Price Behaviour and Its Strategic Relevance

By guest blogger: Christoph Meili at Input Consulting AG

In a price strategic context, price behaviour includes two key questions: How are prices adjusted along the product life-cycle and how should prices be managed in relation to changes in competitors’ prices?. Strategic guidelines on price behaviour can help companies to act with foresight. The following cases illustrate the importance of answering these two questions on strategic level.

Pricing along the product life-cycle:
The evolutionary logic in many industries, e.g. consumer electronics, is that customer’s willingness to pay is decreasing along the product life-cycle. Apple takes this into account when adjusting the prices of its iPhone. The US-market entry price for a new model is always between 600 and 700 dollars. After the go to market of a new version, Apple increases the prices by up to 10%. After the first hype a first small price reduction is conducted. As soon as the next generation is available, Apple reduces the price for the last version by more than 20%. The price reduction is executed step by step. By systematically reducing the price, Apple is able to reach different target customers with different willingness to pay. The graph (above) shows the price development of each iPhone generation (Asymco, 2014).

Price behaviour against competitors:

Due to increasing competition and price sensitivity, many companies seek their luck in reducing their prices, which usually leads to immediate responses from competitors, making price erosion even more severe. In Switzerland this development could be observed in the retail industry. Since Aldi and Lidl announced that they are going to enter the Swiss market, the traditional retailers like Migros and Coop immediately began to reduce their prices and started a price war against each other without even knowing the actual price level of the discounters. , By this overreaction, they both destroyed millions of franks in margin without sustainable impact on customer behavior. Instead of running a low-price strategy, Aldi and Lidl have listed many high quality products which are sold for a medium price. With a clear and binding strategy against competitors price changes, this price war might have been prevented.

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Rules For Pricing Your Products

Entrepreneur highlight before pricing your products and services, you need to understand how customers perceive value A lot of businesses tend to price their products or services based on what they cost, rather than what their customers are willing to pay. The following steps can help you price your products effectively:

  • Listen to your customers
    You really don’t need to hire a marketing research firm to understand how your customers value your products versus competitors. Just take some time to ask customers questions and actually listen, versus just trying to close a sale. This is a good sales technique anyway.
  • Know your competition 
    This can be an awkward question to ask a customer, but it is worthwhile to ask, “If you weren’t doing business with me, who would you go to?” How is the competition different, and how do your customers value what is different? Prepare yourself for surprises when you start finding out your real competitors, and the benefits the competition may have over you. You’re learning stuff you didn’t know.
  • Be honest and fair in your self-evaluation 
    Brutal honesty — it’s very hard for people to do. I typically find that business owners and executives will overvalue the positive aspects of their business, and ignore the advantages their competitors have over them. Going back to the bicycle shop example, the owner might highly value that the store carries Continental tires — simply because one customer a month ago was happy they were in stock. At the same time, the competitor across town has a bike wizard handling repairs, something customers are willing to pay extra for. Simply charging what the competitor charges is going to miss the mark.
  • Recognise that customers are different to othersSome people value a neighbourhood bike shop, while others might have no problem taking a bike off the rack at Walmart. What you charge becomes a question of who you really want to compete with and what type of customers you want to attract. The smart move is set your prices for a particular group of potential customers, rather than all of them.

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The Power of Pricing: Improving Your Pricing and Profits

What is the correct way to define and measure price? More importantly, how can you improve net price realization and profit more money. The following steps can help improve your pricing and profits:

    • Have a clear executive level pricing owner:
      Most organizations do a sufficient job of managing pricing execution and deals flow through the building smoothly. Where we break down is having a clear and experienced owner of pricing strategy. Your pricing manager may be doing a good job tactically, however they are not usually thinking strategically. According to a study published in the MIT Sloan Review, fewer than 15% of companies have any systematic pricing review,

      Assign, goal and empower one of your executive team, most likely the VP of Marketing or CMO, with developing a pricing improvement plan and process.

