Effective product pricing is vital for profitability. Yet most companies struggle with their pricing strategy and processes. Many companies lose revenue by clinging to cost plus methods which are at best sub-optimal and at worst can lead to the spiral of death. And all too often the pricing process becomes a counterproductive battle between sales, marketing and finance.
It does not have to be like this. Conceptually pricing is simple – if you lower the price you make more sales but earn less revenue per unit. There is some point at which your profitability is maximised. The purpose of pricing is to get to this point.
Pricing is an optimisation problem. To solve such a problem you need to set up a model of how the company’s income and expenditure varies with price and use that model to calculate the optimal price. Departments such as marketing, sales and finance still have a vital role in this process but it becomes focused on the issues that are important for pricing. This includes the factors which drive customer, intermediary and competitor behaviour. It also includes factors relating to the company including the analysis of expenses into fixed and marginal.
Laurie Consulting can:
- Help you understand and quantify the factors that are key for pricing.
- Develop the optimisation model combining these factors in a model for complex financial products.
Our optimisation models also enable more advanced techniques such as:
- Strategic pricing where the goal is to find the optimal mix of price, distribution, marketing spend and service to maximise company value.
- Dynamic pricing – for example price low to develop a market and then price higher once scale has been achieved.