Analysis 48: Average Price Received by Competitor

PURPOSE: This analysis arrays each competitor by an index of his average price compared to other competitors who share customer relationships with him. The company will use this analysis to evaluate the relative growth and profitability of those competitors priced above or below it.

APPROACH: Most markets have some spread in the average price charged by competitors. The industry leaders usually price at an index of 100. Occasionally, there will be a competitor priced at a slight premium of 1% to 5% over the industry standard. This is an unusual occurrence. On the other hand, a market where a few competitors price from 1% to 5% below the industry standard is quite common. We call these competitors "Price Shavers" since they are shaving their price in order to make up for some shortcoming as perceived by the customer group.

This analysis categorizes each competitor by its pricing policy compared to the industry standard at 100. In each sampled customer relationship, the company with the Primary role is assumed to be at a price of 100. Other competitors in other roles in the customer relationship (e.g., Secondary and Tertiary suppliers) have prices that relate to the primary relationship holder's price. A Secondary supplier who offers a 2% discount would have an index of 98. A Tertiary supplier charging a 3% premium would have an index of 103. The index for each competitor is the average of his price indices with each sampled customer, weighted by the proportion the sales of each customer is of the competitor's total sales in the sample.

Return to Diagnose Pricing: Price Sensitivity and Competition

Analyses:

• Analysis 47: Competitor Price Point Pricing Index

• Analysis 49: Market Segments Where Share Moves on Low Price

• Analysis 50: Returns from Price Leverage Roles

• Analysis 51: Loss On Price Index
  
  
  

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

• The industry is seeing its first price wars

• Customers are more price sensitive

• Most competitors are offering low prices after a period where leaders held prices high

• As large competitors match low prices, other competitors face difficulties

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 Lessons AT&T Holds for Industry Leaders"
  When a strong industry leader is in a Leader's Trap, the industry may stay relatively attractive for the follower companies. However, once the leader gives up its Leader's Trap pricing, the industry has a very different future.

• "The New Pricing Structure"
  The structures of industry prices are fundamentally different in hostile and non-hostile markets. (1994)

• "The Price Segment"
  The price segment is not nearly as attractive as many assume. (1993)

• "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)