Part 4: Pricing Process
Non-Price Benefits to the Company
Capsule: While the Company may not be able to command a price premium, there are two major types of non-price benefits that customers may grant to improve the Company's profits.
Price premiums are difficult for the Company to gain. As we saw earlier, (See Pricing/Company Price Environment/Price Sensitivity Among Customers), price premiums are really the result of price discounts by Price Shavers rather than the command of a premium by the better competitor. As peers emerge, it is very difficult for the Company to gain an edge with a premium price. Customers simply will not stand for it.
The well-served customer may, however, be willing to help a favored Company improve its profits on their relationship by granting the Company non-price benefits, which reduce the supplier's cost without harming the customer. This is like a hidden price increase since the Company's competition may not even be aware of the favoritism.
There are two types of these non-price benefits for a favored supplier: a more favorable cost of service and a greater share of the relationship. The more favorable cost of service reduces the Company's costs compared to its competition by providing direct cost savings. The greater share of the relationship reduces the favored supplier's costs more indirectly by offering the supplier the opportunity to create better economies of scale.
A Company who serves a customer very well might seek direct cost savings by finding costs in the relationship with the customer that the customer might reduce without an effect on the customer. For example, the Company might be serving several of the customer's ship-to locations at some distance from the Company's facilities closer to the customer. The Company might ask the customer for the right to supply the ship-to locations closest to the customer in return for giving the more distant ship-to locations to competing suppliers. If the customer grants the request, the Company saves money on its shipping costs and the customer is no worse off. Similar opportunities might reside in other logistics, such as shipping or delivery times. Product mix may offer other opportunities to create savings for the Company at no cost to the customer. In particular, the Company may seek to sell the customer more of the high-end, Performance Leader, products the customer purchases. This would increase the Company's margin on the customer relationship.
Many industries have multiple suppliers in larger customer relationships. The additional suppliers offer the customers surety of supply, special products and pricing information (See Diagnose/Segments in the Market/Roles in Customer Relationships). Normally, the Primary Role supplier enjoys a significant sales volume advantage over the Secondary Role supplier in the customer's relationship. A strong company, serving a customer well, might seek to change the share the Company has in the customer's relationship as a reward for the Company's effective performance. A Primary supplier might ask for ten percentage points more of the customer's purchases. A Secondary supplier might ask to reach parity with the Primary supplier.
If successful with the individual customer, the request for a greater share of the customer's relationship will improve the Company's economies of scale in the relationship and yield a more profitable customer. If these requests succeed with several larger customers, the resulting sales increase might have a significant effect on the Company's overall economies of scale and margins.
Non-Price Benefits to the Company Questions
In the next section, the Company evaluates the level at which price is set today and may be set in the future.
Basic Strategy Guide Users Return to: Step 22
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