Establish a high reference price Behaviorial economist Richard Thaler has noted that consumers are really bad at making decisions about value and constantly need "reference prices" for comparison. These concerns encourage companies Pricing article take an incremental approach to pricing: Estimating the size of a market at various price points clarifies the range of pricing Pricing article, suggests which price models to use at any price and volume point, and increases the accuracy of estimates of profitability along the spectrum and of the unit-cost calculations needed to define the price floor.
Especially during this period, companies must keep firm control of their pricing operations, all the way down to individual transactions. Obscure the reference price This is a more clever Apple marketing trick; instead of giving consumers a reference price, hide the pricing altogether.
But as the market share of a company grows, its competitors often react quickly, using low prices to minimize their market loss or to enter the market. Instead of first asking them to compare the new valve with an existing one, the company now sought to evaluate the cost of planned maintenance shutdowns and the role the new valve could play in reducing their number.
Zawada How much should you charge for a new product? The purpose of this page white paper is to demonstrate how having the right pricing automation software can maximize business profitability in the long run.
But companies must see to it that their research does more than make comparisons with known reference points. Related content from the McKinsey Quaterly.
Going to market Presenting a price to the market requires both astute communication with it and patience. In the basic-materials industry, for instance, Asian and Eastern European suppliers have frequently captured market share through penetration pricing once their Pricing article and logistics standards reached minimally acceptable levels, because producers in developed countries could not match their low labor costs.
Even then, however, a lot of money can be left on the table. If an older product remains viable, a company might try to manage the cannibalization problem by giving its new product a higher release price targeting a smaller segment of customers.
The result can be constant downward pressure on pricing that puts target margins out of reach. Global competition, increased pricing transparency, and lower barriers to entry in many of the most attractive industries have contributed to the trend. Many companies want to make a quick grab for market share or return on investment, and with high prices both objectives can be harder to achieve.
The company then took the price of the older, stationary readers and raised it proportionally, solely to account for the time savings. The highest price Since incremental approaches tend to focus on the lower end of the price range, companies should start by defining the opposite end of the spectrum.
A well-known example comes from the US consumer PC market, in which Dell Computer created a lower cost structure and eliminated costs associated with intermediaries by selling built-to-order PCs direct to customers over the phone and the Internet. Whatever its price category, it hits the market in one of three positions.
The World-Class Pricing Framework outlines the stages of growth that pricing managers and their organizations must go through on the journey to excellence.
At present, companies routinely overlook the higher reaches of their pricing potential. Too often, companies Pricing article the benefits of their new products, touting as revolutionary what is at best evolutionary and rarely acknowledging that they are really playing catch-up.
If consumer choice is influenced primarily by benefits rather than price, penetration pricing can only be destructive.
But others, particularly process and relationship benefits such as on-line purchasing options or brand reputation, must be evaluated through market research.
If a supplier can build a presence in such markets quickly, ahead of the competition, it can disproportionately tap into latent demand, expand its share, and establish itself as the market leader.
Companies consistently undercharge for products despite spending millions or even billions of dollars to develop or acquire them. Analyses based on cost differences and process improvements are parts of the puzzle, and so is an understanding of the competitive landscape.
Perceptual mapping, which assesses the benefits of different products that may not be direct substitutes for one another, seeks to identify the benefits that no other product offers. It is similar to budget variance analysis — performing comparisons calculating variances and splitting the performance metrics into sub-elements.
These questions and more can be answered by looking at the management science tools used by some businesses to manage revenue, costs and capacity utilization. Midrange prices, for instance, might put a product in the dead zone -- too cheap for quality-conscious customers and too expensive for bargain hunters.
But by using an existing product as the reference point, the company undervalued a revolutionary product. Penetration pricing With every new product, companies feel tempted to build market share quickly through aggressively low prices -- a tactic known as penetration pricing.
Exploring the full range of pricing options For products that replicate others on the market "me-too" products or that offer small improvements evolutionary productsthe room to maneuver is relatively narrow, and incremental approaches may come close to the optimal price see sidebar " Launch position ".
If costs fall faster than prices, margins should rise over time. Painstaking cost analysis and a clear set of target customers are needed to avoid catastrophe with me-too products, which bring a company into line with the rest of the market without adding new benefits.Most businesses struggle with their product pricing strategies.
Am I charging too much or too little? What's the price elasticity like? How can I grow. Jul 30, · News about Food Prices and Supply, including commentary and archival articles published in The New York Times.
These concerns encourage companies to take an incremental approach to pricing: they use existing products as their reference point. If a new offering costs 15 percent more to build than the older.
Read recently published pricing articles from Pricing Solutions, covering numerous topics including pricing strategy development and execution, pricing excellence, pricing structure, pricing automation, pricing for profit, value-based pricing, pricing research methods, pricing products, pricing services, and more.
Transaction pricing is the key to surviving the current downturn—and to flourishing when conditions improve. At few moments since the end of World War II has downward pressure on prices been so great.
Some of it stems from cyclical factors—such as sluggish economic growth in the Western. Jul 12, · Most executives know how pricing influences the demand for a product, but few of them realize how it affects the consumption of a product.
In this article, Save; Share; Buy Copies.Download