How can you easily get a clear picture of the potential impact of price on your customers? For years economists have developed theories to help explain why customers do what they do. Whilst knowing economics is certainly useful, there is a very simple and straightforward way to bring this sharply into focus and get a firm handle on how the price you are offering, and the prices offered by your competitors, are impacting your customers. And, more importantly than that, it tells you what you should do about it.
To do this I am going to assume you have information about what each customer would pay on your market offerings and on your competitors market offerings, as from this it is possible to construct a simple x-y graph. Plotting competitor savings on the x-axis and own savings on the y-axis (as shown in Figure 1), we can see that different types of actions are suggested from where they sit within this chart.
For example, if you have customers sitting in the circle at the top left-hand corner of the graph, where they “can’t save” with a competitor but they “can save” with one of your offers, then you might be asking why are we so cheap for these customers. Any additional margin that we give away to these customers could possibly be saved for the company instead.
On the other hand customers sitting in the bottom right-hand corner are potentially at risk to competitor offers. They can’t save with any of your market offers however they can save with the offers from your competitors. Certainly, the old rules still apply in the sense that if I have several goods and/or services with you it is more involved for me to leave but at a certain point I will decide that, for example, a premium of 20% is too high, and I will leave.
When you think about the price signal that is being provided to customers in each part of this graph it becomes clear what different actions should be taken.
In the past, arguably customers have lacked access to the tools that allow them to understand where they sit within the pricing landscape (tariffscape). So much so that certain industries with opaque pricing earned the name of a confusopoly. However, with the prevalence of online calculators and the development of free services which allow individuals to upload their detailed billing information the level of transparency is certainly increasing.
Of course, price is not the only factor which should be considered in deciding what would be the next best action. Profitability is certainly extremely important. If you’re making a whopping profit out of a customer, and your competitors have a better offer, you would want to take a small hit on your profitability to retain that still very profitable customer. Other factors, such as quality of service and price elasticity just to name a few are also very important inputs.
So, I hope that I have helped you see how simple and straightforward it is to use pricing to give you clarity on what you should do and how you should be thinking about communicating with each of your customers. If you’d like to learn more about how you can incorporate own and competitor pricing in to your capability set please feel free to be in touch.