SELF TEST #22: Changing the Pricing Process
What does a Pricing Policy include?
A Pricing Policy includes the determination of the frequency with which prices will change, of the amount by which the price will change, of the opportunities for non-price benefits for the Company and of the level at which the Company will set its price.
What determines the frequency of price changes?
The frequency of price changes is primarily the result of changes in the balance between product availability and customer demand. As that balance tips in favor of demand or capacity, prices tend to change frequently in order to redress the balance. Prices change considerably less frequently in markets where both industry capacity and customer demand change at about the same rate.
What control does the Company have on the frequency of price changes and on the amount of price movement?
Only a few companies have the ability to set prices for their industries. Most companies must follow broader market trends for the frequency and amount of price movement. The exception may occur when the industry tends to change its prices at predictable times of the year and in "traditional" amounts. Some companies have violated these traditions in their favor.
How might a company change its profitability in a customer relationship without changing the price in the relationship?
The Company has two basic opportunities to change its profitability in a customer relationship without affecting the customer. The first opportunity reduces the Company's costs directly by giving the Company a more favorable cost position in the customer relationship. An example might occur when the Company seeks, and is given, the right to supply customer ship-to locations that are very convenient for the Company and cost it less to supply than other ship-to locations the Company has been serving. The second opportunity reduces the Company's costs indirectly. This opportunity occurs when the Company asks a customer that it has served well in the past for a greater share of the customer's total purchases. If the Company succeeds in this request, its profitability on the individual customer relationship should increase, and if it succeeds in a number of these requests, the Company's economies of scale should improve and its profits should improve concurrently.
What does it mean to change the level at which the Company sets its price?
The level of the Company's price is the point at which the Company has reached a price for every product transaction with every customer. You find that level by asking for the common characteristics of the customers who all pay the same price.
What are the major levels at which a Company may set prices?
There are six levels available to a Company to set prices:
product, size of order, geography, customer type, individual customer and transaction. In general, the level increases in specificity of the price, and limit on the impact of a price change, as the level falls from product through transaction.
How does it help the Company to change the level of price?
If prices are declining, the lower the level (i.e., the more specific the segment at which the Company determines its price), the more likely it is that the Company can control the spread of falling prices by limiting their effect to smaller parts of the market place. On the other hand, in a rising price environment, the Company would prefer to price at a high level, at the product or size of order level, in order to reduce the cost of administering the pricing policy.
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