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Development of a High-Performance (Competitive Response) Financial Model

The first step toward implementing a best-results Tactical Pricing Response System

Our first piece in this five-part series introduced the steps necessary to develop a successful Tactical Pricing Response System. To review the concepts of the Introductory Article:

  • Over-generalized pricing strategies are popular in the press—but not very useful
    We recommend you work through specific steps to develop a customized tactical pricing strategy
  • There are five steps in developing a best-results Tactical Pricing Response System
    We’ll focus on Step 1 in this article: Develop a Competitive Response Financial Model.
  • Practice making competitive price-change responses before automation
    This is the test-run for your Competitive Response Financial Model.
  • Business intelligence software allows for real-time competitor price information analysis
    But software is not the complete solution.  The complete solution starts with:
  • Development of a High-Performance (Competitive Response) Financial Model.
    This concept can be subtitled ‘We have to understand the ‘financial numbers’ of our businesses before we can make sound price-change decisions.’  Darn it.

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Achieving the best financial results from tactical price changes is possible only when: (1) you can forecast the financial outcomes of a given pricing change, and (2) those forecasts can be made both accurately and in real time. In essence, you must be able to calculate that Price Change A produces Financial Result B, and that calculation has to happen immediately (or best-results tactical price change responses are not possible). So—are you up for a quick test of your competitor price-change response capability?

A business scenario to consider:

  • A direct competitor sells some identical items.
  • Their search-engine visibility is such where prospective customers are likely to find their online store when searching for the items.
  • You monitor their price changes by manual viewing.
  • Today, this competitor lowered prices on a line of branded (or directly comparable) items. In net: they are selling the same products at a lower price than you do.

Two options now exist.  And here comes the first surprise: these options are not related to actual price changes (i.e. keep your price the same, or change it).  Instead, they are far more fundamental in business decision making nature:

  • Maintain or change price—and not know the upcoming financial impact is
  • Maintain or change price—and know the upcoming financial impact is

And that’s the key right there: Even with all the press discussion of ‘pricing strategy’, few seem to make the core connection: pricing strategy is not about the actual ‘changing’ of prices; those are tactics—actions—business moves.  Nor is it about what amount a price is lowered or raised; those are numbers—figures—percentages. Tactics and numbers do not a strategy make. Pricing strategy is about having a correctly functioning and financially sound financial model in place; one that allows Financial Result B to be calculated when Price Change A is considered.

Competitor Price Change Alert!  Price Change Response Time!  And the old maxim applies: Guessing is bad.  Now—let’s find out if you are guessing. Could you predict financial metrics outcomes in a real-life scenario of competitive price change?  These steps set the stage for finding out:

  • Choose one of your popular items.
  • Write the (current) price on a post-it note.
  • Subtract 7% from that price and write that figure on a second post-it note.

Now, pop up the order screen of one of your scallywag competitors. Pull up their comparable item and right where the price is listed—put the second post-it note on the screen. There—now it has happened: that competitor has lowered the price on one of your best-selling and most important product lines. By 7% at that!

Ten minutes are allotted for ranting and raving, various calls to business cohorts declaring the scallywags are at it again, and if absolutely necessary, one trash-can kicking. But only one—there are important decisions to make now.

Make-or-break decision making time: Right now, do you have a High-Performance (Competitive Response) Financial Model to put into action?  A numbers and metrics-based model that you can pull up on your computer screen, plug ‘real life’ numbers into, and from this, understand the real financial outcomes of your price changes?  In essence, we’ve just asked you to declare one of the two options as true and real for your business enterprise.  Which one is it?

  • Respond to competitor price changes without knowing the numbers-based impact
  • Respond to competitor price changes with knowing the numbers-based impact.

If choice two is your answer—wow!—that is really good news. You are in the top 10% of practically every industry with regard to capability to run your business by tactical financial numbers. The rest of us rely on intuition, gut-feel, and, at times, even the kick-the-trash-can-response systems. If, by chance, you are with the 90% ‘rest of us’: On [our website] you will find a PDF file entitled:

  • Pentagon GuideDoc  #1: How to develop a sound Competitive Response Financial Model (to be released soon)
    This GuideDoc provides a set of guidelines and considerations to assist you in developing, from scratch, your own (customized) Competitive Response Financial Model.

To note:  every business operates in different ways; hence, each business will have a different form of Competitive Response Financial Model.  The net is: we can’t ‘give’ you a model. The GuideDoc will, however, provide a framework so that you may consider your business circumstances and design a customized model that serves you correctly.

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In the next Article:  The (Usually) Missing Step: Practice Price-Change Response Scenarios. 

There is a key to developing the best price-change response system: practice response scenarios, not specific competitor price changes. Consider what ‘scenarios’ refers to, and please—do avail yourself of the opportunity to work through GuideDoc #1.  We’ll pick up with that discussion (and your new Competitive Response Financial Model) in Article02.

 

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