BASIC STRATEGY GUIDE: STEP 21
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Activity Three: Develop a pricing policy to improve the Company’s market share and returns.
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Step 21: Look for opportunities to change price to gain or save share
| PRICE CHANGE OPPORTUNITIES | ||
| Price Reduction | Price Increase | |
| Objective
Competitive Driver | Sales Volume
Opportunity Source | Margin Improvement
Opportunity Source |
| Knowledge: | 1. No Last Look | 1. Better Cost of Service
2. Pace of Price Decline 3. Ancillary Benefits |
| Capacity: | 2. Constraints on Capacity (rare) | 4. Constraints on Capacity (common) |
| Will: | 3. Industry Move
5. New Low Price Point 6. Competitive Entry | 5. Industry Move
6. Unique Market Leadership 7. High-end Product |
What:
Look for specific opportunities to change price, either selectively or across the board, in order to gain new profitable share, to maintain the share the Company has in the face of a falling price situation, or to raise margins.
Why:
As industries mature, pricing becomes more complex. In most markets, there are opportunities both to increase effective prices to gain additional margin and to reduce prices to gain additional market share and contribution margin. Exploiting these opportunities requires the Company to evaluate its pricing with each Very Large and Large customer.
What to Watch For:
Many markets offer specific opportunities to reduce price to gain share, and at the same time, to avoid proliferation of the low price to higher-priced customers. These specific opportunities commonly occur:
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In markets where customers do not offer “Last Look” as a common practice in the industry.
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Developing and some Stable industries have few customers using “Last Look.” However, virtually all customers use it in Hostile markets.
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“Last Look” is always an advantage to the incumbent supplier and for the customer.
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Audio Tip #112: The Effect of Last Look
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In situations where there is a broad move by the industry’s competitors to reduce price. The Company can rarely fight this move.
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Any form of price reduction by a competitor will place price pressure on the other competitors in the industry. Even if the competitor reducing prices is not a direct competitor, the domino effect of his price reduction will reach the Company and its customers.
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In Hostile markets, a price discount to one of the larger Intermediary customers always spreads. It will move within a week or two in the Very Large and Large sizes, within several weeks in the Medium and may not spread fully through the Small customer size.
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Audio Tip #120: Using Low Price to Gain Share in Hostile Markets
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Where at least one of the leading companies in the industry is in a “Leader’s Trap”. A company in a Leader’s Trap always reduces its price eventually. Usually, when it does so, it has also lost some of its market share.
Audio Tip #118: The Leader’s Trap
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Where the Company might introduce a new low Price Point, a Price Leader or Next Leader product.
Audio Tip #83: Price Leader Products and Companies
Audio Tip #84: Next Leader Products and Companies
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These products may slow the pace of price decline in the Standard Leader product by meeting better the needs of price sensitive customers.
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These products often tap an entirely new segment of the market. They help absorb some of the industry’s excess capacity by increasing overall demand.
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Where the Company, or the industry leaders, wish to slow or eliminate the entry of new competitors to the market.
The Company may have an opportunity to increase its effective prices and margins in situations where competition cannot, or will not, respond with lower prices:
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When the customer is willing to give the Company a more favorable cost of service in its relationship.
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Where the Company has an opportunity to delay price discounts with Medium and Small customers. This is not a price increase, but rather a delay in the timing of a price decrease. This delay raises the Company’s margins.
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Where the Company might increase prices on ancillary benefits, which are out of the sight of many customers and competitors.
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When the industry is using its capacity at a high level. The industry’s best Standard Leaders will have high utilization rates before the industry as a whole. Their initial forays into product allocation begin the upward price pressure for the industry.
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When industry competitors have a tendency to follow price increases rather than to use them as opportunities to discount against those who raise prices.
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A price is always meant to discourage a competitor, even in a situation where competitors tend to follow the Standard Leader’s price increase. There are other competitors waiting to enter the market, especially at the low end, under the umbrella set by the industry’s current competitors. A company planning a price increase should consider its impact on competitor expansion.
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The freedom to raise prices without reducing revenues exists with many branded categories. However, these categories also have a tendency to raise prices to such an extent that they encourage the entrance of low-end Stripper and Predator products. While this low-end entry often takes years to develop, the damage it causes is extensive for several years.
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Where the Company offers unique benefits of worth to customers. A company would be wise to avoid touting a high price position, if it has one, with its customers. Instead, it should tell its customers that it sets its prices “at the market” and wants to get paid for its superior brand and performance with a greater share of the customer’s volume.
Audio Tip #79: How Much Must My Product Reduce the Customer’s Costs?
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Where the Company might introduce a high-end (Performance Leader) product to serve better the needs of a segment of customers in the market.
Action:
Reduce price with carefully selected customers in order to gain entry to those customer relationships or to maintain or expand the Company’s penetration of attractive customer relationships. Raise prices to increase margins, provided that customer demand does not fall by enough to eliminate the profits from the margin increase.
More Information on Price Change Opportunities on the Advanced Site
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For helpful context on this step:
Videos:
Video #2: Causes and Symptoms of Hostility
Video #78: Competing Against Low-End Competition Part 1
Video #79: Competing Against Low-End Competition Part 2
Video #45: High Returns With Low Prices in Hostile Markets
Video #72: Overview of Pricing Part 1: How to Look
Video #73: Overview of Pricing Part 2: What to Expect
Video #11: What Ends Hostility
Perspectives:
Symptoms and Implications:
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As large competitors match low prices, other competitors face difficulties
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Some competitors seek price increases more aggressively than others
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Demand has turned up bringing a tight market and more capacity
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