Defining the Best Price

Price Optimization

Ask yourself the following questions:

Data suggests that people underprice by 3 -5%. Our research has found that 23 – 35% of buyers buy on price. 70% who would buy on value always choose 2 – 3 of our value offerings over a discount. If everyone bought on price, they would choose a discount first.

To get more Price (one of the four Ps of marketing), you have to understand the value you deliver and determine what you need to get more value. A skillful query of the market and your customers will tell you what those customers value and what they are willing to pay. If you ask them the right way, then you will get the answers that lead to more Price. In other words, more Price is about delivering more value. You have to

  • Create value
  • Communicate value
  • Deliver value
  • Capture value

price optimization

Seeking the Best Price

Price is the one component of the marketing mix that has a direct and straight path to the bottom line, so price optimization is key. Proven analytics operationalizes pricing by

  • Identifying the optimum price range for your products today
  • Managing pricing policy for the long term health of your business

The expected goal of pricing policy is to maximize long-term earnings. While this is a simple statement, it is a difficult challenge complicated by uncertainties, competitors, multiple products of yours in the market, and segments. The core issue, however, is always the customer demand—how your products or services measure up against a set of competing alternatives at various prices. The calculation of customer demand should be the critical driving concept for any pragmatic approach to setting price. And with the long term in mind, the short-term impact of pricing decisions must be understood.

From a practical perspective, the starting point for pricing should be the “optimum price,” the price that maximizes the short-term earnings, assuming that competitive prices remain constant. With knowledge of the market price sensitivity and the marginal costs, potential earnings are computed. As shown in the graph to the left, the blue line is the expected share at a defined price—assuming that prices of competitive alternatives remain constant. The green line represents your earnings as a percent of the maximum earnings over the same price range. The maximum range is the optimum price range. Having both the share and earnings allows the business team to estimate the cost in earnings of increasing share.

Define and Implement the Best Price

Breakthrough analytics go the next steps and models scenarios of changing competitive prices and internal costs. We

  • Guide your team through the entire process, including establishing an implementation path
  • Build a price optimization tool that can be used for your established and proposed products
  • Provide and manage the external market research most suitable to your business environment
  • Help you install the internal capability and other pricing tools to optimize price within your product and service portfolio

Successfully Implement a Price Change

There are four steps to the best price and successfully implementing a price change:

  1. Identify the structure of the business. This involves specifying the competitive set, the relative manufacturing and marketing costs, relevant market segments, and the key value elements. The business will need to define product life cycle stage; value structure (brand and performance); and competitive brand positioning.
  2. Design, test, and field the appropriate market research. This should be done by independent marketing research firms. Using the sales force or an internal resource for these studies increases the risk of bias that could adversely impact results.
  3. Analyze the data and build pricing support tools. For the pricing process heuristic, tools and models are developed that allow for the identification of optimum pricing. Dynamic value maps are also developed to help define alternative strategic pricing positions. Typically, this analysis goes well beyond the pricing issues to include perceptual, importance, and competitive quadrant maps, as well as a range of other marketing and quality analyses.
  4. Engage the team in workshops to use the tools to set the pricing policy. It is critical that not only are the policies agreed upon, but also that the organization—and in particular the sales force—supports it. Too many policies fail due to lack of support. A major purpose of the analytical approach is to build consensus within the organization. That is, the analytical structure provides a rational approach where opinions are tested against market measurements.

A major purpose of the analytical approach is to build consensus within the organization. Analytics-based facts provide a rational and objective foundation for functional initiatives where options are set against market measurements.

Additional Benefits of Pricing Optimization

  • The models developed can be used to conduct “what if” analyses
  • The approach can be expanded to estimate pricing policies for multiple products in the same family or market
  • It is consistent with Lean and Six Sigma methodologies for practitioners
  • Its team approach ensures alignment and information sharing
  • This approach can be combined with other tools to create an expandable business toolkit
Advertising Agency Associate Director

“[Breakthrough is] excellent at defining the REAL problem (the question behind the question). Worth every penny.”

Learn more about pricing optimization.