After making two career moves and landing up as a Professional Pricer in 2008, I feel compelled to scratch the surface of the power of scientific pricing. The pricing discipline has matured and transformed over the last 15 years. Modern scientific paradigms such as AI, Deep Learning, and Neural Networks have made significant inroads into the pricing practice. The heatmap is a 10,000 ft. view of today’s pricing function. The pricing evolution continues from cost plus based to a more advanced value driven role, all backed by science.
Moving from Reactive to Proactive pricing
The power of scientific pricing enables businesses to make the move from reactive to proactive pricing. A proactive business does not only track their competitors, but they also set the rules of the game on the market. They are razor focused on thier prices by figuring how their rivals act, the category they are in, the brand awareness and the demand.
8 “Hows” that will help a business transform
- How should I respond to competitor moves in the market?
- How can I address “willingness to pay” in different customer and product segments ?
- How can I better evalaute the affect on products Y and Z when I change price on product X?
- How can I recommend products and services based on what a customer is most likely to buy?
- If a price increase is imminent, how can I identify customer segments to target?
- How can I make the best use of my promotion and rebate budget?
- How can I better understand the risk associated with potential customer churn?
- How can I define an optimal product portfolio mix so my products are priced at the right price points?
It all starts with the DATA
- Bids and Opportunities
Why is Price Differentiation so effective?
Differentiated pricing opens up new door to profit potential. In simple terms, price differentiation or often called as price segmentation is charging different prices to different customers for a product or service that is same or similar. The airline and hotel industries have effectively used price differentiation as customers rarely pay the same price for a particuar seat.
Consider a product that costs $25 for a unit. Business will lose money from customers when they sell a unit at an uniform price of $35. Some customers may be willing to pay more while the rest may find that price to be too high. If that business were to segment that price into three categories – $30, $40, and $50, it can then appeal to a broader group of customers looking for a cheaper product as well as extracting that extra revenue from customer segment that were willing to pay more for their product.
Few examples of differentiated pricing from everyday life,
- Volume – 3/6/12 months gym memberships will have different price points.
- Location – Price of a front row seat vs. a back row seat for a baseball game at the Yankees stadium.
- Level of Service – You can expect to pay much less for a non-refundable airline ticket vs. a fully refundable one.
- Time of Purchase – Think IPhones. If you are willing to camp outside of an Apple store to grab the latest and greatest 11 release, Apple will command a premium price. You won’t mind either because of “willingness to pay” on your part!
How does Scientific Pricing work
Imagine a latest smartphone on market being priced at $500. Few customers may be willing to pay $550 as they want to get the next latest and the greatest smartphone model. Other customers may see this price as too high and never convert. If you set the price at $500 flat, you lose $50 from people who won’t buy. At the same time you lose $50 from customers who are willing to pay more, for a total missed opportunity of $550. Airlines use sophisticated price segmentation techniques all the time. Stephan Liozu talks in length about price differentiation and value capture in his book, Dollarizing Differential Value: Quantification and the Capture of Customer Value.
How to do Scientific Pricing
Gain strategically from scientific pricing
Through scientific pricing analytics, you can gain from:
- Increase prices in segments where your product has a superior price-value position versus the competition
- Implement a price premium by taking advantage of swings in supply and demand
- Arm your sales force with documented value proposition and incremental value capture
- Focus sales and marketing efforts on price-insensitive customer segments
- Recognize price increase opportunities where customers have significant switching costs
- Reduce the emphasis on discounting through smarter pricing and rebate initiatives
- Cross and up sell based on products a customer is most likely to buy