SELF TEST 20B: Evaluating Competition and Their Knowledge, Capacity and Will
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.
What is a Peer?
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 a 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 Price Leverage?
Price Leverage is a Supplier Role reason to be in a customer relationship. The customer uses Price Leverage by employing a Price Shaver competitor to force its suppliers in higher roles to offer it a lower price.
Where might you expect to find Price Leverage in a customer relationship?
Normally, you would expect to find Price Leverage as a Tertiary or Other Role in the customer relationship. It also may exist as a Secondary Role position with Small and Medium customers and a few Large customers.
What is Price Information?
Price information is a Role reason, usually in the Secondary Role, where the customer uses a "Peer" of the Primary supplier in order to ensure that the customer knows what competitive pricing is in the marketplace.
Compare Price Leverage to Price Information.
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.
How do you Win customer volume on price?
A company Wins additional customer volume on price when it offers a low price to the customer who accepts the low price without offering the low price to other suppliers in a Last Look, or when the other suppliers refuse to match that low price. This Win is an example of Positive Volatility due to Price.
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.
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 by paying a premium for his product. Over time, the company in the Leader's Trap not only loses share and profitability, but also sees prices fall to a level near the price established by the discounting competitor.
How do we evaluate the will of a competitor to counter our price move?
We evaluate the will of the competitor to counteract our price move by looking at the effect of the price change on the competitor’s profits. If we raise prices, the competitor may see a risk that some of his price sensitive customers leave the market. This is a particular problem if the competitor has more price sensitive customers than does the average competitor in the marketplace. A Price Shaver would be such a competitor. The competitor may also have the will to resist our price increase if it believes that it would be able to hold lower prices and thereby gain additional customer sales volume as the rest of the industry raises its price.
At the other end of the scale, when we want to reduce our prices, a competitor may be hesitant to go along with the reduction if the competitor believes that this reduction will hurt his overall profits, as a margin fall due to the price decline is greater than the volume loss if the competitor refuses to go along. Normally, we wouldn’t care if a competitor refuses to match our lower price. Such a move simply gives us the opportunity to exploit that competitor’s Leader’s Trap.
Are competitive pricing tactics predictable?
High and low priced competitors are more predictable. Most competitors tend to be consistent in their pricing within a particular business. Those competitors who are discounters will usually follow a price increase reluctantly. Those competitors who are constantly trying to raise prices will follow a price decline reluctantly. There are some competitors who are consistently unpredictable. They will lose some volume on a competitor’s lower price and gain other customer volume with their own lower prices. These are competitors that we can not predict with accuracy.
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 does it mean if a competitor has higher than average Negative Volatility due to price?
This is a competitor in a Leader’s Trap. This competitor is likely to give up customer sales volume to a discounting competitor rather than reduce its prices and face the consequent margin decline on its broader business.
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