Back to Basics on Pricing

When it comes to price increases and making customers pay more, there are many broad generalizations like the 1% price increase fallacy and behavioral nudges. Today’s journal features big brands that are slowly testing price increases. These brands are ignoring the popular fads and instead are practicing effective pricing.

Be it big brands or up and coming tech startups, Effective pricing is about doing 3 things right, let us see these in the context of the brands in the journal story:

  1. Segmentation and Targeting: Starbucks is increasing prices, not across the board price increasing on select drinks that add significant value to certain segments and come with no alternatives. Starbucks is justifying the change with their messaging, “hard to make drinks” (as if cost matters to pricing). Other companies are doing targeted price increase based on Geo segmentation, avoiding price increases on certain products in the U.S. while raising them in other markets.
  2. Incremental Change: Garden Fresh Restaurant Corp raised its prices but is measuring whether it is driving net profit over sales lost due to high pricing. Its CEO, Mr. Mack said the goal is to regain profit but not scare away consumers in such a price-competitive business.
  3. Customer Margin: Some companies are not simply raising prices. They are focusing on Customer Margin, total profit from a customer by selling multiple products to them. When OfficeMax saw customers cutting back significantly on certain high priced items, it rolled back prices. When it saw increased demand for other items, it increased their prices. You don’t have to maximize profit from one item, you can maximize profit from a customer by selling them a basket of goods.

There is one exception in the story, Principal Financial Group, that said, “Our working assumption is that we have no ability to raise prices”.

Wrong assumption! There is only no room for blanket price increases and fads. There is always room for practicing data-driven effective pricing – because customers, competition, costs and circumstances (economy, technology etc) are always changing.