Nearly everyone agrees that the coming Brexit barriers will increase the volatility and complexity of doing business within the UK. Pricing can serve as both a bulwark against uncertainty and a great source of opportunity during this period. However, when it comes to pricing, it is key to remember that one size does not fit all.
Any price increase subjects a company to volume risk. This is a matter of price elasticity. But volume risks can vary as well. In fact, depending on how sensitive certain products and market segments are to price changes, a company can achieve a significant effective price increase by raising some prices, leaving some steady, and cutting others. The mix and the balance makes the difference. An organisation with a solid and smart pricing capability will be able to work cross-functionally to evaluate the potential impacts of any pricing moves, and learn to optimise the mix of moves rather than trying to make one bold move.
Put another way, the key here is price differentiation. Products and customers are not always equal in their ability to serve as profit sources. If a company can estimate price elasticities accurately, it can take those into account and differentiate prices by category, by geography, by customer segment, and by product or pack type. In this scenario, taking a lower total price increase on smaller product configurations (or none at all) and reducing the number of units per pack would be a smarter way to achieve higher prices than simply slapping a price increase of 10 percent across all SKUs. This level of awareness, and the options it gives a company, reflects our insistence on creative, intelligent, and responsible price management.
In a recent project for an online classifieds business, we helped deliver an overall average 22 percent price increase. However, virtually nobody got the 22 percent... a significant proportion of the customer base saw no price change and some saw up to 50 percent. Importantly the price increase was aimed at where customers perceived the greatest value – in this case for the customers listing the highest value products, with the shortest listing duration and the highest sell-through. Nobody “likes” a price increases, but in this case acceptance was over 95 percent because the company properly calibrated the mix of pricing moves and then carefully prepared and rehearsed its communication of them.
What does successful price management entail? Simon-Kucher & Parters has identified three key factors:
#1: One size does not fit all