Since you're reading this, chances are you have asked some of these very questions more than once. And quite possibly, the answers you received (or gave yourself) were less than satisfactory or convincing.
According to a recent study published in the MIT Sloan Review (Summer 2012), fewer than 15% of all businesses do any systematic study of pricing and fewer than 5% of Fortune 500 companies have a full-time function dedicated to pricing.
This short shrift given to pricing is even more perplexing in the context of the importance of pricing. As notable business investor Warren Buffett once said, “The single most important decision in evaluating a business is pricing power. If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. And if you have to have a prayer session before raising the price by 10%, then you’ve got a terrible business.”
The good news is that smart pricing is not nearly as hard or mysterious as it may seem. And any business, big or small, has all the data it needs to make simple but smart pricing decisions that can have a big impact on its bottom-line.
Chief Outsiders has released a new eBook on “Smart and Simple Price Adjustments for Higher Profit” that reveals the “secrets” to smart and simple pricing. This eBook is available as a free PDF download as well an iPad-compatible, interactive iBook from Apple’s iBook Store.
Key takeaways from the eBook are:
- Profitable pricing decisions can be made without knowing specific price elasticity of demand.
- Contribution margin is the key determinant of how a price change will impact the bottom line.
- Fixed costs don’t matter when making decisions on price changes if they remain fixed over the range of volume under consideration.
- Generally speaking, a product (e.g. software) or a service (e.g. ski-lift season pass) with relatively low variable cost (high contribution margin) is likely to benefit more from a price discount than a product/service with a relatively high variable cost.
- Prices of complementary and related products and services (usually with very different cost structures) can be adjusted so as to maximize overall company profitability.
- If price elasticity of demand is known (or can be estimated), it can be combined with other analysis for even better pricing decisions.
Atul Minocha is a member of the Chief Outsiders West Regional team. He is also a member of Sierra Angels investor group and teaches marketing at a liberal arts college in Lake Tahoe. Contact Atul at firstname.lastname@example.org or on LinkedIn.