Analysis 52: Time To Lateralize Price Discount

EXHIBITS:

HOW TO INTERPRET THE ANALYSIS: This exhibit shows the time in months required for a price discount to spread throughout each customer size category in the marketplace. Once a new low price is established in a marketplace, this lower price, or its equivalent discount on the prior price, tends to spread, or lateralize, throughout the market. In this industry, virtually all Very Large customers receive the same discount, or the same new low price, within a week. Large customers receive the new discount within a month, while Medium and Small customers wait two and four months, respectively.

PURPOSE: This analysis quantifies the average time that a discount takes to spread to other members of a customer segment. Armed with this knowledge, the Company may slow the spread of price discounts to its smaller customers by insuring that their discounts do not exceed the price expected from the rate of price discount lateralization of the past.

APPROACH: Each time the Company offers a discount in the market place, there is a tendency for that discount to spread to other members of the segment and then throughout the remainder of the market. In a Hostile marketplace, this tendency is very high. In a Hostile market, any discount given to one member of the segment is highly likely to spread (i.e. lateralize) to other members of the segment.

This analysis measures the time from the establishment of a new low price in a customer segment until that same discount spreads through the other members of the segment. This analysis uses segmentation described by the customer Size/Role matrix, but other segmentations may also apply.

The Company uses the results of this analysis to project the timing of the expected demands for lower prices that should come in each segment as a result of a discount offered to one of the larger competitors.

Return to Diagnose Pricing: Price Increase Opportunities

Recommended Reading

For a greater overall perspective on this subject, we recommend the following related items:

Analyses:

Symptoms and Implications: Symptoms developing in the market that would suggest the need for this analysis.

Perspectives: Conclusions we have reached as a result of our long-term study and observations.

"Discovering Hidden Pricing Power"
A company's effective use of the pricing tool in a price-sensitive market requires more flexibility and market knowledge than is needed in a less hostile environment. The pathways to the pricing opportunities in tough markets lay in three actions a management can take to use price effectively in a market that appears intolerant of price increases. (1998)
"The New Pricing Structure"
The structures of industry prices are fundamentally different in hostile and non-hostile markets. (1994)
"Who Has Pricing Power?"
One of the first clear signs that a market has become hostile (or that hostility has ended) is a change in who sets prices. Pricing power shifts as a market moves into and through hostility. (1994)
"Why Price Cuts Don't Build Share"
Customers often say they buy on price. But the real buying process is more complicated. Price is not the customer's first consideration. It is his last. (1992)