ROI is a mantra in today’s pricing environment. One of the biggest opportunities in any market is to improve ROI by becoming the price leader – defined as the company in the marketplace whose competitors adjust appropriately to any price move that it makes.
Company A has two principal competitors and a number of smaller niche players. The niche players serve focused geographic areas or offer specialty products or services to unique segments of the customer base. Company A is a premium priced producer and is a price leader. Each time it raises or lowers prices, its competitors also make a price move. If Company B has a current price which is 90% of Company A, then when Company A lowers its price Company B will adjust proportionally. Thus Company B will still have a price 90% of Company A. The reverse occurs when Company A takes a price increase.
To establish the position of price leader, two conditions must be present. The first condition is that Company A must have sufficient market share to impact the market. There are no absolutes, but the norm would typically be between 25-30% or even more. Proctor and Gamble, for example, typically seeks a 35% share in any market, believing that this is the minimum requirement to influence price. As importantly for P&G, 35% share provides enough financial return to justify the investment of time and resources needed to exert price leadership.
The second condition is to invest the time and resources needed to thoroughly understand the marketplace.
It is a cliché that you cannot do good pricing without good information. This is especially true for a price leader. If a leader consistently fails to read the price/value proposition, and the overall impact of price changes, competitors will eventually stop following. Dow Chemical is a paradigm of a price leader which invests in good information.
Price leadership costs and it costs more when a company first makes the attempt. It is not for the faint of heart. Typically, a company trying to be a price leader will first increase prices. Competitors will not automatically respond. They will wait to see if the company is committed to the price increase.
And the acid test is that the leader is prepared to lose some business initially to commit to the increase. Few executives are willing to take that risk unless they are convinced that it will work. This reinforces the need for good market intelligence to allay the fears of top management.
Truth be told, there are no guarantees when you are asserting price leadership. A contingency plan should accompany the leadership strategy to elegantly recover if it is unsuccessful. If it works it will take a series of selling cycles before competitors feel comfortable with the leader and start reacting more appropriately and sooner. The shorter the selling cycle, the faster the response. This reduces the cost of leadership over time.
In the movie “What About Bob?”, Bill Murray plays an eccentric, neurotic character whose unpredictable behavior eventually reverses the roles between his therapist and himself. He takes control of his therapist’s life. Just like Bob Wiley in the movie, eccentric and unpredictable price moves can yield greater short-term control over pricing.
Another way to achieve price leadership is to create pricing momentum. Momentum is created by changing price in a rapid fire, unpredictable way to get the attention of competitors. It may consist of promotional discounts on a rotating suite of products while increasing prices on others. Success is measured by set targets for each price move, including sales revenue, units sold, competitor response and time to competitor response.
Two things are essential. The first is selecting a spectrum of products for promotion or increases. The second is making these price moves as transparent as possible.
Using pricing momentum to become a price leader is a high wire act. A mix of price increases, decreases and promotional pricing over relatively short periods of time will eventually capture market attention and encourage competitors to follow the leader.
To recap, the following should be noted about price leadership:
The company must have enough market presence to influence pricing.
Formal market intelligence is required to avoid disaster.
Each price move should have a contingency plan to recover if it does not succeed.
Each price move should be accompanied by setting targets to measure success or failure.
The company must understand that price leadership costs. It has benefits but these benefits will not occur immediately.
Over time, if successful, the short-term costs will go down as competitors respond more quickly and appropriately.
Benefits must be gauged and measured to ensure continuing commitment to price leadership.
Pricing momentum created by rapid-fire price changes may be an effective tactic for price leadership.
Pricing momentum has been successfully executed by a number of companies. By creating a new dynamic in the market they can capture the attention of competition and use it to take the leadership position in pricing.