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Reduce Price to Improve Revenues and Margins

CHOICE 3: USE THE COMPONENTS OF PRICE TO FURTHER LIMIT THE SPREAD OF THE LOWER PRICE

Every price has at least three, and usually four, components: the Benefit Package, the Basis of Charge, the List Price and, often, the Optional Components of Price. The company may use these components to further contain the spread of its new, lower, prices to customers within its isolated segments. You may use these components as follows:

A. Change 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 package includes all the Function, Reliability and Convenience benefits at the product Price Point. The company may reach a new lower price by changing the Function, the Reliability, the Convenience or any combination of the three benefits at the same time as it changes price. The use of this component of price often enables the company to offer a lower priced product with acceptable margins. Any combination of the three benefits of the main product at the same time as it changes price.

Companies commonly use a change in the Benefit Package in order to:

  • Encourage initial purchase of company product
  • Broaden scope of relations with customer

B. Change the Basis of Charge: Illustrative Examples>> The Basis of Charge is the unit measure the company uses to quantify the price, or an optional component of the price. A change in the Basis of Charge will often reflect changes in company costs, or market demands to simplify pricing. Frequently, this change in the Basis of Charge also produces a new product Price Point. Companies commonly use a change in the Basis of Charge in order to:

  • Encourage larger than average purchase
  • Increase trust in supplier
  • Attract customers for separate product
  • Create price gaps against competitor

C. Change the List Price: Illustrative Examples>> 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 the company uses to offer lower prices to a particular segment of customer. If the company were to change only the List Price among the four major components of price, then all of the customers in its price-based segmentation would receive the lower price. In many cases where the company chooses to change only the List Price among its four components of price, the isolated segment, which is the recipient of the lower price, is sufficient to limit the price spread. Companies commonly use a change in the List Price in order to:

  • Encourage larger than average purchase
  • Reduce customer anxieties about future prices
  • Encourage initial purchase of company product
  • Reward customer for actions improving company margins
  • Attract customers for a separate product
  • Reduce price gaps with lower-priced competition
  • Create price gaps against competitor
  • Broaden scope of relations with customer

D. Change the Optional Components of Price: These optional components of price include various forms of effective price changes the company uses to reduce its effective prices for specific segments of customers. These price adjustments allow the company to keep its nominal List Price unchanged. We have found several relatively common components that companies use to reduce their prices. These optional price components include the following:

