Part 3: Price Change Opportunities

Price Discount Opportunities

Capsule: The Company may discount to gain share where a customer does not use "Last Look," or where it finds a competitor in a Leader's Trap. The preservation of market share drives most price discounts.


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The Company uses a price reduction to gain additional sales volume or to protect the volume it holds today. The Company would make this kind of an offer to attractive, long-term customers. This move can pose danger. In industries with overcapacity, the Company must use the price-discounting tool judiciously. Otherwise, a price discount offered by the Company to one customer may easily spread to other customers. With this spread, the Company loses much, or all, of the benefit of the discounted offer. Most price reductions in Hostile markets are defensive, meant to retain current customers rather than to expand market share.

The Company may use the price discount to gain volume only in circumstances where the competitor either cannot or will not respond in kind. A competitor response that matches the discounted price would leave the Company without the new volume. The customer would have lost his incentive to shift his relationship.

As the table below illustrates, there are six common patterns of opportunity to use a price reduction to increase the Company's sales volume.

PATTERNS OF PRICE REDUCTION OPPORTUNITIES

Objective:

Driver of Competitive
Response
Additional Sales Volume

Source of Opportunity

Knowledge: 1. No Last Look
Capacity: 2. Constraints on Leader's Capacity (rare)
Will: 3. Industry Move

4. Leader's Trap

5. New Low Price Point

6. Competitive Entry

Examples of Price Discount Opportunities >>

1. No Last Look

The first opportunity to use a lower price to gain share occurs where the competitor has no knowledge of our price reduction. This occurs primarily with customers who do not use Last Look. These tend to be customers who purchase from the Company for more important reasons than for the lowest price in the market.

These are the price reductions aimed at specific customers in order to Get In their relationships or to Increase Use with a valuable customer. Normally, the Company would plan to bring the customer's discounted price up to the average price for the segment over time.

The Medium and Small customers are the most likely customers not to use Last Look. This may also encourage the Company to improve its customer mix as prices decline. The Company's mix of customers becomes a more important issue in a Hostile market. When industry prices are low, the industry's larger customers (i.e., Very Large and Large customers) receive such large discounts that they account for less than their proportionate share of profits. If these larger customers account for 80% of the industry's sales volume, their proportion of the industry's profits will be below 80%. The Medium and Small customers grow in importance because they contribute a larger share of the industry's profits than they purchase in sales.

Price Discount Opportunities Questions

  • Are there customer Size/Role segments where Last Look is uncommon?

  • Which customers, especially Very Large and Large customers, are not using Last Look?

  • Would these customers grant the Company more sales volume if they were offered a lower price?

  • Would the more profitable Medium and Small customers in the market consider purchasing more from the Company if we offered them a short-term discount? We are more likely to use this opportunity in a Deteriorating or Hostile market.

2. Constraints on Leading Competitors' Capacity (rare)

The second, and rare, opportunity to use a low price occurs when there are constraints on competitor capacity. The competitor, then, does not have the ability to respond to our lower price. This is not the typical place where the Company would choose to use a low price. Normally, capacity constraints on competition open the possibility for price increases, rather than for price decreases. However, the Company may find itself in a situation where its competition is out of capacity, while it still has some remaining. It might choose, in that circumstance, to use that excess capacity to attract new Core customer purchases.

More Price Discount Opportunities Questions. . .

  • Do any current competitors have constraints on their current capacity, such that they could not offer additional product availability in response to a low price offer to their customers?

  • Are the customers of these capacity-constrained competitors in the Company's target Size/Role segments?

  • Do we share relationships with these competitors?

  • Would these shared customers or potential Core customers respond favorably to a low price offer from the Company?

The last four patterns of opportunities to use price reduction to gain or hold market share occur because the competitors have indicated specific intentions about their pricing policies and made their Will known to us.

3. Industry Price Decrease

The first pattern is a broad industry move downward in price. In this circumstance, the Company must follow the industry's price decline or risk losing important Core customer sales volume. If the Company were not to match price declines, the customer would defect. The price reduction can be short-term if the original competitive offer of a low price were similarly short-term. The price reduction may also be short-term if the competitive conditions that led to the low price offer are likely to change soon.

More Price Discount Opportunities Questions. . .

  • Is there an ongoing broad industry move to reduce prices that would threaten the Company's sales volume with current customers if the Company refuses to follow the price reduction?

