Choose segments and write the strategy

Your report suggested a move on at least one of these three practices:

• whether a pricing strategy exists;
• whether different customers pay different prices deliberately;
• whether competitor price moves are anticipated.

This move guide puts your pricing strategy on one page. It says whom you price for, where you stand against named competitors, and where you defend or harvest. It also plans your answer to the two competitor moves you most expect.

If you took the consumer check, go to the consumer section. If your products reach shoppers through retailers, go to the section for brands.

1. When it applies

Use this move guide if your report placed any of these three practices in the lowest two stages.

If all three already sit at the middle stage or higher, skip this move guide.

It needs evidence first. Without costing the customer and learning what customers value and competitors charge, the page records opinion.

2. What to do

Seven steps. They take about four weeks, in two drafts.

1. Define three to five segments from needs and behaviour. Use the profit map and the value interviews. Write a price rationale for each segment.
2. Name the fences. A fence is what stops a customer buying at another segment's price, such as an order size, a contract term or a service level.
3. Sort the range. Separate the lines customers compare against rivals from the specialised lines they cannot easily compare.
4. Write the page in three layers. First the principles, then the rules for setting price, then the price positions. Principles change rarely, and prices change often. Table A below does this.
5. Plan your answer to two competitor moves. Take the two price events you most expect. For each, say where you defend, where you concede, who decides and within what limits.
6. Have it co-signed. The chief executive and the sales head sign it.
7. Take it to the board.

The three free worksheets do the recording:

• /worksheets/pricing-b2b/pricing-strategy for the page and its sign-off;
• /worksheets/pricing-b2b/segmentation for the segments and their fences;
• /worksheets/pricing-b2b/pricing-response for the two competitor moves.

3. What to produce

One table, plus the three worksheets above.

Table A. The three layers

Pricing problems often start with a break between the layers: principles nobody turned into rules, rules nobody follows, or price positions set outside the rules. Check each link before you change a price.

4. A worked example

Illustrative. Written for this move guide. It describes no client.

A commercial flooring supplier sells to builders, fit-out contractors and facility managers.

The segments.

• Builders buy on project tenders and compare every line.
• Fit-out contractors need fast delivery and samples on site.
• Facility managers buy replacements across many sites, under contract.

The fences.

• Builder prices need a registered project.
• The fit-out tier needs a minimum order and a trade account.

The three layers.

• Principle: price for service where customers value it, and stay level with the national competitor on lines everyone compares.
• Rule: fit-out prices start from the value of next-day delivery. Builder prices start from the competitor's tender price, with cost as the floor.
• Position: hold a premium in fit-out, match the national competitor on standard carpet tiles, and harvest the discontinued ranges.

The competitor moves.

• If the national competitor cuts carpet tiles, match on tendered projects above a set size, decided by the sales director. Concede the small builders' orders.
• If a new importer enters, hold price in fit-out and watch the next two tenders.

One month on.

• The chief executive and the sales director had signed the page, and the board had seen it.

On a retake, all three practices could be answered at the middle stage.

What it looked like in our work

From our own work. Figures changed.

A building materials maker surveyed two kinds of distributor on what mattered when they chose a supplier. Each scored the same factors from 1, not important, to 5, important.

Full-service distributors valued service and range. Low-cost distributors cared most about price, transport cost and surface quality. The two needed different offers.

Two segments, two prices

From our own work. Figures changed.

An insurer had two groups of customers with very different sensitivity to price. Pricing each group on its own sensitivity beat one price for all.

Margins are per customer, on a price of 100. Price sensitivity is the per cent change in customers for a 1% change in price.

The less sensitive group lost 1,680 customers on a 10% rise. The more sensitive group gained the same number on a 5% cut. The total stayed at 36,000, and the average margin rose by about an eighth.

Play the rival's next move before it comes

Illustrative. The payoff logic is standard game theory.

A rival has cut price on the lines customers compare. You can match everywhere, match only where you defend, or hold. The rival then decides whether to cut again. Score each pair of moves for both sides.

Matching everywhere gives away margin on lines nobody compared. Holding everywhere invites a second cut, because the rival keeps winning orders. Matching where you defend leaves the rival nothing to gain from cutting again. The segments you defend come from the price positions in Table A.

Fill the grid from the rival's own economics: its costs, its spare capacity and how much of its profit sits in the segment. Then write the answer into the response plan before the cut comes. Decide your response alone. Never discuss it with a competitor.

How sensitive each segment is

Illustrative. Dummy figures.

Estimate each segment's elasticity with its likely range. Set it beside the break-even for a 5% rise, which depends on the segment's margin. A rise pays where the whole range sits to the right of the break-even.

Here, a rise pays for large accounts, and only just for mid-sized ones. For small accounts and online, it would cost more than it earns.

5. Effort and dependencies

What you need

• The profit map from costing the customer.
• The evidence page from learning what customers value and competitors charge.

