StrategyStreet / Diagnose / Pricing / Company Price Environment




Part 2: Company Price Environment

Capsule: The Company Price Environment section examines the pricing opportunities the company has in the next twelve to eighteen months. This section adopts a short-term focus on the company's pricing and develops specific pricing objectives and guidelines for each key customer.

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The Industry Price Outlook in the previous section provides a picture of the market's future development for the next several years. It defines the Company's expectations for price direction and the intensity of price competition for the industry as a whole.

Against this background, the Company examines its nearer-term pricing environment. This effort has a time horizon of the next 12 - 18 months. This review tracks the development of customer price sensitivity in response to competitive pricing tactics, evaluates likely competitor responses to the Company's price initiatives and sets guidelines for its pricing for each customer in the near future.

The Company begins this effort by analyzing the degree to which its customers have become price sensitive. As customers become more price sensitive, the use of price to improve the Company situation becomes more difficult. The difficulties exist because customers may resist, as might competitors. The Company evaluates the likelihood of a competitor trying to block the Company's attempts to change prices in anticipation of setting its own objectives. The objectives the Company develops for its pricing considers the current profitability of each major customer and the opportunities the Company may have to change this profitability to its advantage.

We examine each of these issues in turn in the following sections:

Price Sensitivity Among Customers
Capsule: There is opportunity to use price to improve profits as long as customers do not become price sensitive. The industry's competitors teach a market to become price sensitive. As customers become price sensitive, they begin to use the "Last Look" tactic in order to extract even lower prices from their best suppliers. Ironically, "Last Look" drastically reduces price-based competition.

Competition and Their Knowledge, Capacity and Will
Capsule: Competition may have the power block our attempts to change prices. Whether they will do so depends on their knowledge of our actions, on their ability to change their capacity in response to our move, and on their will to risk their profits.

Pricing Objectives and Guidelines
Capsule: The basic rule is to raise the price until it attracts a competitor or chases away a customer. Usually the competitor, rather than the customer, sets the upper limit on the price. Company guidelines follow these objectives by adopting primarily Defensive or Offensive tactics in pricing.

The Company begins its near-term price planning by examining the price sensitivity among the industry's customers.

Basic Strategy Guide Step 20

Summary Points

Next: Pricing Sensitivity Among Customers