The cost of not knowing the right price

Going with your gut, or with insufficient data, leads to inefficient pricing

A rose by any other word would smell as sweet. Shakespeare taught us that. But does the same hold true for price?

Do roses priced $24.99 per dozen smell the same as those sold for $170? What is the impact of price on perceived value? Or, if we can continue with the olfactory analogies, just how low must a price be before a consumer smells a bargain?

Deciding just how much to charge for the goods you manufacture can be challenging. Retailers and distributors push you in one direction. The appearance of new competitors may push you in another. And as any manufacturer who has ever done a store check can tell you, retailers don’t always offer products at the suggested retail price.

The nature of what you make has an effect as well. Prices for luxury items are generally elastic, i.e., a small change in price is accompanied by a large change in demand. Luxury goods, in other words, are highly responsive to price changes. Necessities, on the other hand, are generally inelastic. If the price of milk drops by a few cents, it’s unlikely that consumers will start buying loads more of the stuff. Cigarettes and gasoline are two other oft-cited examples of inelasticity. When the price of those items rise, consumers don’t suddenly quit smoking and start walking.

But unless you’re selling milk, smokes or fuel, figuring out price isn’t easy. You probably have a feel for what price will work. But so does everyone you work with on the path from factory to consumer. And their instincts and opinions may not mesh with yours.

Looking deeply at price data across a category can help find consensus among manufacturers and retailers about what a price should be. That alone is reason enough to conduct a price study.

But there are other advantages too. Because you never know what you’ll find when you dive deep into pricing data.

Uncovering opportunities

We worked with a manufacturer awhile back that was seeing its input costs soar. And those rising costs were pressuring the company to take a 10 percent price increase on its product portfolio.

But rather than make a decision based on feel and costs, the manufacturer reached out to us for a broader, data-based look at the segment.

The NPD Group conducted a price evaluation study that included price elasticity, price point/gap analysis and a price-tier evaluation of its portfolio versus the competition.

What that pricing analysis unveiled was both unexpected and remarkable: an opportunity to launch a new product line to fill a category void. That new line, “started by that elasticity study,” is now a $60 million business.

More recently we heard from a tech manufacturer that wanted to learn more about category pricing dynamics across all its distribution channels.

We conducted a study that included price elasticity and price point/gap analysis that included alignment of e-commerce and brick and mortar strategies.

Once again the results were illuminating. Analysis revealed that goods sold via e-commerce were more elastic in price than those sold in brick and mortar stores. That’s no surprise given consumers’ ability to compare prices online easily. But the study also identified a number of “opportunity price bands” that the company rapidly placed into test markets.

To learn more about how looking more deeply at prices can uncover opportunities, check out “Five Proven Ways to Make Your Pricing Work for You.” Or just contact us using the form to the right.

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