Instructions to the first input folder
To get your target price you need to fill in as much data as possible in the Price Changer fields. In this article, we’ll go through all of them.
- Product name. The actual first field is the name of the product, which you’re free to type in. You may need it later when printing out the results to remember what was the price calculated for.
- Segment. Choose which market segment you’re in. 1 stays for budget mass-market products, where price is the main argument. 2 is for well-enough products that are affordable to most customers and already have certain features. Customers are ready to pay a bit extra for it. 3 – is the middle segment. Products have features, are rather unique and although the price is still an important factor, the product quality plays a significant role. 4 is for premium products, business class. Price is above average and quality is outstanding. And finally 5 – is the highest option that stands for luxury products. Excessive features & the highest prices are accessible for a limited number of customers.
- Current sales price. Your average sales price. Not the list or gross price. Type in the price which most of your clients are buying with.
- Current volume. Number of pcs you sell per selected period. You may choose any convenient period – e.g. a year or a quarter. It’s needed for market share calculation that doesn’t take the length of the period into account.
- Current margin. Your profit margin when you sell with the mentioned sales price. The simple formula is profit/price or 1-cost/price.
- Price sensitivity. It’s a very important parameter that influences the price elasticity of demand, which is a core element of the tool. Mind following hints to choose the right value:
- Non-sensitive. Unique and exclusive good that has no analogs. Price change is hardly influencing demand.
- Barely sensitive. 10% price fluctuation may lead to a 3% demand change. Some luxury products fit.
- Not much sensitive. Goods with high brand loyalty, unique features that effectively hook target audience. Little price changes hardly matter, but a larger increase may lead to some customers’ flow
- Relatively sensitive. Customers react to pricing after some visible steps and with a certain delay. For instance, 10% price adjustment, your demand may change by 6-8%
- Fairly sensitive. % of price change is usually similar to its influence on the demand.
- Noticeably sensitive. Daily goods or regular supplies in a rather competitive market would fit here. Customers pay attention to price and soon react to price adjustments if there are no factors that may keep them steady.
- Considerably sensitive. The price change will not stay unnoticed, it’s an important factor in the market. Do it carefully. 1% of price alteration may lead to doubled % of demand reaction.
- Very sensitive. Highly competitive market environment. Customer pay attention to every % of price changes.
- Strongly sensitive. 1% of your pricing decision will influence your demand 4 times more. Price is the main instrument of competition
- Totally sensitive. It’s not like 1% of your price increase would stop your sales, but it’ll hit your volumes immediately and hard.
- Product originality. The more unique your product is the more engaged your audience is. 5 is the highest point here – choose it if your product is truly outstanding. 4 -many USPs, but there are similar solutions. 3 – an average product with certain features that justifies its position in the market but competition with similar advantages is there. 2 – low value of features, very average. 1 – copy of other similar goods in the market, not unique at all.
- Product maturity. In the long-run demand becomes more elastic as customers find alternatives and competition adjusts its strategy and prices. Choose 1 for a start-up, new product, 3 for growing business, and 5 for a mature product. 2 and 4 are for fine-tuning.
- Number of competitors. Type a number of your direct competitors. Like if it’s a golf-class car, take others from the same class, but not all the brands and models in your market.
- Brand loyalty. Rate how your customers are dedicated to your product. 1 – customers don’t care about your brand; 5 – your audience is an absolute fan club, an army of committed enthusiasts.
- Market share. Put here your share in volume (pieces, contracts, etc.), not in value! If the market is 1 mil. cars bottles and you sell 50K, the share is 5%, no matter how much they cost.
- Market limit. This option matters when the tool would suggest you lower your price, growing your market share. Most likely you can’t become a monopolist and there are mechanisms that will stop you from it. And take into account the brand loyalty of other brands’ clients – there will be always a share of those who won’t buy from you. So please evaluate what maximum share theoretically you could reach. For example, you have a 5% market share and can grow to a maximum of 30% because of regional limitations.
- Competitors’ reaction. Bear in mind that you’re not alone in the market and your competitors will react to your actions. Often it depends on the market share or popularity of your brand. The more significant for the market your product is, the more carefully competitors will look after your pricing. On the other hand, there are various factors that will keep them from following you, like niche strategy, unique proposition, etc. It’s up to you now to evaluate, follow your competition knowledge. Points mean: 1 – no reaction, 2 – competitors follow after 25% change, 3 – competitors follow after 10% change, 4 – competitors follow after 5% change, 5- competitors follow almost immediately, after 2% change. Example for “4”: you give a discount of 3% – no reaction, you give a discount of 7%, competition reacts, giving minimum 2% of additional discount.
Instructions to the 2nd input folder
In the 2nd input window, you should type in your competitors’ market shares. Put top 5 if possible. You may put any quantity, even zero if you have no market share information. It’s important to follow rules:
- If there’s market share, the price must be also typed in
- Always indicate the average price for “all the rest”. Just give your assumption
- If you mention 0 competitors, put average market price anyway, or just repeat your price
Comments to the Dashboard folder
At any moment you may switch to 3rd window and observe the dashboard. The data here is mostly self-explanatory. The best price is presented on the top line, followed by other variables that would be actual at that price. The little circle diagram shows the new market share after the pricing decision. The graph at the bottom reflects profit dynamics at every price step. When you hover over it at a certain pricing step, it shows profit and volume for it.
It’s important not only to take the generated price but also to keep an eye on the curve and its protuberance. The flatter it is the more flexibility you have, but if it is curvy then some extra modifications to price may lead to a significant profit drop. Act smartly!