  • Provide a Rebate. Illustrative Examples>> Companies use a rebate with customers when there is some uncertainty on the purchases the customer will make, or on the lower price the customer will earn. The rebate component ensures that the customer earns the lower price. The customer receives the lower effective price, in the form of a rebate. In the consumer market, a rebate may be interchangeable with a coupon. Companies commonly use a rebate in order to:
    • Encourage larger than average purchase
    • Encourage initial purchase of company product
    • Reward customer for actions improving company margins
    • Reduce price gaps with lower-priced competition
    • Create price gaps against competitor
  • Offer a Coupon. Illustrative Examples>> If the effective price reduction is relatively low, the lower price may come in the form of a coupon. The coupon reduces the product price for the price sensitive customer while leaving the other customers to pay the regular price. This method of conveying a lower effective price exists primarily in the consumer market. The customer earns the lower price conveyed by a coupon once the customer has purchased the product. Coupons often require the customer to find and save the coupon and, sometimes, submit information after the purchase of the product. These requirements reduce the effective cost of the coupon because some customers will not complete all the steps for the lower price. Companies commonly use a coupon in order to:
    • Encourage initial purchase of company product
    • Encourage customer to renew relationship
    • Reduce price gaps with lower-priced competition
    • Create price gaps against competitor
    • Reduce adverse customer reactions
  • Extend a discount in kind. Illustrative Examples>> The customer receives the lower effective price by receiving more product in the unit of product purchased than the previous version of the product, without paying more for the unit of product. This lower effective price allows the company to return to regular, higher, pricing once the supplies of the larger product are exhausted. Companies commonly use a discount in kind in order to:
    • Encourage larger than average purchase
    • Attract customers for a separate product
    • Reduce price gaps with lower-priced competition
    • Reduce adverse customer reactions
  • Waive fees or make a one time or periodic payment. Illustrative Examples>> The customer receives a payment to offset some of the customer’s costs related to the product. The payment may be a fixed sum or an amount tied to a specific cost the customer incurs. This form of a lower effective price may reduce the cost of the price reduction because some customers will not qualify for it or may not use it if they do qualify. Companies commonly use this type of payment in order to:
    • Reduce customer anxieties about future prices
    • Reward customer for actions improving company margins
    • Increase performance benefits of product
    • Reduce adverse customer reactions
  • Offer a trade-in allowance. Illustrative Examples>> The customer receives the lower effective price as a cash payment or as a reduction in the price of the new product when the customer surrenders the old product. This lower price reduces the customer’s cost to dispose of the product. This method may allow the supplier to recoup some of the cost of the lower price if the traded product has cash value. Companies commonly use a trade-in allowance in order to:
    • Encourage customer to renew relationship
    • Increase performance benefits of product
  • Provide a sample of the product. Illustrative Examples>> The customer receives the lower effective price in the form of a sample of the product to be sold. This price adjustment differs from a Discount-in-kind because there is no payment required for the sample. Companies commonly provide a sample of the product in order to:
    • Encourage initial purchase of company product
    • Reward customer for actions improving company margins
    • Attract customers for a separate product
    • Broaden scope of relations with customer
  • Provide a free, or heavily discounted, product from a third party. Illustrative Examples>> The customer receives a lower effective price in the form of a free or heavily discounted product from a third party. This form may reduce the cost of the lower price if the company is able to pay the third party supplier of the free product less than the customer values the product. This form of price adjustment is used primarily with consumer end users. Companies commonly provide this discount in order to increase the performance benefits of the product.
  • Provide a free, or heavily discounted, product from the company, other than the product on sale. Illustrative Examples>> This form of price adjustment may reduce the cost of the lower price if the cost of the free product is less than the value the customer places on it. This component also applies when a company offers customers its product for “free” in order to attract third party revenue, especially advertising, or to attract the customer to purchase other company products. Companies commonly provide this discount in order to:
    • Encourage larger than average purchase
    • Attract customers for a separate product
    • Increase performance benefits of product
  • Set a Price Cap. Illustrative Examples>> Offer to limit the price the customer might face or to limit the total amount the buyer might pay for an amount of product or service. Only customers who reach the cap level receive the lower price. Companies commonly set a price cap in order to:
    • Encourage larger than average purchase
    • Reduce customer anxieties about future prices
    • Increase trust in supplier
    • Reduce adverse customer reactions
  • Extend a payment term. Illustrative Examples>> Allow the customer to pay later than is customary in the industry. This optional component includes the company’s offering of financing, either subsidized or unsubsidized, to the customer. Companies commonly extend a payment term in order to:
    • Increase performance benefits of product
    • Broaden scope of relations with customer
  • Offer a Put. Illustrative Examples>> Grant the customer the right to resell the product to the company at a stated price in the future. The customer may not be required to pay for this Put. Companies commonly offer a put in order to:
    • Reduce customer anxieties about future prices
    • Increase trust in supplier
  • Offer a Call. Illustrative Examples>> Grant the customer the right to purchase the product at a stated price for a specific period of time that is longer than the norm. The customer may not be required to pay for this Call. Companies commonly offer a call in order to:
    • Reduce customer anxieties about future prices
    • Encourage customer to renew relationship
    • Reward customer for actions improving company margins
  • Provide a meet or release agreement. Illustrative Examples>> Allow a customer on a contract with the company to present the company with a legitimate, competitive price offering. The company must then meet that price offer or release the customer to buy from the competitor. Companies commonly provide a meet or release agreement in order to:
    • Reduce customer anxieties about future prices
    • Increase trust in supplier
  • Agree to a performance payment. Illustrative Examples>> The final payment by the customer depends on the company’s achievement of specific objectives, including all performance and price guarantees.

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