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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.  

Pricing „  Determine  Price  Sensitivity

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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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Determine price sensitivity  

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