm focuses on controlling its costs of producing and marketing the good so as to maintain its market price.
A firm could change its pricing strategy as market conditions and its specific situation change. Thus, if a firm opts for status quo pricing at a time when the market is down, so as to survive a down market, it may decide to change its pricing objectives later. As the market improves, the firm may decide to focus more on maximizing its profits and change its pricing accordingly. Similarly, a new entrant to an established market might opt for status quo pricing initially and change its strategy later as it gets better established.
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