WORKSHEET #22: Changing the Pricing Process

Step 1:

Determine the Company's outlook for prices over the next three years (see Basic Strategy Guide Steps 19 and 20).

Step 2:

Review the Company's internal pricing data for a sample of customers the Company has served for several years. Review past periods of price increases and decreases in the industry, and from that review determine:

  • The frequency with which list prices were changed during each period.

  • The frequency with which actual prices for an individual customer were changed during the period.

  • The amount by which list prices changed during the period.

  • The amount by which individual customer prices changed during each period.

Step 3:

Examine the Company's costs of serving the larger customers in the market in search of non-price benefits that will reduce the Company's costs of serving the customer directly. From that analysis determine:

  • The logistics costs that the Company might reduce without affecting the customer.

  • The product mix changes the Company might negotiate with the customer. These changes may include having the Company sell more of the higher margin products to the customer, at the expense of other competitors.

Step 4:

Examine the Company's share of the relationship with each Very Large and Large customer. Isolate those customers the Company has served particularly well compared to competition and determine:

Step 5:

Determine the level at which the Company sets its prices today by asking: What characteristics (e.g. size, geography, etc.) describe segments where all customers pay a similar price? The answer to this question may be different for different segments. The segments really define the level at which the Company prices. When the Company reduces Price, these segments, in broad terms, include Product Purchased segments, Margin Bulding segments, Target Competitor segments and segments related to a Period of Time. For examples of these segments, please see Improve/Pricing/Reduce Price/Directions. When the Company increases Price, these segments include Captive Customer segments, segments where competitors cannot counter the price increase, and segments where cmopetitors are unlikely to be willing to counter the increase. For examples of these segments, please see Improve/Pricing/Raise Price/Directions.

Step 6:

Use the same approach to determine the level of price application, and how those levels changed, in each of the previous periods of changing prices in Step 2.

Step 7:

Determine the "ideal" pricing level to maximize revenues in the coming twelve to eighteen months.

Step 8:

Determine the savings in revenues and margins that the Company might achieve by pricing at the ideal "level" compared to the next higher level (i.e. the level with less detail and control).

Step 9:

Describe the costs to the organization of operating a Pricing Policy at the "ideal" level and at the next higher level.

Step 10:

Determine the net savings from the Company's pricing at the "ideal" level, after paying the costs of the Pricing Policy administration determined in the previous step.

Step 11:

Adjust the level of future price application to reflect an appropriate trade-off between the price control and the cost of administration.

Basic Strategy Guide Users Return to Step 22