Dynamic pricing strategy and commoditization
In pricing, suppliers must deal with more than just their customers. As soon as there is a possible alternative, be it a competing product or a substitute, competitors’ prices and action-reaction patterns begin to matter. Especially in competitive markets with a limited number of competitors, value pricing is not the entire story. On the other hand, our experience shows that there is no such thing like a complete commodity: contractual aspects, service, reliability, etc. can matter, in addition to physical features, brand, and reputation. Pricing decisions become even more complex when other strategic actions, such as investments, positioning, and partnering options, must be decided in parallel, which is typically the case. Also, large customers can impact this interplay.
Our way of modeling every stakeholder’s objectives and options helps our clients understand the relevant implications of distinct pricing decisions. It improves their decisions in this field, also accounting for dynamic long-term factors.
Selected cases: Dynamic pricing strategy and commoditization
Competitive dynamic pricing strategy
For one of the top products of our client, a large chemical company, we developed a pricing strategy, taking into account multiple scenarios regarding action-reaction patterns in the pricing, capacity building, utilization, and positioning of the three main competitors.
As a result, our client gained a deep understanding of how the respective dynamic pricing strategies (i.e., action-reaction patterns) influenced one another and how he should act in the light of this. During the project, the specific impact of multiple regions and customer groups were included.
Countering a copycat attack
Our client was in a systems B2B business, building manufacturing systems and selling consumables. In this industry, which contained only three competitors, an Asian copycat found a way to copy the technology, break up the system, and sell consumables outside of the system. This broke up the traditional logic of the industry, which had earned money mainly through consumables.
During the project, we developed a new approach to pricing the portfolio of machines and consumables to defend against the copycat, as well as diverting the attack to the two established competitors.
Coping with competitor overreaction
In a market with significant overcapacities, prices had recovered due to an unforeseen capacity shortage. After a period of disciplined capacity and pricing policy, a new competitor showed aggressive behavior once more. In analyzing the action-reaction patterns, we discovered that the greatest danger to industry profitability was not the aggressive behavior of the new competitor but a resulting overreaction on the part of a larger player, and we came to conclusions regarding actions to mitigate part of the risk.
Three-year strategy checkup: after the entry
During the initial project, an entrant into a technology-driven monopoly attacked our client by copying a production technology.
Three years later, we conducted a strategy checkup with the client team, widening and deepening the original model to adapt to a new strategic move the entrant had taken recently.
Pre-emptive capacity investment and termination of a co-producer agreement
In a market with short capacity but an unstable market environment, the logical competitor for the next capacity investment, given established industry conduct, hesitated, while our client ran short on capacity.
The client asked us to evaluate the options for pre-emptive capacity building and/or the termination of a co-producer agreement, with the danger of aggressive retaliation. In spite of these doubts, our team came to the clear decision, advocating a significant investment while also cutting down the co-producer agreement.