As marketers flex this analytical muscle they are able to develop a variety of models – from marketing mix to attribution, from segmentation to pricing;
We’ve been involved in a few pricing model conversations lately and thought we’d share some key points.
Higher profitability targets, greater competitive pressures, and the emergence of new technologies are all impacting a company’s approach to pricing.
Why is pricing important? A McKinsey study found that a 1 percent change in price could result in an 8.6 percent change in profitability. The company found that pricing can have a greater impact on the bottom line than just reducing costs.
For example, a 1 percent improvement in fixed costs generates only a 1.7 percent increase in operating profits, while the same 1 percent improvement in variable costs (including raw materials, labor, etc.) begets a 5.9 percent rise in operating profits. As a result many organizations have asked us what factors to use in developing a model that is right on target.
Unfortunately the most common pricing strategies are often not a very good approach. In a survey of its members by the Professional Pricing Society, 30 percent of respondents said they priced new products by mirroring their nearest competitors, and another 22 percent set new-product prices to recover costs and tack on a profit.
Only 18 percent said they did customer research to determine the value of the product or service to potential customers. And when it comes to Internet pricing, 40 percent said they simply mimic the pricing of their offline sales channels, and 28 percent responded that they don’t have an Internet strategy at all.
So what is the ideal pricing strategy? You want to develop a strategy that will capture the value of the product or service for a particular customer or customer segment without putting the brand at risk.