Part 4: Pricing Process
Frequency of Price Changes
Capsule: The industry changes prices more frequently as the industry's product availability changes rapidly relative to changes in customer demand.
For most companies, the frequency of price changes matches that of the market. Relatively few companies actually lead prices for an industry. Most follow others' leads. Considering frequency of price changes within the company's overall pricing process is more a matter of preparing for a change in the frequency of the market's change in prices. In practical terms, the Company must have an organization in place to handle a larger volume of price changes if the frequency of price changes is increasing.
Price changes more frequently as the industry's available product capacity rises and falls rapidly compared to changes in customer demand. A Stable market sees relatively slow changes in available product capacity and demand. These industries, such as most consumer goods markets, change prices infrequently, once or twice a year.
Other industries see a more precarious balance between product availability and customer demand, giving rise to more frequent price changes. Deteriorating industries have new product capacity coming on-stream rapidly, faster than customer demand grows. These markets see frequent price declines as competitors jockey for market share. Reprieve industries are running out of product capacity, especially among the industry's best competitors. These industries see rapid price increases as competitors exploit their new-found pricing power.
These two types of industry, Deteriorating and Reprieve, see frequent price changes but they implement these changes differently. The Deteriorating market changes its product list price less frequently than it changes the actual prices customers pay. List prices may change once or twice a year. In the meantime, industry competitors are quietly discounting deals with larger customers. Price changes are frequent but invisible. A Reprieve market changes list prices and actual prices frequently. The changes are visible as well as frequent.
A Hostile market has ample product availability and the price pressure that can accompany it. The product capacity changes relatively slowly compared to customer demand in these industries. These markets change list prices infrequently. In many of these markets, actual prices applied to any customer also change infrequently. However, because customers, rather than competitors, initiate most price declines in Hostile markets (See Pricing/Company Price Environment/Price Sensitivity Among Customers), the Company may expect frequent requests for individual price changes during the course of a year as many customers attempt to improve their prices.
If prices are likely to change with greater frequency, the Company may need to change its organization to accommodate the new environment. Especially in a falling price environment, the Company needs an organization capable of monitoring, reporting on, and responding to, numerous price initiatives by competitors and customers.
Frequency of Price Change Questions
Next, the Company examines the amount by which its price should move.
Basic Strategy Guide Users Return to: Step 22
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