Determine Price Sensitivity If you’re thinking about a price change and are very concerned how your customers may react, you can run through this exercise and generate an estimate of their price sensitivity. A higher price typically means lower volume. Yet you may generate more total revenue and/or profit with fewer units at the higher price; it depends on how sensitive your customers are to price fluctuations. If they’re extremely sensitive, you may be better off at a much lower price with substantially greater volume. Estimate how sensitive your customers are to fluctuations – it will help you determine the right price and volume combination. More importantly, you can estimate how a price change can impact your revenue. Price Elasticity. Think “price sensitivity” – how quickly will your customers defect if you raise your price? If you raise your price 1% and many of your customers defect, they’re extremely sensitive.
“Price elasticity” is a difficult value to calculate unless you have plenty of price and volume data and an economist on staff. However, a general estimate is better than nothing; this exercise will help your team generate the estimate together.
Summary EXERCISE SUMMARY
When to Address
If you’re working on your pricing strategy and need to understand how price changes will affect your revenue and profit
Who Should Participate
Business leaders: company founders, owners, presidents and vice presidents Marketing and sales leaders Product managers Channel managers
Where to Use the Results Why it’s Important
Use them to influence your final price decision and as a benchmark for future price evaluations.
Many companies haven’t estimated price elasticity and haven’t determined the price that will deliver the maximum revenue and profit.
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Your pricing obviously affects total revenue, profit and your market share growth What Builds Upon it rate. Timeframe to Completion Potential Business Impact
Roughly 30 minutes to one hour
Medium
Deliverable
You’ll estimate your price elasticity and calculate the prices that project to deliver the greatest total revenue and total profit.
Next Steps
Continue shaping your strategy with Sales Process and Marketing Plan & Budget.
Target Completion Date
PARTICIPANTS TASKS
PERSON RESPONSIBLE
DUE DATE
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Notes
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Determine Price Sensitivity
What to Complete
1. GATHER PRICE SENSITIVITY DATA 2. DETERMINE PRICE ELASTICITY 3. FIND OPTIMAL PRICE
Where it Fits in Pricing Match Pricing Strategy to Value Proposition Define Pricing Strategy Determine Cost of Goods Sold Set Price Floor Review Competitors’ Prices Determine Price Analyze Competitor Price Changes Determine Competitor Price Change Response Gather Price Sensitivity Data Determine Price Elasticity Find Optimal Price Calculate Profitability on a Single Deal
1. GATHER PRICE SENSITIVITY DATA
The best way to estimate your price sensitivity is to collect and analyze market data. Where should you start? Talk with your customers. First, list all the people in your organization who touch your customers, regardless of their department (sales, marketing, account management, customer service, etc.)
NAME
DEPARTMENT
1
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2 3 4 5 6 7 8
These people will comprise your survey team. Next, list your current customers to contact and any non-‐ customers that your above team has a relationship with. [Exercise 3 – Understand Your Prospects’ Problems can help] COMPANIES THAT CONSIDERED CURRENT CUSTOMERS TO CONTACT YOU BUT BOUGHT FROM A NOTES COMPETITOR Then, determine how you’ll deliver the survey. Method for gathering this information TECHNIQUE
EXPLANATION / WHEN IT’S USEFUL
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Formal customer survey
Informal feedback
Used when you want completely honest feedback from a group of customers; when set up correctly, you can measure this feedback more precisely than informal, open-‐ended communications. Especially helpful when you want to gather customer feedback on an ongoing basis and track your performance over time. Used when you want feedback from a small group of customers -‐-‐you’ll evaluate their responses on a one-‐by-‐one basis. If your questions are highly detailed and you want to probe for more information when you hear a certain response, you may be better off using this method.
Shape your survey to collect the data outlined in the questionnaire in 66-‐H. Use it to estimate how different price changes would affect the buying behavior of your customers and prospects. Enter the responses in 66-‐I. Since you’ve asked for estimates, some may be wildly off the norm and could dramatically skew the results. Are they realistic? If not, don’t use them.
2. DETERMINE PRICE ELASTICITY
To estimate your price elasticity, use 66-‐J to find the following values: Price that delivers the greatest total revenue Profit margin at this price Quantity at this price Price that delivers the greatest total profit Profit margin at this price Quantity at this price You may find that two different prices deliver the highest total revenue and highest total profits. In this case, determine your company strategy (revenue growth, profitability, etc.) prior to making any change recommendations.
3. FIND OPTIMAL PRICE
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What are your results? You may have different results for optimizing revenue and profits. OPTION Price that delivers maximum total revenue Price that delivers maximum total profit
PRICE
SELECTION
Use 66-‐I use 66-‐J as your reports.
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