SELF TEST 20C: Company Pricing Objectives and Guidelines
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.
When an industry is in overcapacity, what are the basic rules of pricing?
There are three basic rules. First, raise the price in any customer relationship where the customer is not price sensitive. Second, reduce the price where competition will allow the company to enter or expand in a customer relationship on the basis of that low price. Third, match any lower price of other competitors, either in one of our customer relationships or attempting to get in the relationship.
When prices are rising and we are short of capacity, should we allocate our product evenly across all customers?
While this is the most common way of allocating company capacity, there is a better way. An equal allocation across all customers treats Core, Near-core and Non-core customers equally. A sounder policy is to support the Core customers first by raising prices more for Near-core and Non-core customers in order to free up their capacity for use to support Core customers. If the Company is unable to support all the needs of Core customers, it fails those customer relationships.
When the Company is out of capacity, what are its basic pricing rules?
There are five basic rules when the Company is in a Reprieve market. First, follow industry prices up. But while doing so, ensure that the Core customers have first claim on the Company’s capacity. Second, in order to free capacity for the Company’s Core customers, raise prices first on Non-core customers until they seek other suppliers. Then use their capacity to support Core customers. Third, if the Company still needs capacity for its Core customers, begin raising prices on Near-core customers in inverse order to their long term profitability for the Company. This raises prices first on the lowest return Near-core customer and then continues to the next lowest return customer, and so forth, until the Company has freed up enough capacity to support its Core customers. Fourth, if the Company still needs capacity to support Core customers, then raise prices, even on Core customers, in inverse order of the size of the customer’s annual purchases from the Company. This rule raises the prices on the Core customers who purchase the least amount from us first. Fifth, limit any price increase if substitute products or potential new entrants to the market would take sales volume away from the Company.
When the Company raises its prices, how much should the resulting value proposition leave the customer in savings?
As a rough rule of thumb, a price increase on a product/service package should still leave the customer with a good 25% savings on using the product compared to the customer’s next best alternative that does not use the product. This rule should keep the new value proposition attractive for the customer.
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.
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