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How Do Your Price Tests Potentially Impact Your Customers' Relationships with Their Customers?

Jul 2, 2008
Have you ever provided customers with an incentive to buy more and had them take that incentive and then buy less? Most companies have had that experience.

For example, many consumer products companies offer quarter-end sales incentives to sell extra products during the current accounting period. These incentives usually mean that customers don't buy very much in the subsequent two months.

Those reduced purchases mean that manufacturing costs are higher. Also, the inventory that consumers receive isn't as fresh. In many cases, the customers never reduce their prices to consumers.

Naturally, profits over time are depressed by such a price structure compared to never offering discounts. At the same time, volume is unchanged or even reduced compared to price structures that help consumers, such as temporarily lower prices when the alternative products are more expensive. For example, lower consumer prices for frozen lemonade could expand consumption when fresh lemon prices are at their lowest.

The full effect of a new pricing structure is seldom felt unless the potential for increased consumption is transferred efficiently to the customers' customers. For example, if you make large price concessions, and your customers raise prices to their customers, your volume may fall instead of increase. Certain types of pricing structures contain more risks in this regard than others.

When customers know that you are testing, they are more likely to behave differently from what they would do if the price structure change were permanent. Unless your customer is the ultimate user of the offering, you will probably find that your tests need to be adjusted to make them operate either as permanent changes or to act like permanent changes.

For example, you may want to ask your customers to make certain agreements about what they will do in exchange for the benefit of what you are providing. If that is not possible, you may need to rethink how the structures are designed in order to give customers a clear incentive to act only in the ways you hope they will.

In the case of the price concession structure just described, perhaps the benefits would need to be tied to the volume of your offering that is purchased.

Having understood more about how a price test can hurt customers' customers, why don't you now think about how such price tests might help customers and their customers? An example comes when new prices allow people to afford profitable steps that they could not otherwise afford, such as by finding new ways to secure low-cost home mortgages for new homes when financing is tight but homes are reasonably priced.
About the Author
Donald Mitchell is an author of seven books including Adventures of an Optimist, The 2,000 Percent Squared Solution, The 2,000 Percent Solution, The 2,000 Percent Solution Workbook, The Irresistible Growth Enterprise, and The Ultimate Competitive Advantage. Read about creating breakthroughs through 2,000 percent solutions and receive tips by e-mail by registering for free at

http://www.2000percentsolution.com .
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