Dangerous assumptions for pricing


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There’s an interesting article in the Marketplace Section of today’s Wall Street Journal written by Dana Mattioli that talks about CEOs paying more attention to pricing strategies as they struggle between rising costs and price-sensitive shoppers.  The article is titled Executives Zero In on Pricing and it can be assessed here (registration may be required).

The article lays out many of the strategies that companies are implementing in their quest to raise revenues through price increases including balancing out price increases on some items with decreases on others,  rolling back discounts, and targeting price increases for certain places and not for others. Nothing remarkable in that, but I was struck by a statement made by one of the CEOs who was interviewed for the article.

Larry Zimpleman is CEO of Principal Financial Group; an insurer and asset management company based in  Des Moines, Iowa. He indicated that while the company hasn’t slashed its fees for insurance, 401(k)s and mutual funds, it also hasn’t raised them and doesn’t plan to in the foreseeable future. He also stated that “our working assumption is that we have no ability to raise prices.”

If you look at that last statement closely, it really implies a Principal Financial Group assumption that the pricing points for all their products are perfect. That’s quite an assumption that one would hope is backed up by strong quantitative data. Just because prices happen to be where they are today, doesn’t mean for a minute that they should be there. How much rigorous testing has the company done with regards to its pricing model? Does the company understand the price elasticity curves that its customers implicitly use when purchasing its products? And is the company constantly testing its pricing model assumptions against real world data? There are just a few of the questions I would ask Mr. Zimpleman and his senior executive team.

Contrast Principal Financial Group’s relative simplistic view of pricing with that of another firm mentioned in the article. Royal Caribbean Cruises actively collects data from booking inquiries on phone calls and its website. It then analyses the data to adjusts hundreds of its prices through the course of a day–day in and day out–to maximize ticket revenue. The result has been a 7.1% rise in revenue from the year-ago quarter.

Here’s the takeaway: Developing an effective pricing strategy requires more than just going with seat-of-your-pants assumptions. It’s easy to assume your current strategy is best, but doing so usually results in leaving money on the table – money that will be lost forever and never be recovered.

Republished with author's permission from original post.

Patrick Lefler
Patrick Lefler is the founder of The Spruance Group -- a management consultancy that helps growing companies grow faster by providing unique value at the product level: specifically product marketing, pricing, and innovation. He is a former Marine Corps officer; a graduate of both Annapolis and The Wharton School, and has over twenty years of industry expertise.


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