    • Optimize your product range:
      If you have segmented your customers and understand which ones are truly price sensitive, having a basic price fighter in your range will meet their needs without disrupting your full product line pricing. At the high end, are their additional products or services such as extended warranty or faster shipping or higher performance that a segment of customers values


      Look at your product pricing strategy vs. your user segmentation again.

    • Align sales compensation with profit growth:
      If your reps are compensated for revenue, and not for profits or price improvement, what incentive do they have to fight for the best price? If you were selling and could make 5% commission on $1000 with little effort, or 5% commission on a $1010 sale with some effort and risk, what would you do? The 1% price lift is worth a negligible amount to them, but a huge amount to your bottom line and exit multiple!

      Consider having, at a minimum, your sales leaders compensated on expansion of either average selling price or gross margin.
    • Revisit your ‘price waterfall’ annually:
      Look at each deduction from your list price to the final, net/net price you bank. Are programs such as co-op still pulling their weight as you’ve shifted your mix to inbound marketing, away from relying on distributors to create demand? Do customers take an early pay discount when paying after the early pay period has expired?Once you have established your price waterfall, compare it to your leading competitors. Odds are you are being pushed to match invoice price plus you have more attractive trade terms, which your customers and sales team are not discussing in a price negotiation.

      Conduct a review of you and your competitors, selling terms and price structure annually.

    • Understand what your customers’ value:

Do those who set pricing truly understand what your customers’ value? Do your selling tools and training continuously reinforce the value of your products? What was the last insight your team delivered about how to improve pricing?

Ask your customers why they do, and don’t, buy from you.

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How Tools and Technology Can Help Manage Pricing Performance

McKinsey & Company notice how too often staff and sales reps struggle to see how their own goals match those of the organisation. Companies introduce all manner of performance management systems, but they can become complex, cumbersome tools that leave employees less motivated than before.

The challenge for companies is to develop a performance-management system that benefits both the sales reps and the company. That requires both a system that works and a way to track performance. In our experience, companies that outperform their peers do the following three things well:

  • Uncover data on performance
    Measuring performance requires transparency into data that matters, such as profitability. Without that data, managers can’t tell whether sales rep pricing activities are helping or hurting. A European steel producer had data, for example, on how overall profitability but sales managers lacked the tools to drill down to the individual customer or product level. That meant they could never measure the profitability of any given transaction or take actions to improve it. The people who win here are those who can get the field team, the inside team – everybody – using the system to input more data.
  • Design the system with the sales rep in mind
    Putting a pricing dashboard system in place can be useful, but it’s meaningless if the salesforce does not use it. A system should be both easy to use and relevant to the sales rep. Data visualization, simple outputs, and an ability for a rep to easily run queries against the data is a prerequisite for the success of any technology.
  • Set the right targets and track actions
    The final piece in the puzzle is active management and tracking. That starts with defining clear targets for sales reps based on a systematic analysis of all the facts and factors relevant to price. When those are established, the best pricing leaders put in place specific metrics that help track progress against those. It’s important to balance metrics between revenue targets and pragmatic measures of margin that are relevant to the business but also practical for the rep.

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Optimise Pricing and Promotion Strategies Through Advanced Analytics

ComputerWorldUK know understanding buyer behaviour and maintaining competitive advantage can be a vigorous task. In today’s increasingly digital world, consumers have mobile, on-line, and social channels at their fingertips, in addition to in-store channels, to research product offers and compare competitor deals before making a purchasing decision. With the pressure omni-channel consumers are putting on companies to provide the most relevant and compelling deals 24/7, how can companies transform to deliver on this consumer need and maintain a competitive advantage? The answer is two-fold: adopt a customer-centric pricing model and use advanced analytics technologies to understand buyer behaviour and develop relevant pricing and promotional offers.

