WORKSHEET #20A: Evaluating Price Sensitivity Among Customers
Step 1:
Determine the prices that competitors charge on the Standard Leader product (see Analysis 47 and Analysis 48):

The competitor's list price for the Standard Leader product is the starting point.

From the random sample of 100 customers and the 25 interviews of larger customers done in Activity 1, Basic Strategy Guide Steps 1 – 18, and using Analysis 66, determine the average price received by competitors by asking the customer the following question: Using an index price of 100 for your Primary supplier, could you tell us the indexed price you pay to the Secondary, Tertiary and Other suppliers? For example, if the Secondary supplier charges a price 2% below that of the Primary, the Secondary supplier's index would be 98.

For each competitor in the market for whom you have sufficient data, calculate the average index price the competitor receives, weighted by the sales volume at each price. Include all Primary relationships at a price of 100.
Step 2:
Determine whether each Very Large and Large customer in your set of customer interviews offers Last Look to its suppliers. For this step, you use the random sample of 100 customers and estimate the percentage of the volume of all purchases by Very Large and Large customers who offer Last Look.
Step 3:
From your random sample of 100 customers and the 25 larger customer interviews, estimate the annual percentage rate of total Negative Volatility due to price in the industry:

Calculate the annual percentage rate of Negative Volatility as the sum of all the Negative Volatility volume in your sample divided by the total purchase volume in the sample. Convert this Negative Volatility to a percentage of annual purchase volume.

Divide the total volume of Negative Volatility due to price in your customer sample by the total volume of the sample's Negative Volatility.

Multiply this fraction times the annual rate of Negative Volatility.
Step 4:
Do the same calculation as in the previous step to arrive at an estimate of the industry's Positive Volatility on price.
Step 5:
Allocate all the Positive Volatility on Price you identified in the previous step to the twelve or sixteen Size/Role market segments on the industry's Size/Role matrix (see Analysis 19). The data for this analysis comes from your random sample of 100 customers in the market (see Analysis 49):

Allocate the total sales volume of Positive Volatility moved on Price to each Size/Role segment.

Calculate the percentage of the total Positive Volatility moved on Price in each Size/Role segment as a percentage of the total Positive Volatility on Price in the market as a whole.

Sum the total of these percentages, both by individual sizes (i.e. Very Large, Large, Medium and Small) and by individual roles (i.e. Primary, Secondary, Tertiary and Other). Totals for all the sizes of customers and for all of the roles each sum to 100%.
Step 6:
Using your random 100 customer sample, determine where on the Size/Role Matrix that low price is particularly effective or ineffective moving market share as follows:

Determine the Positive Volatility on Price in each Size/Role market segment (done in the previous step).

Calculate the total sales the industry makes in each Size/Role segment, as well as the total Positive Volatility that takes place in each Size/Role segment and in the total market.

Divide the total Positive Volatility on price in each Size/Role market segment by the total volatility in the market segment. Do the same calculation for the total market.

Divide the fraction of Positive Volatility moved on price in each Size/Role segment by the fraction of Positive Volatility moved on price in the market as a whole. Convert this fraction to an index using the Positive Volatility on Price in the market as a whole as 100.

Any Size/Role market segment with an index above 100 is purchasing more on low Price than the industry average. Any Size/Role market segment with an index below 100 is purchasing on low price at a rate below the industry average.
Step 7:
Interview the sales force and marketing staff to classify competitors:

Companies in a Leader's Trap

Price Shavers in the industry and their current discounts, in percentage off the Standard Leader product

Price Leaders in the market and their products

The Company's Peer competitors
Step 8:
Determine the prices that customers of various sizes pay for the Standard Leader products, using a sample of the current customers of the Company (see Analysis 67):

Array a random sample of current company customers of all sizes on a chart, where the vertical axis is average net price paid on the Standard Leader product, and the horizontal axis is the total size of all the customers purchases in the market.

Draw a least squares fit regression line through these points on the chart. This line projects average "expected" prices for customers of a given size.

Customers above the line pay high prices, customers below the line pay low prices. Then interview the sales and marketing staffs to determine:

What explains the Small and Medium customers who pay low prices



What explains Very Large and Large customers who pay high prices

Step 9:
Determine the time it takes for new low prices to spread to each customer size as follows (see Analysis 52):

Identify an instance of a new low price reached among the Very Large customers.

Divide the new low price by the old low price. The percentage difference between the new price and the old price is the percentage change in prices. Use this percentage change in the step below.

Determine the length of time it takes for a sample of customers of each size category to realize this same, or greater, percentage price change in their prices, starting from the date of the new low price reached among Very Large customers.
Step 10:
Determine the predictability of customer prices compared to other customers (see Analysis 68):

Take a sample of current customers who have been customers over the last several years. This may be the same sample as used in Step 8.

Establish an average or median price paid currently by the average customer in each size segment (that is, Very Large, Large, Medium and Small) and the same price at a date three years previously.

Determine the difference between each customer's price paid currently and the average price for the customer size segment, and convert this difference into a percentage over or under the current average price.

Make the same calculation for each customer and its price three years ago.

Determine the percentage of customers who remained in the same relative price position in both periods.

Interview the marketing and sales staffs to determine why the customers who change their relative position (i.e. from paying low prices to paying high prices or vice versa) made the change.
Step 11:
Using your random sample of 100 customers and your 25 interviews of larger customers, calculate an index of the Negative volatility due to price for each competitor (i.e., for whom you have sufficient data from your customer sample), using the overall market's Negative Volatility due to price as the 100 base to determine (see Analysis 51):

Competitors who are low in Negative Volatility on price. These companies are competing by using the low Price tool.

Those competitors who are high in Negative Volatility on price. These companies are reluctant to use low price as a competitive tool. They tend to attempt price increases.

Companies who show no consistent pattern with Negative Volatility on price. These companies are unpredictable using this analysis. Their pricing guidelines appear to be inconsistent.

Confirm these findings by interviewing the sales and marketing staffs in order to use the conclusions to predict competitive pricing initiatives and responses.