We continue with our competitor price moves and cover now assessing your options. This includes step two, defining your own goal, and step three, identifying your own potential moves. As a business there really are only three types of goals you usually have. It's either achieving a target, rebalancing your portfolio or managing competitive moves. So let me give you an example for what the target could be and the corresponding price moves. Achieving a target is usually along the lines of increasing you volume by 2% or improving your overall margin by 150 basis points and the price moves well. If you want a grow market, you probably have to reduce your price a little bit, so price moves for the rentals could drive volume. Or if you want to make more margins, you probably have to identify price deltas and segments who could pay for that. Rebalancing the portfolio is usually something along the lines of offsetting the market decline in one segment, like the first home owners. Or shifting revenues to a completely new category like game rooms, which we didn't have before. The price moves here are increasing price for family with kids to drive margin, as an example. Or consider your price repositioning with a new product category. Those two goals usually have active price moves. Now managing competitive moves already sounds a little bit reactive, and here this example, modern is having aggressive price moves to get into the bedrooms for the first home owners. And obviously if you are attacked, you need to defend or consider an attack in another grassland to take share from the attacker. Let me give you a couple of general rules of thumb that relate back to our three different types of fields in our game board. Attack on the castle, if someone attacks you and you are on your home turf you want to defend it. And you protect it by lowering the prices, but don't overdo it. You want to lower the prices just enough to defend your market share. And the rule of thumb over experience is usually in the range of 20 to 40% of the price change the competitor has made. So if your competitor drops the price by $100, you should think about a range of $20 to $40 to respond. Now if you want to attack a competitor, for example, to gain market share, to retaliate or to divert the focus, you need a little bit more force. And here the rule of thumb is use 60% to 80% of the competitors force. If you are being attacked on a grassland, avoid reducing prices in the same grassland. Actually try to compensate for potential market share losses in an adjacent grassland. And try to balance your overall grassland market share. And lastly when there's an attack on a desert, try not to respond with a price war. Deserts are deserts because the profit pools are small from the beginning, so a price war will do a lot of harm and erase all possible profits. Rather, think of repositioning yourself as a premium brand, for example, to justify a price premium or other non-price moves to the price cuts. We now move on to the next step which is about charting the possible competitive responses. Let's discuss first when it's most appropriate or when do you really have to feel compelled to drastic responses to your moves. Therefore, criteria that I look at. It's the overall competitor pricing strategy. And has this competitor in the past been rather conservative or fairly aggressive? What's the cross-elasticity with your competitors? If they buy one unit from you, does this mean they buy one unit less from the competitor or is it actually not that bad? What is the competitor's strategic goal in the area that you are doing your price moves? Is it in focus and therefore important or is it not really in focus? And lastly, what's the competitor's margin room? Is there very little room for him to move on price down? Or does he have a fat margin cushion that allows him to do big moves? Now if all of your answers to these questions are really more on the right side of these scales, then you can expect probably a pretty strong comparative response to your price move. The most important indicators you have to observe for comparing the responses, are the market share and their profits. So, we have a little example here, where Modern is doing a price move. And you anticipate competitors to reduce price to counter that. And you'll have to get a sense of what this means, how much they could respond to what this means to your market share. So, this is the base case and this is Modern's current market share. Now, if competitors, as a response to our price move, cut their prices by five percent, we actually lose a little bit of share and then, as you can see, if they cut ten percent or more, 15 or even 20, then there is a significant drop in our market shares. So this gives you a sense of how far you should probably push it. Now, for the profits, you do the same thing. For the same competitive price cut scenarios, you want to map out how we, meaning Modern in this example, fare profit wise, and how Smith, who is seen as the key competitor now does profit wise. And here you can see quickly that within a 15 to 20% price reduction, Smith is going to lose really out a lot on their margin. So they're probably not doing that kind of a drastic move to counter our price move. And you can see that it's a lot more reasonable in terms of the margin in the 5 to 10% price cut range.
