BASIC STRATEGY GUIDE: STEP 23
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Activity Three: Develop a pricing policy to improve the Company’s market share and returns.
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Step 23: Adjust the level of price by targeting price-based segments with the four components of price.
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What:
For an overview of how to organize your innovation ideas, please see our overview Perspective, “The Dart Player’s Guide to Pricing When Prices Fall.”
Create changes in the level where the Company applies its price by choosing price-based customer segments and then by using one or more of the four components of the price to limit the price change to those segments.
More Information on the Advanced Site >>
Why:
There are many occasions when the company wishes to change a price, but only for a part of the market. In a falling price environment, the company would like to limit its new lower prices to as small a segment as possible in order to maintain its margins. In a rising price environment, the company may raise its prices selectively to some segments and not to others in order to avoid any potential loss of sales as prices rise in the industry. The combination of the choice of a price-based segment and carefully chosen price components serve to limit the extent of the price changes to those parts of the market that best serve the company.
What to Watch For:
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Price segmentation, that is, segmentation for the purpose of controlling the spread of a new price, always reflects the pressures and opportunities created by competition rather than the needs of customers.
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In a falling price environment, the company may limit the extent of the new low prices to one or more of the following price-based customer segments:
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The Product Purchased Segments. Customer segments purchasing a particular product or product component receive the lower price. Companies use this segmentation when the focus of price competition is on a particular product or group of products.
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Margin Building Segments. There may be opportunities in a falling price environment for the company to use some customer segments to help it improve its margins. These customer segments would take actions, which the average customer does not take, to improve company revenues or to reduce company costs. In return, they receive a lower price.
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Competitive Supplier Segments. In some markets, the falling prices are the result of aggressive pricing by a particular competitor or competitor type (for example, Price Leader discounters). Customer segments who do, or could, purchase from these discounting competitors receive the low price.
More Information about Segments >>
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In a rising price environment, the company segments customers according to the likelihood that competitors either will not, or can not, respond to the company’s change in Price. A competitor is unlikely to counter the company’s price increase if it does not have the knowledge, the capacity or the will to do so. These segments include:
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Customer segments who are captive to the company. Some customer segments are effectively captives of the company due to their strong preference for one or more components of the company’s current performance package.
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Segments of customers where competitors cannot counter the company’s change in value. These segments may require a particular component of the product system, but competitors do not offer it. In other cases, the competitor would not even know of the change in Price and Performance.
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Segments of customers where competitors are likely to be unwilling to counter the company’s change in value. Competitors are likely to follow the company’s price increase when the customer segments cause higher costs and where the competitor tends to follow the company’s price increases.
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Every Price has at least three, and usually four, components: the Benefit Package, the List Price, the Basis of Charge and, often, Optional Components of Price. The company may use these four price components to further contain the spread of its new pricing to customers within its target segments. These four components of price include:
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The Benefit Package. The package of benefits is the Performance part of the Value proposition the company offers the customer with the main product. This Performance package includes all the Function, Reliability and Convenience benefits at the product Price Point. The company may reach a new price by changing the Function, the Reliability, the Convenience or any combination of the three benefits of the product at the same time as it changes price. Any combination of the three benefits of the main product at the same time as it changes price.
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The Basis of Charge. The Basis of Charge is the unit measure the company uses to quantify either the List Price or an Optional Component of the Price. Frequently, this change in the Basis of Charge also produces a new product Price Point.
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The List Price. The List Price is the company’s stated price for a unit of the product as described by the Basis of Charge. This is the most common of the four major Components of Price that a company uses to change a price. The company changes its List Price by adding discounts or premiums.
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Optional Components of Price. The Optional Components of Price include several forms of price adjustments the company uses to modify its effective prices for specific segments of customers. These components enable the company to maintain its List Price for the product while allowing or requiring other customers to pay a lower or higher price. The Optional Components of Price vary in a falling price environment from those in a rising price environment.
More Information About Components of Price >>
Action:
Use a price-based segmentation and a broad spectrum of components to control the proliferation of falling prices and create a more complex pricing structure whenever:
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Industry prices begin to come under pressure
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Company has the opportunity to serve better a particular Core customer segment
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Company may selectively recover costs of high cost customer segments
Use fewer segments and components when industry prices are high or rising to attractive levels. This action reduces the cost of pricing administration.
More Information on Price Segments and Components on the Advanced Site
To develop new pricing innovations, see
Improve Pricing >>
For helpful context on this step:
Videos:
Perspectives:
Symptoms and Implications:
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