Are You Giving Away Profit?

Does Your Pricing Leave Money on the Table?

As the new year has begun, several clients called on us for help with pricing.  This makes sense.  The current economic environment is not favorable to raising prices, yet costs, especially shipping,  continue to rise.  Which means setting the correct price at the outset is critical because price increases may be difficult to establish in the near future. 

So how to set the right price?  Many companies employ a combination of pricing to market and cost plus pricing.  Both of those are legitimate and important steps to establishing reasonable prices.  But when pricing to market there is often at least a little bit of wiggle room.  Should you be below the cheapest offering on the market?  Below the highest offering on the market?  Does your brand name support higher pricing?  How do your features enter the equation?   Do you offer more features?  Should your pricing reflect that?  How much is a feature worth? 

We have several methodologies to optimize prices.  Conjoint analysis and discreet choice are related methodologies that seek to identify the underlying importance consumers place on price in the purchase decision.  Both involve respondents making a series of choices that force them to consider such factors as price, key product features and brand.  The equations behind these models enable us to identify the importance placed on each factor and, with numerical factors such as price, the importance of price as price goes up or down.  The power of these methods lies in our ability to simulate consumers’ choices through modeling.  First we identify the importance of each factor and then we change the values of each factor, run them past the consumers in our model and then we simulate the choices they will make under changing conditions, such as changing prices. 

These methods enable us to predict market share for a set of brands and/or share of choice for a set of products.  Then, by altering price, we can see how share changes.  So, for example, if my brand is a mid-priced brand and I simulate dropping my prices I can see how my brand share increases and I can see which lower priced brands I’m stealing share from.  This is a great way to assess whether dropping prices is a good idea because it lets us assess whether the drop in prices will come with an off-setting increase in volume.

Likewise we might simulate the addition of features to see the optimum price the additional features will command and we can then evaluate the incremental cost of the features versus the likely incremental gain in price. 

To see some of our research-based observations on pricing, please see our previous blog post on pricing

Please call 609.661.0632 or email today for more information about how our research experience on pricing can help you to maximize your sales and profitability!