Pricing Summary Outline
This section is intended solely to help you to diagnose market pricing for your business and to save you time and cost in gaining a good understanding of your business situation.
Once you have completed this section, your next step would be to move to the Improve Pricing section.
Throughout the text, you will find links to information that offer further insight on the topic. The green links are glossary pop-up boxes. In addition, at the end of each section, you will find questions and links to analyses that will guide you through your diagnosis.
SUMMARY POINTS
Pricing: Introduction
Type of Industry and Its Profitability
Capsule: If future demand exceeds capacity, prices should rise. Prices should fall if future capacity exceeds demand. This rule holds most readily in industries with low marketing and sales expenses as a percentage of sales. If you are in a low marketing and sales expense industry, one with commodity-like characteristics, spend the time to develop detailed forecasts of demand and supply. Otherwise, don't bother. In high marketing and sales industries, expect prices to come under pressure if industry returns are high or if the industry has had several years of price increases at a rate greater than inflation.
Capsule: As in politics, all demand growth is local. You start by forecasting local demand growth and extend beyond the local service area only where necessary.
Future Capacity From Current Competition
Capsule: The current industry has many different forms of capacity that it can make available or withdraw from the market. Each of these forms has a separate cost that affects market prices. The various forms of capacity enter, or withdraw from, the market depending on the price.
Capsule: The economic effect of every price is the discouragement of a competitor from operating some or all of its capacity. In low marketing and sales expense industries, the price falls just short of the cash costs of the next increment of capacity that the industry could supply the market. In other industries, prices and margins tend to rise until they attract low-priced competition.
Capsule: The best guess pricing scenario may be okay. But, check out the best and the worst case scenarios just in case.
Price Sensitivity Among Customers
Capsule: There is opportunity to use price to improve profits as long as customers do not become price sensitive. The industry's competitors teach a market to become price sensitive. As customers become price sensitive, they begin to use the "Last Look" tactic in order to extract even lower prices from their best suppliers. Ironically, "Last Look" drastically reduces price-based competition.
Competition and Their Knowledge, Capacity and Will
Capsule: Competition may have the power block our attempts to change prices. Whether they will do so depends on their knowledge of our actions, on their ability to change their capacity in response to our move, and on their will to risk their profits.
Pricing Objectives and Guidelines
Capsule: The basic rule is to raise the price until it attracts a competitor or chases away a customer. Usually the competitor, rather than the customer, sets the upper limit on the price. Company guidelines follow these objectives by adopting primarily Defensive or Offensive tactics in pricing.
Capsule: The Company may discount to gain share where a customer does not use "Last Look," or where it finds a competitor in a Leader's Trap. The preservation of market share drives most price discounts.
Capsule: The Company cannot increase its prices if competitors don't follow, so most price increases begin as short term events, pending competitive reaction. Long-term price increases depend on a unique competitive position or on an unusually un-competitive market.
Capsule: The industry changes prices more frequently as the industry’s product availability changes rapidly relative to changes in customer demand.
Capsule: No traditional movement in price is sacrosanct. Price should move in the increment that suits the Company's objectives.
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.
Capsule: Apply the price at a low level in a falling price market and at a high level when prices rise.
Segments to Receive the New Price
Capsule: The segments to receive the new price result from the pricing pressures and opportunities the market environment creates. These segments differ in falling price environments from those in rising price environments.
Components of Price Used to Target the Chosen Segments
Capsule: Every price has three components and, usually, a fourth. The company uses these components to focus its changing price on its chosen customer segments.
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Next: Introduction
This section covers most of the questions you must answer to develop a successful pricing policy. Turn next to the Improve Pricing to develop new ideas for your future pricing policy.