StrategyStreet and the Board of Directors
8. How will the company exploit industry prices to gain share and increase profitability?
This is always a question of finding the right balance between a rising price and declining unit sales. If anything makes a customer feel ill-treated, it is a price that the customer perceives as higher than that of the competition. In a low or falling price environment, the board should encourage and support the company as it builds more flexibility and faster response times into its pricing approaches. A wise company is loath to be known as high-priced in a low-price market.
A high priced market, where prices might decline, may create a Leader's Trap situation for an industry follower willing to flout current industry rules or norms. An astute number two competitor in an industry dominated by a much larger competitor saw that the industry leader had committed itself to high and inflexible pricing. The second ranked competitor then exploited this inflexibility by instituting more frequent price reductions in amounts that varied from the industry's traditional practice. The industry leader refused to follow these price initiatives and lost share to this number two competitor who saw the industry as ripe for a price reduction.
A rising market is another matter. This market needs a company to lead on prices to set the pace for the rest of the market. In many high or rising price markets, customers respond tepidly to low-priced offers, so cost savings, through more broadly based product pricing, improve margins. This kind of market demands less flexible pricing in a trade for a lower cost to administer the pricing system.
If this comfortable market allows prices to rise above inflation for several years, the board should watch for the emergence of low-end competition. As these cheaper competitors gain footholds, an industry price decline becomes inevitable. Cigarettes and many packaged consumer goods markets stand witness to this common painful development.
For further discussion of this question, see:
Basic Strategy Guide Step 21: Look for opportunities to change price to gain or save share.
Basic Strategy Guide Step 22: Change the pricing process according to the direction of industry prices.
Basic Strategy Guide Step 23: Adjust the level of price by targeting price-based segments with the four components of price.