consider sophisticated pricing strategies Anyone who sets their price on the basis of the percentage margin they want is mad! The ‘required margin’ should only be used to determine the floor with regard to pricing, and never the ceiling or optimal pricing. Margin pricing is all too common, and particularly damaging to profitability. I recently […]

consider sophisticated pricing strategies

Anyone who sets their price on the basis of the percentage margin they want is mad! The ‘required margin’ should only be used to determine the floor with regard to pricing, and never the ceiling or optimal pricing. Margin pricing is all too common, and particularly damaging to profitability.

I recently heard Jeff Bezos criticising the business practice of fixating on the competition in developing strategy, when the focus should always be the customer. Despite this truism, basing prices on competitor pricing strategies is all too common.

There are many more sophisticated pricing strategies. These include – demographic pricing, dynamic pricing, increasing elasticity, product positioning, psychological pricing, unit management, to name a few.

Perhaps the most interesting to me is what behavioural economists call ‘charm’ pricing, a concept most of us are well aware of. A 2016 study looking at charm pricing considered conversion rates at various price points. The results included the following:

• 99c – 3.06%
• $1.00 – 1.88%

• 99 – $3.44%
• $3.00 – 2.11%

• $3.99 – 3.21%
• $4.00 – 3.39%

• $5.99 – 1.56%
• $6.00 – 1.42%

This study suggests a number of things:

• The numbers in the price matter
• The number 9 is a powerful force
• The impact of 9 decreases as the price increases

Pricing is much more complex than you may think, and consideration of a sophisticated pricing strategy is important if profits are to be maximised.

Source of core statistics – ECWID 2016

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D. John Carlson – Adviser and Speaker – 0402 273 350 or [email protected] .