How long

• About four weeks, in two drafts.
• Then a refresh each year.

What gets in the way. We have seen these in our own work:

• Segments by size. The biggest accounts are rarely the most profitable. Build segments from the profit map as well.
• Accepting the commodity label. A building-products business in our own process notes held a price premium on a product everyone called a commodity. A new plant had cut turnaround and lifted consistency.
• A strategy written before the evidence. Without the cost to serve and the customer interviews, the page records opinion.

What we have seen. "A building products business: pricing by sub-segment added about a fifth to EBITDA." We have seen this in our own work. It is not a forecast for yours.

6. How will you know it worked?

The test is whether prices follow the page. Retake the check after the page has been through one price review. Each of these should be true when you answer:

For consumer businesses

This section is for the B2C Consumer Pricing Health Check. The job is the same. The positions are by category and against named competitors, and the fences are by channel, timing or version.

When it applies

Use it if your report placed any of these three practices in the lowest two stages.

What to do

1. Name your target customers.
2. Give each category a role. The role is traffic, margin or halo.
3. Write your position against each main competitor, by product group. Match, premium or ignore. Table B below does this.
4. Check the gap against it every month, from the competitor basket in learning what customers value and competitors charge.
5. List who is meant to pay less, such as members, off-peak buyers or students. Test the fence around each lower price.
6. Write it on one page and have it co-signed.

The three free worksheets do the recording:

• /worksheets/pricing-b2c-direct/pricing-strategy for the price-position statement;
• /worksheets/pricing-b2c-direct/competitive-position for the position against each competitor and the monthly check;
• /worksheets/pricing-b2c-direct/segmentation-fences for the fences.

What to produce

Table B. Role and position by category

A worked example

Illustrative. Written for this move guide. It describes no client.

A pharmacy chain sells through 70 stores and a website.

• Vitamins became a traffic category, matched to the main discount chemist on the twenty best-known lines.
• Skincare became a margin category, held at a premium with advice in store.
• Members paid less on vitamins. The fence was a member account, and the code-sharing that had leaked the discount stopped.
• The monthly check found the vitamin gap had drifted on three lines, and they were brought back into line.

On a retake, all three practices could be answered at the middle stage.

Effort and dependencies

• Who. The pricing owner drafts. The chief executive and the heads of trading and marketing co-sign.
• What you need. The competitor basket, and what customers would pay by category.
• How long. About four weeks, in two drafts. Then a monthly gap check.
• What gets in the way. A price-match promise with no limit. Write which competitors and which products it covers.

How will you know it worked?

For brands selling through retailers

This section is for the B2C via trade Brand Pricing Health Check. For a brand, the strategy is set by category and channel. It says where you stand against competitors and own-brand, what each channel is for, and whether you supply the retailer's own brand.

When it applies

Use it if your report placed any of these practices in the lowest two stages. The own-brand practice applies only if you supply own-brand, or have been asked to and not decided.

What to do

1. Position each category against competitors and own-brand.
2. Give each channel a role: grow, hold or migrate. Write the price differences between channels that fit each role.
3. Find the terms that reward volume you do not want, such as a discount for scale that passes no cost saving back. Change one of them at the next terms round.
4. Set this year's price target by channel for each category.
5. Write it on one page per category, and have the sales and marketing heads co-sign it. Table C below does this.
6. If you supply own-brand, work out its return separately. Count the capital that own-brand volume uses, apart from the brand. Agree a walk-away price with the board before the next tender or renewal.

The three free worksheets do the recording:

• /worksheets/pricing-consumer-trade/category-price-strategy for the page per category;
• /worksheets/pricing-consumer-trade/channel-roles-and-market-structure for the channel roles and the terms to change;
• /worksheets/pricing-consumer-trade/own-brand-stance for the own-brand return and the walk-away price.

What to produce

Table C. The page, one row per category

A worked example

Illustrative. Written for this move guide. It describes no client.

A dairy desserts maker sells through the two big grocers, independents and convenience, and supplies one grocer's own brand.

• Each channel head had priced as they saw fit.
• The page set a premium against the main competitor and a stated gap to own-brand for each of three categories.
• Grocery was to hold, independents to grow, and convenience to migrate from direct delivery to a wholesaler. A drop-size discount that rewarded small orders was changed at the next round.
• Own-brand used a fifth of the plant's capacity and earned well below the brand. The board agreed a walk-away price before the tender.

On a retake, all three practices could be answered at the middle stage.

Effort and dependencies

• Who. The commercial manager drafts. The sales and marketing heads co-sign. The board agrees the own-brand walk-away.
• What you need. Net-net price by channel, cost to serve by channel, and the competitor and own-brand price record.
• How long. About four weeks, in two drafts.
• What gets in the way. An own-brand contract priced to keep the plant full. Count the capital it uses before the next tender is priced.

How will you know it worked?

The worked examples are illustrative.

Think we've used your work without proper credit? Tell us and we'll fix it.