SELF TEST #20: Setting Objectives and Pricing Guidelines
Before Last Look develops in a marketplace, what might we expect to see as prices for similar products from one competitor to the next?
Before the development of Last Look, prices from one competitor to another for similar products may vary a great deal, for example, by 30% or more.
How do we assess the likelihood that a competitor will follow us in a price change, either up or down?
We evaluate the competitor's knowledge of our change, the capacity the competitor has to counteract it, and the will to risk its profits in response to our change.
How do we explain price premiums in a market?
Price premiums on similar products, for example, across Standard Leader products, are the result of a weaker company having to discount its products in order to sell against a stronger company. All price premiums are the result of a weaker company having to discount rather than the stronger company successfully demanding a premium.
What is a Peer?
What is a Price Shaver?
A Price Shaver is a competitor who discounts less than 10% from the market's standard price for a product comparable to other products in the same leadership category, often to compensate for slightly lower benefits.
A Price Shaver is usually a Standard Leader company that must offer only slightly lower prices for the Standard Leader product in order to compete. A Price Leader is a completely different Price Point. This competitor and product offers substantially lower prices for a product that has total benefits clearly below those of the Standard Leader product. Sometimes Price Shavers become a type of Price Leader called a Predator, offering benefits similar to the Standard Leader for users but below the Standard Leader for buyers.
What prices do Peers receive compared to one another?
Generally, Peers receive the same price. In roughly 90 percent of the cases of Peers occupying Primary and Secondary role positions with a customer, the two Peers will receive the same price. In a small minority of cases, the Secondary supplier may offer a slightly lower price.
What is a Leader's Trap?
A Leader's Trap is a situation in which an established industry competitor maintains a Price Umbrella and cedes share to a discounting competitor in the mistaken belief that customers will stay loyal to the established competitor. Over time, the company in the Leader's Trap not only loses share, but also sees prices fall to a level near the price established by the discounting competitor.
Explain Last Look.
Last Look is a market practice where a customer, when offered a low price by a current or potential supplier, then advises the other current or potential suppliers of that low price in order to give them the opportunity to match the low-priced supplier's price.
Price Information is a Role reason for a customer who purchases from a Peer of the Primary supplier. This Peer Secondary role supplier assures the customer that the Primary supplier is offering the customer a reasonable price. Price Leverage is also a Role reason, usually in the Tertiary and Other roles with larger customers, where the customer purchases from the supplier offering a low price to use as leverage against the prices of the Primary and Secondary suppliers in the relationship.
How does the competitor's knowledge of our price move affect our pricing plans?
If we plan to raise prices, we want all competitors to know of the price increase so that they will follow us. If we plan to decrease our prices, we want none of our competitors to know of our move so that we might reduce the price and gain additional customer volume without the competitor having a chance to match our price.
What effects does Last Look have on a marketplace?
Last Look significantly reduces price-based competition. It does not eliminate it entirely because there remain some differences in pricing from one competitor to another as Price Shavers continue to offer low prices. However, Price Gaps from one competitor to another become much smaller than those before Last Look. If a market turns Hostile, list prices from one competitor to another will be virtually identical. Price differences on similar products in the marketplace will exist from one customer to another but prices will not vary greatly from one competitor to another. Last Look takes away most of the secrecy in competitor pricing.
Where do lower prices originate in Hostile markets, where prices and returns are already low?
The continual pressure on pricing in Hostile marketplaces, and the lower prices that this pressure brings about, is usually the result of customer, rather than competitor, initiatives. The most aggressive customers demand, and often get, lower prices. These lower prices then spread to other customers in the marketplace.
What determines a competitor's capacity to counteract our price change?
If we plan to increase our price, competition must have the capacity, or product availability, to reverse that increase by offering that product availability at a lower price. If we decrease our price, the competition can counter our move only if it is willing to give up sales volume, current capacity utilization, to us in order to protect its higher prices with other customers.
Before Last Look, Price Gaps on similar products from one competitor to another are often quite large, 25 to 50%. Once Last Look is fully established, and especially if the market becomes Hostile, price differences from one competitor to another will rarely exceed 5%.
In a Hostile marketplace, who is responsible for the majority of price declines?
In a Hostile market, the customers, rather than competitors, are responsible for the majority of price declines. Last Look takes away most of the opportunity to offer a low price in return for more share. In addition, lower prices tend to spread to other customers in the market. As a result, few competitors have real incentive to offer lower prices. Instead, these lower prices are the result of demands, or bluffs, made by customers to reduce their prices.
What does it mean if a competitor has more Positive Volatility on price than average in the industry?
This is a discounting competitor who will reduce prices wherever it sees the opportunity to gain sales volume with a lower price. This competitor is likely to follow price increases reluctantly.
What are the typical Defensive pricing guidelines?
There are three defensive pricing guidelines. First, match competitor price reduction offers with all current customers. This includes all Core, Near-core and Non-core customers whose purchases from us produce positive cash flow. Second, discount to gain new customer sales volume where the company finds a competitor in a Leader's Trap. Again, each of these transactions should generate cash for the company, net of any spreading of the low-priced offer to other customers. We apply this guideline first to Core customers and then, in turn, to Near-core and Non-core customers. Third, encourage Last Look for all company customers.
What are the typical Offensive pricing guidelines?
There are five offensive pricing guidelines. First, while following industry prices up, ensure that all Core customers have first call on the company's capacity. Second, raise prices on Non-core customers until they seek other suppliers or we have created enough capacity to support our Core customers. Third, where the company still needs capacity to support Core customers, raise prices on Near-core customers. We would raise these prices to the Near-core customers in inverse order of their long-term profitability to us. We raise the prices first on the lowest return Near-core customer, and then move up from there. Fourth, raise prices to the company's Core customers in inverse order of the size of the customer's annual purchases from us. This is a step we would rather not take. It is far better to find a way to support these customer needs as all of these Core customers have enduring value for us. Fifth, consider substitute products and potential new entrants to the market as probable limiters on the higher price levels in the industry. This guideline obviously applies only when the company is able to determine the level of industry prices. Most of the time, it applies to industry leaders with very strong brand names in industries with normal to high levels of marketing and sales expenses.
What objectives would any pricing policy have?
Each pricing policy has two objectives; the first, raise the prices to the highest level that the individual customer will pay for its products. This objective implies that the products still leave the customer with a clear net cost savings from the use of the product. The second objective is to keep prices low enough to discourage a competitor from entering the market or taking volume from one of our customer relationships.
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