Since price strategy is one of the pillars of any business strategy, I took some time to create the Price/Volume Matrix™.
I believe the graph is self-explanatory, however, if needed, the PDF provides a bit more information.
In a nutshell
Any price/volume combination in between the two levels, Break-even Level, and Reservation Level, could be worth pursuing. All other areas would normally be considered ‘out-of-bounce’: it is either unsustainable (below the blue line) or inconceivable (above the yellow line).
Contraints
The total available market (demand) for your product – across conceivable price points – is called the Total Available Market (TAM).
For instance: The total LED Market in The Netherlands.
The business model not only identifies the products or services to sell, but also requires to identify a target market, and the expenses it anticipates to make a profit. This target market is a section of TAM, or a segment of the total market. This presents us with the Serviceable Available Market (SAM) – the percentage of TAM that can actually be served.
For instance: The total LED Market for indoor lighting in The Netherlands sold by lumberyard stores.
If we include all constraints, i.e., competition, distribution challenges, trends, and other market influences, we end up with a Serviceable Obtainable Market (SOM), which is the percentage of SAM which can be realistically reached, given the practical limits of our business model. This is also referred to as our Target Market.
Market share is a percentage of SOM (sales volume divided by SOM volume).
For instance: A market share of 15% of the total LED Market for indoor lighting in The Netherlands sold by lumberyard stores.
A market analysis is about identifying potential customers, this might be all customers that need lighting, not necessary LED lighting. This is what is referred to a Potential Available Market or PAM. While these potential customers might consider LED lighting to be too expensive, we could introduce a cheaper product to get them onboard and grow TAM.
Questions
- What will be an excellent strategic price point (price optimization)?
- What Strategic Advantage Strategy supports our value proposition most?
- What Strategic Value Strategy should we consider?
- What distribution challenges are we going to face?
- Can we grow SOM (Target Market) by changing our distribution strategy?
- Can we increase our margin by lowing our cost price?
- What competitive advantage can be obtained from interrelationships?
- Should we accept an unsustainable level because of an accompanying product?
- And so on.
Strategy
In any case, the Price/Volume Matrix™, or Pricing Strategy, can not be seen as separate. It is part of an integrative strategic approach – a directed course of action to achieve an intended set of goals – to accomplish our firm’s mission, goals and objectives, including:
- Horizontal Strategy (across divisions)
- Product/Customer/Resource/Network Development Strategy (ROUNDMAP)
- Business Development Strategy
- Distribution Strategy
- Growth Strategy (Ansoff Matrix)
- Strategic Partnerships
- And so on.