4. Competitors in a Leader's Trap

Next, the Company may find competitors, especially Peer competitors, in a Leader's Trap. A Leader's Trap situation presents other companies opportunities to gain attractive customer sales volume under the umbrella of the Leader's Trap. Leader's Trap Examples>>

More Price Discount Opportunities Questions. . .

5. Introduction of a New, Lower Price Point

The third of these four opportunities emerging from competitors' will to respond is the introduction of a new Price Point. In many instances, price declines in a market result from the introduction of a new Price Leader or Next Leader product in the market. These new low priced products generally cause the market to grow and present the opportunity for the Company to grow as fast, or faster, than the market by introducing its own new Price Point.

A Company may choose to add a new, low Price Point in order to limit the extent of a price decline in its industry. Industry-leading companies use this tactic in a market that is experiencing a broad fall-off in prices or is facing the immediate possibility of such a broad price decline. However, the Company might also use this tactic in order to gain share with a new, untapped segment of the market.

These new low price points may slow the rate of price decline in the Standard Leader product. They do so by meeting more precisely the needs of customers who have become price sensitive. Some of these customers may not need all the benefits and attendant costs built into the current Standard Leader Product. The new low price point products meet their needs at lower prices for the customer and lower costs for the Company.

These new low price points also may help the industry absorb some of its excess capacity. They often tap into new customer segments who could not afford to, or would not, buy at the Standard Leader product price. As these new customers enter the market, the overall growth rate for the industry may well increase. This increase in demand hastens the end of overcapacity.

More Price Discount Opportunities Questions. . .

6. Forestalling an Entry by New Competitors

Finally, the Company may introduce a price reduction in order to forestall the entry of competition into the market. This competition may originate with suppliers of substitute products or with companies planning to enter the market attracted by the market's high returns. Normally, this type of price reduction is undertaken by the industry's strongest Standard Leader. This company wishes to continue its control over longer term industry prices by ensuring that no new sources of competition come up against it.

Sometimes the Company is the beneficiary of an unanticipated reduction in its cost structure. If this were the case, the Company could choose to maintain its prices and improve its margins. In a highly competitive market, however, the Company may find it more advantageous to reduce its prices and pass this cost saving along to customers before competitors take advantage of the opportunity to do so.

In a few markets, strong, leading competitors choose to reduce their prices over the long term in order to discourage current or potential competitors from competing for their customers' business with a low price. This pricing tactic can be effective for an industry Standard Leader who can offset the low prices with its superior economies of scale in order to achieve high returns on invested capital. If the leader has superior economies of scale, this pricing tactic tends to weaken competitors. A few leading companies in various industries have used this tactic effectively.

More Price Discount Opportunities Questions. . .

  • Have the Company and its industry competitors had unforeseen reductions in an important cost element? If so, what would be the effect on the Company and the industry's return on investment of a decision not to pass on these unforeseen cost reductions with lower prices to customers? Would competition be likely to be attracted to the industry and the use of price discounting in this kind of an industry price environment?

  • Are there substitute products that might expand their presence in the Company's market at today's price levels?

  • Are there potential new entrants to the market that might be attracted by the industry's current returns?

  • How low would prices have to be in order to discourage the expansion of substitute products or new entrants into the market?

  • Where would the Company need to price its product in order to discourage other competitors from using a price discount against the Company in competing for customer volume?

Both the customer segment and the individual customer must also be worth the Company's price discount. In a Hostile market, any customer who will generate positive cash flow on his purchases from the Company, without spreading the price discount to other customers, would qualify as an attractive customer. Even the worst of these customers would increase the Company's profits. In all other markets, however, the customer who receives a low-price offer should either be a current Core customer or fall within the Company's target Core customer segments, as defined by the Size/Role segments where the average customer relationship should produce a return at or above the Company's cost of capital.

More Price Discount Opportunities Questions. . .

  • At what price level would each Core customer or each Size/Role segment become unattractive for the Company?

  • Which Core customer segments would the Company choose to enter, or expand, on the basis of a lower price?

A price decrease reduces the Company's margins and cash contribution. The company should make up for at least this contribution lost on the price decrease with the contribution gained or saved on the customer volume affected by the price decline.

More Price Discount Opportunities Questions. . .

  • How much contribution margin decrease does the Company's planned price decrease produce?

  • How much contribution margin will the Company gain or retain on sales to customers affected by the price decrease?

Basic Strategy Guide Users Return To: Step 21


The Company has identified opportunities to reduce price to save or gain share. It may also have important opportunities to raise prices to improve margins. These opportunities also follow several common patterns. We turn to these patterns next.

Summary Points Next: Price Increase Opportunities