Contextual Pricing: The Death of List Price and the New Market Reality by Robert Docters & Michael Barzelay & John G. Hanson & Cecilia Nguyen

Author:Robert Docters & Michael Barzelay & John G. Hanson & Cecilia Nguyen [Docters, Robert]
Language: eng
Format: mobi
Publisher: McGraw-Hill Education
Published: 2011-11-08T14:00:00+00:00

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Time is critical to pricing strategy. Take price at a time when your customers and competitors are not ready to fight you on it.

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Entrants/Opportunistic Raiding. In addition to entrants, companies raiding competitor’s Homeland markets face the problem of changing customer buying habits. Entrants typically will set a superior price/ performance offer before potential customers (depending on the quality of the product or service, this price may be above or below that of the incumbent). The idea is to make it worthwhile for customers to change. With multiple competitors in a market, companies are likely to resort repeatedly to lowering pricing as a way of gaining market share. This is why, to no one’s surprise, more competitors generally means lower prices.

To send the message of lower price, entrants tend to favor a relatively simple “transparent” price. Underpricing the incumbent works best when customers can compare product or service prices easily; it becomes less effective as the purchase grows more complex. Complexity and hidden price elements are usually not the best tactics for an entrant, because they force customers to work to understand the entrant’s price advantage—something customers may not be willing to do.6

Understanding underdog strategies is important because every company sometimes plays the role of underdog or challenger or entrant somewhere in its markets. That role applies to start-ups, such as mail-order florist Calyx & Corolla entering the retail flower market. It applies to large established firms in new areas, for example, P&G’s entry into the premium pet food market. It can apply to overseas expansion, such as major automobile manufacturers muscling their way into the Chinese market.

An example of “Simpler is better for entrants” is the long-distance telephone service market. Large corporate users’ contracts run hundreds of pages and depend on dozens of elements such as usage, geography, installations, and features. Consequently, direct “apples to apples” price comparison is difficult. This is one reason why price is a less effective tool for capturing large business customers than for winning smaller business and consumer accounts. That is why voice over Internet Protocol (VoIP) entrants such as Skype and Pioneer offer simple tariffs to new accounts, either flat rate or a penny or two per minute.

In contrast, customer inertia and conservatism help incumbents. To avoid the effort and perceived risk in changing suppliers, customers will often allow incumbent suppliers a material price premium. For example, as part of its quality programs at one point, Xerox had a policy that allowed incumbent suppliers up to a 15 percent price premium over potential suppliers before it would switch providers.

When customers are not willing to grant incumbent vendors a price premium explicitly, the real price level can often be masked through a complex price structure. Unless they have a monopoly, incumbents have a strong incentive to make it difficult for customers to compare prices directly. For instance, consumer electronics manufacturers such as Sony vary their model numbers among retailers so that consumers cannot be sure they are comparing the same model. Similarly, in the commodity chemicals business, buyers are highly sensitive to price.

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