Restructuring the existing pricing strategy could impact many aspects of an enterprise, from marketing to inventory management, and increase complexity throughout the business. When adopting a new pricing and promotions strategy, companies should explore the following factors to help lower the risk and better manage the transformation journey:

  • Data management
    A technology foundation comprised of a big data infrastructure and an advanced analytics platform can help execute specific pricing and promotions strategies.
  • Advanced analytical methods
    A quantitative and qualitative analysis of customers is crucial for companies to understand the effectiveness of a particular pricing model. A comparative analysis across all channels can also provide companies with insight into how they are faring against their competitors.
  • Technology
    Look to implement new strategies across multiple systems, including legacy, with advanced optimization software.
  • Strategic insight
    Attract, develop and retain people with advanced analytics skills to analyse and convert data into crisp and actionable insight, and motivate decision makers to make insight-driven decisions.
  • Continuous test and learn
    As customers move from one channel to another, companies can test new prices, measure customer responses in real-time and optimise their pricing and promotions accordingly.

When pricing insights are incorporated into daily business processes, strategic decisions can be made with greater confidence. To gain the most value from analytical insight, it is recommended that businesses develop robust governance and execution plans. Taking an analytics-driven approach to pricing and promotions can offer a variety of advantages. For example, a leading European food retailer adopted multi-channel pricing with a key lines strategy for online and offline products. Using an analytics-based pricing strategy, the retailer was able to increase the frequency of price updates in real-time and gain a better understanding of the competition. The impact was an increase in sales and profit, and improved price perception among customers.With today’s omni-channel consumer constantly seeking the best deal, an analytics approach to developing a pricing and promotions strategy can no longer be looked at as an option. As such, pricing analytics is quickly becoming an essential business driver due to the insights and competitive advantage it can offer.

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7 Reasons to Think Twice Or More About Your Pricing Strategy

Business2Community highlight how pricing a product or service “right” is among the most difficult decisions that any company makes. Pricing is a choice, and one that carries enormous ramifications. The “right” price is highly subjective but essential to achieve your business goals. Here’s why: 

  • Your pricing strategy should support your overall business objectives 
    What’s your business strategy? Price must align with your business objectives. For example, most people know that Amazon pursued a “land grab” strategy by growing its customer base early on at the expense of profit, and priced their products to fulfill that objective. Consider your own strategy and price accordingly.
  • Price is a HUGE differentiator. And sometimes the only differentiatorMany times the only major difference between products is its price. Last time I shopped for a tennis racquet, the store offered hundreds to choose from. They were lined up in price order, least expensive on the left, most expensive on the right. I noticed the expensive ones tended to have larger racquet heads. When I asked the difference, the sales person said that once you get about to about $150, there is little difference other than racquet head size and price. He said older people generally want a larger head size, and have more money to spend, so those racquets cost many multiples more. And guess what? They buy them.
  • Price defines your brand
    What do you think about when you think Hyundai? And what you think about when you think Audi? Much of what defines a luxury brands is it’s high price sticker.
  • Price defines your customer
    What kind of customer do you want? Your price will define the kind of customer you will attract, so proceed with an understanding of the ramifications.
  • Price will alter your business operations
    A value (inexpensive) provider operationally needs to be structured to handle a higher volume business. That can be very challenging. A luxury provider has be alluring enough to attract those willing to spend the money to purchase an exclusive product or service. Generally that means less customers overall.
  • Price will affect the way you market and sell your product
    An item that costs $4.95 has to be marketed very differently than one that costs $499.95 or $4,995. Let’s say your business model allows for an expenditure of 20% on average for marketing against the sale of an individual product. So for an item that costs $4.95, your marketing spend is $1; for an item that costs $499.95, it’s $100. The more expensive the item, the more flexibility you have with how you can market it.
  • Understand how price sensitive your market really isFor some product and services, price sensitivity is incredibly high. The more commoditized your product is, or the more generic it seems to your marketplace, the more sensitivity there will be. Uniqueness has value, and therefore is less sensitive. Other market conditions – such as doing business with highly funded markets – typically lends itself to less price sensitivities.

How To Raise and Lower Your Prices

Entrepreneur understand you need to make changes to improve your bottom line, without alienating your customers. The decision to raise or lower prices is a tough one, with many ramifications for your business. But the decision whether or not to change prices is not as important as the decision about how to accomplish the change.

