WORKSHEET #21B: Price Increase Opportunities
Step 1:
Evaluate the costs of serving the Very Large and Large customers. More specifically, look at the cost of logistics for each size of customer. Determine whether the Company may have an opportunity to reduce its logistics costs with each customer by changing its customer relationship without a cost to the customer.
Step 2:
Identify those Very Large and Large customers the Company has served well over the last year. Determine whether the Company has an opportunity to increase its share of those customers' purchases due to this better performance. Interview the sales and marketing staffs to reach this conclusion.
Step 3:
Determine the price at which price declines proliferate in the industry (see Analysis 51):
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Find recent examples of a new low price reached among Very Large customers in the market.
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Determine the percentage reduction in the product price that this new low price represents.
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Determine the time that it takes for the rest of Very Large, Large, Medium and Small customers to receive the same or greater percentage discount on their current prices for the product.
Step 4:
Identify the current or potential ancillary benefits in the current Product and Service package:
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List the benefits that provide the customer with Reliability and Convenience.
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Compare the prices that the Company charges for these ancillary benefits to the charges of competition and consider raising the Company's relative prices.
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Review Improve/Segments to identify potential needs that the current customers might have for additional benefits to enhance Reliability and Convenience.
Step 5:
Identify any current or near-term constraints on competitor capacity:
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List any competitor who may be subject to a strike or to constraints on supplies of critical raw materials and parts.
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Project the capacity utilization of the top three competitors in the industry over the next twelve to eighteen months in order to identify those competitors who may be running low on excess capacity.
Step 6:
Identify competitors who might refuse to go along with a broad industry move to raise prices. These are competitors who have resisted price increases during past periods of capacity shortages among the industry's leading competitors. It also includes those competitors who may have more price sensitive customers than the average competitor in the marketplace. If there are no pressures on these competitors to respond differently than they have in the past, the Company should plan for the likelihood that any price increase will fail.
Step 7:
Determine the economic worth of any unique positions the Company might have:
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Specify the points of uniqueness that the Company enjoys against the other Peer competitors in the market, including Function, Reliability and Convenience benefits.
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Determine the value to the average Very Large customer of these unique benefits by estimating how much these benefits reduce the cost per unit of the product life cycle cost.
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Consider whether the Company might increase its product price to capture some of the value of the unique position it holds in the market. Remember in this step to leave the customer a clear savings in its Value Proposition for using the Company's product compared to its next best alternative.
Step 8:
Identify opportunities the Company might have to introduce a Performance Leader product:
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Select a representative Very Large and Large customer.
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Evaluate the life cycle costs these customers incur with the current product (see Worksheet #16: Estimating the Core Customers' Life Cycle Costs Per Unit for this analysis).
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Use the Improve/Segments section of StrategyStreet to identify potential unmet needs of these customers.
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Identify new Function, Reliability or Convenience benefits that the Company might add to meet these currently unmet needs for a premium price. Use the Improve/Products and Services section of StrategyStreet for this step.
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Establish a Value and a Price for these new benefits, remembering to leave the customer with a clear cost savings, on the new Value proposition.
Step 9:
Estimate the likelihood that the price increase will result in a net revenue increase for the Company:
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Calculate the margin increase, in dollars, across all customers expected from the price increase.
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Estimate the contribution dollars lost on the product sales the Company might lose as a result of this price increase. Convert this potential lost contribution into an overage contribution margin per unit of lost sale by dividing the lost contribution dollars by theunits of sale that might be lost. Note that the contribution margin lost will usually be below the average contribution margin since the most price sensitive customers already are paying low prices.
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Calculate the number of units of sale the Company can afford to lose before it loses as much contribution margin from defecting customers as the Company gains with its price increase. The Company does this by dividing the total contribution dollars in the first step by the contribution dollars lost per unit of sale in the second step to produce a total number of units the Company could lose from defecting customers before it loses all the benefit of its price increase.
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In interviews with sales and marketing staff, evaluate the probability that the Company would lose as much or more units of sale from the price increase, as it calculates in the previous step.