SELF TEST 20A: Evaluating Price Sensitivity Among Customers
What is price sensitivity?
Price sensitivity is the customer’s willingness to change from one supplier to another for low price.
What is a Price Gap?
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 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 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.
What is a Price Leader?
A Price Leader is a competitor or product that offers below industry-standard performance for a very low price. More than 50% of a Price Leader company's total unit volume is sold at price points below the Standard Leader product
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 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.
What is a Price Umbrella?
A Price Umbrella is a situation where a competitor in an industry holds prices up and allows other current competitors or new market entrants to discount against it and take market share with the discounts. Companies in a Leader's Trap hold a Price Umbrella over discounting competitors.
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.
What is Positive Volatility due to price?
Positive Volatility is the percentage of industry or individual company volume sold during a period of time that is gained by a company, or by a set of suppliers, from another company or set of suppliers. Positive Volatility is the sum of Get In plus Increase Use volume. Positive Volatility due to price occurs when a supplier offers a customer a low price that other competitors either can not, or will not, match.
What is Negative Volatility due to price?
Negative Volatility is the percentage of industry or individual company volume sold during a period of time that is lost by a company, or by a set of suppliers, to another company or set of suppliers. Negative Volatility is the sum of Get Out plus Decrease Use volume. Negative Volatility due to price occurs when a supplier, incumbent in the customer relationship, refuses to match a low price offer from another competitor. Negative Volatility due to price may also happen to the incumbent competitor if he does not know of the lower price offer made by another competitor to the customer.
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.
Why are there differences from one customer to the next in prices paid in the marketplace when the market is Hostile?
We can explain some of the differences in prices paid as being due to differences in sizes of customers. However, there are still dramatic differences in prices, even within the same size category. Some Small customers will pay lower prices than some Very Large customers. The differences in pricing from one customer to the next usually reflects differences in the policies the customers follow in demanding lower prices. Those who demand lower prices, and threaten to leave the supplier without them, usually get them. Those who are less demanding will pay somewhat higher prices, though they may be compensated for these higher prices with better service.
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.
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