Raising and lowering prices effectively involves careful attention to timing. It requires knowing how to affect your customers’ perception of the value inherent in what you are selling. It forces you to study and accurately predict reactions from your competitors. You should consider the following:

  • Decide how much to change prices
    Sometimes businesses announce major price hikes, even doubling their previous rates. One theory is that a single large price hike will get the pain over with. Businesses may also announce large price hikes when they’ve experienced major increases in the price of a key ingredient or cost component. A company that is being overwhelmed by sales volume from an unexpectedly popular product may jack up prices to reduce demand to a manageable level.If you have more than one product, consider raising prices on some items while leaving the others the same, or even lowering them. Some customers are sensitive to the slightest price hikes for a particular item while mostly ignoring other increases. Auto-mobile dealers use this fact to their advantage by cutting prices on cars as low as possible and attempting to make much of their profit on accessories like fancy paint jobs, about which customers are less price-sensitive.
  • Pick the right time
    If you decide to raise or lower prices, you must pick the right time. If you’re lowering prices, choose a time when the change will have the most impact; if you’re raising prices, choose a time when you’ll encounter the least resistance. Your business’s seasonality, growth stage and sales cycle affect your choice. Many retailers, for example, raise prices seasonally, usually in the fall when Christmas is near and rushed shoppers pay less heed to prices. A brand-new store early in its growth stage might delay a price hike, however, in a bid to gain market share. Meanwhile, a computer store catering to businesses is likely to ignore the holidays and time prices changes to coincide with new model introductions, which are more important to its sales cycle.
  • Change value and price
    Prices don’t exist in a vacuum. Like the earth under your feet, a price is supported by the value the customer perceives in the product or service to which the price is attached. Thinking about price and value in this way makes it clear that this is at least a two-dimensional problem. That is, you can change the pricing and leave the value alone, or you can change the value and leave the pricing alone. You can also change both value and pricing or leave them both alone. Any one of these changes can be tailored to have the same impact on your bottom line, at least on an individual unit basis, but they may have vastly different effects as perceived by customers.

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How Pricing Determines Your Business

SmartBear see it is often said that you should not talk about price during customer development interviews. The usual justification is that your goal is to uncover the details of your potential customers’ lives and pain-points, whereas a mention of price turns attention away from that topic, diverting the discussion to budgets and comparative value. However, price is as important as any other feature to determine product/market ‘fit’. 
Price is inextricably allied to brand, product, and purchasing decisions — by whom, why, how, and when. Price is not an exercise in maximizing some micro-economic supply/demand curve, slapped post-facto onto the product. Rather, it fundamentally determines the nature of the product and the structure of the business that produces it. 
The best thing, of course, is to realize that price is linked to everything, and bring it into your customer interview process Talk about their expectations of cost, and why, who would write the check, who would need to approve it, whether an ROI argument would be welcomed or scoffed at, or what would need to be changed to justify doubling your price (at which point, maybe you should do that an in fact double your price!) In fact, discussions of price in particular was the key to invalidating one business idea and then validating WP Engine, which now (2014) employs 200 people. Price is not an afterthought, it is essential business design.
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A New Approach to Pricing Mobile


Bcg perspectives realise how subscribers’ thirst for data seemingly insatiable, these should be heady times for mobile network operators. Spurred by smartphones, 4G networks, and bandwidth-intensive applications like video, global mobile data traffic grew 81% in 2013, according to Cisco’s Visual Networking Index. And no slowdown is in sight: by 2018, traffic is expected to be nearly eleven times greater than in 2013. Yet many telcos are experiencing flat, and even declining, revenues.

Forward-thinking providers have gotten the message: pricing should be centred around data. This lets them monetize the extraordinary growth in that traffic and, crucially, make the economics of the business work. The growth in data requires huge investments in network capacity—investments that can pay off only when revenues are aligned with usage. BCG estimates that this new approach—called “pathways conjoint”—can boost margins for the same target of gross adds by up to 10 percent over traditional conjoint-based pricing. This is growth that would otherwise be left on the table. And it can be obtained far more easily and quickly than providers might expect.

