A friend, also named Scott, recently sent me an article Leading the Way that discussed the frequency of small lubricant competitors leading the way in price changes. The article, originally published in Lubes’n’Greases magazine demonstrated that independent producers increased prices of lubricants as frequently or more than the major producers. The article reminded me you don’t have to be the largest competitor to be a price leader.
Leadership in pricing includes the obvious decision of when to increase or decrease prices, but it also includes the structure of your market price model, the architecture of price differentiation between segments and customers, and your process of innovation in pricing.
Starbucks started as a single location offering premium dark-roasted coffee and premium service at premium prices. There were other places at which customers could buy coffee at much lower prices, but Starbucks demonstrated customers would pay more for a compelling value proposition. Uber is another example. When they started, they were much smaller than yellow taxi companies, and they offered prices that were often lower than taxis. However, Uber was the first to use surge pricing which raised their prices above taxis during peak periods. Customers were willing to pay because surge pricing greatly increased the odds they would get a ride during those periods. In this case, Uber led the way in both price levels and price structure.
When I think of innovation in pricing, I often think of airlines. Although startup airlines initially were simply low-price competitors, in recent years they have offered price leadership in the way of ala carte pricing. Airlines like Spirit began using a pricing structure that could offer something to the most price-sensitive customers without killing all their prices. So there is a very low price available for the customer who only wants a seat, does not need to check a bag or store one overhead, does not mind a middle seat, does not mind boarding last, and does not want anything to drink. And by not providing those things, Spirit keeps their cost structure low. For customers who want some of those other things, the prices are higher, and offer a financial return to Spirit for providing them. These unbundled price structures are now very common in air travel.
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