Denice R. Preston
The rising cost of living makes managers need to pay carefully for pricing. Toptal’s financial Expert Kalil Rodrigues shares four outside-the-box suggestions for maximizing your pricing strategies.
Authors are verified experts in their fields. They compose on subjects in which they have extensive experience. All our content is peer-reviewed and vetted by Toptal experts in the same area.
Kalil is a financial strategist for corporations, a financial expert, and a business consultant. A graduate of Bain & Company and global aerospace company Embraer, He has also been the leader of strategies at Nubank, a Latin American fintech leader with more than 50 million customers in Brazil, Mexico, and Colombia. Kalil is a pricing model specialist, including expense and revenue planning projections, forecasting, financial modeling, mergers, and acquisitions.
Pricing is vital to a company’s business plan and is even more vital in a highly volatile economy. Due to the explosion of consumer demand, supply chain disruptions, and simple economic policy and monetary policy, inflation is increasing quickly worldwide. According to the most recent information from the US Bureau of Labor Statistics, Inflation in the US Consumer Price Index rose 9.1 percent between June 2021 and June 2022, the highest increase in the past 40 years.
The US Consumer Price Index has increased sharply from January 2021. energy prices are rising faster than other components, including food and services.
Experts are divided on the length of time that global inflation will be, making it difficult to set prices competitively now without compromising profits. If there ever was the time to look at how you price your products, it’s right now.
I began my career as a consultant at Bain & Company, responsible for pricing projects for businesses of all sizes and types across diverse geographies and industries. After that, as an independent contractor, I decided to concentrate on the pricing. All too often, I’ve observed carefully designed, complex pricing models and pages of extensive data analysis that don’t bring any value.
Why? It’s often because people don’t understand the basic principles of the pricing approach or the complex nature of the factors that affect pricing strategy.
For instance, many pricing models rely heavily on historical sales data and customer behavior. However, these models aren’t likely to help in a new situation, such as a global epidemic or conflict.
It’s Not Always About Being the Cheapest
You might think lowering their prices is the most effective way to outdo your competitors. This is because the economic basis of every pricing strategy relies on the tradeoff between cost and sales volume. If there’s a demand for your item, everything else being equal, reducing its price will lead to more significant sales. But pricing isn’t always so easy to determine.
In 2021 the Boston Consulting Group’s Center for Consumer Insights conducted a study that surveyed 41,000 people worldwide about their shopping habits. They found that depending on the purchase the respondents were questioned, about 70 to 90% of respondents declare themselves to be “value conscious” (defined as always considering price before spending money). However, this self-declaration did not always reflect in the actual buying habits of consumers. When inquired about their most recent purchase across a broad range of consumer products and service segments, only a tiny percentage of respondents had purchased the least expensive item – in most cases, less than 15 percent.
Over a range of countries and categories, the majority of countries and product categories have been surveyed as being value conscious, which is defined as taking their time before making a purchase. But when asked about their recent acquisition, only 20% of the respondents could select the least expensive item while the next highest priced alternative cost less than 5 percent more.
The most important thing I’m trying to emphasize here is that the level of value individual consumers assign to a product can be subjective. Customers are typically more willing to shell out a more costly price for something they consider more critical. For many consumers, the cost can indicate quality or even confer an image of status. Some people might be content to shell out a few dollars more for a morning beverage of high-end Starbucks coffee, whereas others might be equally content sipping Nescafe and getting a discount. The context and the conditions are essential elements to be considered when designing the pricing strategy.
Don’t Assume Promotions Equal Profits
If executed correctly, promotions can be an effective method to increase revenue. Many customers have become accustomed to discounts and discounts during specific periods of the year. But, I’ve observed that businesses are prone to becoming dependent on promotions, which could ultimately devalue the company.
In 2018, one of the largest furniture retailers with a premium brand in Brazil employed me as a Pricing manager to assist in finding ways to boost revenue. With this in mind, the company put together a calendar of promotional events that initially increased revenue without affecting margins overall.
After listening to our findings and suggestions, A wise executive decided to stop the cycle. Some promotions were maintained; however, most were eliminated. The company also aimed an increased effort towards creating customized offers based on customer segmentation, which is less likely to impact margins negatively.
Dynamic Pricing Isn’t Just for Airlines
You may believe it’s a myth that price-based dynamic is only a problem for the e-commerce and travel industries; however, it’s also beginning to gain popularity across other sectors. For example, the makers of The Lion King utilized innovative pricing techniques to create the most successful show on Broadway in 2013, and numerous ride-hailing firms today employ “surge” or “demand” pricing strategies to boost profits during peak hours.
While it’s probably not a good idea to alter the price for the B2B SaaS platform each when a user connects to your site, many industries can implement some of the concepts for dynamic pricing within their strategies.
Dynamic pricing strategies are a way to boost the performance of pricing and growth in market share across a broad range of industries, including retail, consumer goods, and telecommunications, based on Bain’s survey of more than 1000 consumer-focused companies Bain studied.
Services like consulting and enterprise software firms have already implemented dynamic pricing methods. However, they don’t label them that. They typically use proposal-based pricing as a method which is price-based pricing that is where the price quoted for an item or service is adapted to the requirements of a client and perception of the value for the particular product or service. This isn’t an exact explanation of dynamic pricing, but the concept and impact are comparable.