  • Building a better plan
    Before telcos can employ pathways conjoint, they need, as always, to develop the general contours of their mobile plans—parameters that BCG’s approach will then help them refine. Although there is no perfect template for creating a modern, data-centred mobile plan, BCG has identified an essential group of practices that provide a solid starting point.
  • Implement more data tiers at a stable price per megabyte 
    Mobile operators have largely moved from unlimited data plans to tiered data buckets—a sound policy that allows them to provide similar value to customers at less risk to themselves. But often pricing hasn’t been linear: larger buckets tend to cost far less per megabyte than smaller buckets. That gives users an incentive to buy more than they need—a nice model for the moment, but one that could prove unprofitable as usage goes up.
  • Embrace multi-device and multi-user plans with shared data
    With the growth of smartphones and tablets, households and individuals possess more devices than ever. Telcos can take advantage of this trend by moving beyond traditional one-SIM-card contracts and letting multiple devices share one bundle of data. This will bring a number of important benefits. (See image above). For one thing, it will allow providers to price data higher than for a standard one-SIM-card plan, as customers can still realize savings over the multiple individual plans that they would otherwise need. Higher data prices, in turn, allow telcos to offer additional SIM cards at low cost—an incentive for customers to add more devices and more shared data as well.
  • Take a fresh look at subsidies 
    Smartphone subsidies tend to be far more costly than those for more basic phones (in Europe, they typically run €100 to €200 more per handset). And they can be risky. Given the off-network uses of smartphones, telcos can end up footing the bill for an expensive gadget if they don’t carefully design their plans. Yet there is good reason to keep these subsidies. They make plans more attractive to customers who want the latest phones.
  • Set a fixed ARPU for voice and text 
    The impact of OTT players on traditional voice and text volumes isn’t likely to subside. Indeed, Juniper Research estimates that, by 2018, OTT services like WhatsApp are expected to control 75 percent of all mobile messaging traffic. In light of this trend, providers might consider offering flat-rate, unlimited-use voice and text for all but their low-end packages. By doing so, they can protect their business model from drop-offs in usage. Yet here, too, operators should proceed carefully. Some may find that there is still some value in voice allowances.

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How To Price Risk To Win and Profit

McKinsey & Company delve into how to logistics of risk and how to capture the benefit. Any project has an associated risk—delays, cost overruns, unexpected government interventions, market dynamics, etc. For large projects involving significant operational commitment, these risks can turn into considerable and unexpected financial costs. Having seen overruns hit tens and hundreds of millions of euros/dollars or more.

Despite these significant financial penalties, companies rarely give risk its due when it comes to pricing. In many cases, companies still treat risk as an afterthought. Large construction projects, for example, often simply add a standard “contingency cost” of 5 or 10 percent to cover the risks. Here’s how to capture the benefits:

  • Know the risk
    With the wide availability of data and advanced analytics, companies now can develop risk models that weren’t possible before. They can scale the complexity of the analysis up and down, but the deeper the analysis, the better the information for making decisions. Most companies, however, start with almost nothing, so even putting together a set of “orders of magnitude” estimates based on hypotheses lays a useful foundation for creating awareness of risk and factoring it into the process.
  • Develop a risk pricing plan
    Once the risks have been identified, the company has to price and come up with an approach for each (or at least for the most important ones). Generally this is a choice between pricing the risk into the contract, mitigating it, managing it during implementation, or simply walking away from it. Each option, of course, comes with a trade-off and cost. Almost any risk, for example, can be mitigated. Locking in the price of a basic material needed for a project can reduce the risk of price volatility though it may increase costs. Understanding these trade-offs helps in deciding on which risks to take. Risk review should be both systematic and flexible enough to respond to changing situations.
  • Negotiate the risk
    Risk has a cost and a value. In many cases, however, the customer has little idea of the risks and therefore has a limited appreciation of what it’s worth. For this reason, contract negotiation has to include a clear articulation of risks and their value, which is why prior risk analysis is particularly valuable. Negotiators need to understand both the risk and the rationale for pricing it, and be able to defend it when speaking with the customer. 

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