Improving Your Pricing Model

Macro of Priceing gun on white
© Photographer: Filipherzig | Agency:

Companies have three types of levers for pricing improvement:

1. Tactical levers – These offer quick, no-risk fixes for pricing policies and anomalies. Solutions might include tightening the terms of payment, setting strict guardrails such as minimum profitability levels, increasing prices on products or product features that have low visibility, and monetising giveaways (such as freight and service). Tactical levers can be decided upon quickly and rolled out for immediate impact.

2. Strategic changes in price levels. These involve moving prices on key items up or down – as much as 5% or more – by changing list prices or redefining the terms of trade promotion. Such actions are not to be taken lightly. To predict how customers or consumers will react, companies considering strategic price-level changes must make extensive use of analytic tools, such as conjoin analysis, price elasticity measures, profit parabolas, and in0depth customer interviews. These changes also require companies to use game theory and industry structure analysis to predict how competitors will respond. The investigation phase takes some time, but once a decision is made, implementation is fast – and so are the results.

3. Fundamental reshaping of pricing schemes. This is a step change that requires a company to creatively rethink its overall pricing structure. It could lead to overhauling the product lineup or completely rebuilding the discount structure. It might also involve pricing-model innovations such as pricing for performance, subscription pricing, or dynamic pricing, which is pegged to an external variable such as the time of the day. (In some vending machines, for e.g., the price of the products varies from the morning to the afternoon). These types of changes require managers to carefully segment their customers and opportunities. Piloting and testing are crucial before pricing schemes are rolled out; therefore, implementation takes longer for other, less complex moves.

Duranton, Izaret and Hutchinson, 2013


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