Pricing

I previously blogged about pricing here regarding behaviors and pricing, and academic studies providing insights to develop strategies from.  Recently from McKinsey Quarterly on "Building a Better Pricing Structure" here, average review though:

"A pricing infrastructure can be difficult and costly to create. It requires investing appropriately, empowering the right people, articulating clear targets and goals, and managing risk. Yet the benefits of realizing true pricing excellence are worthwhile: a one-percentage-point improvement in average price of goods and services leads to an 8.7 percent increase in operating profits for the typical Global 1200 company.1 Since a well-executed pricing-improvement program often yields price increases of two to four percentage points or more, sustaining a long-term price advantage may represent roughly 15 to 25 percent of a typical company’s total profits."

Consumer Behavior and Pricing

I was first educated on the art of pricing by a good friend Mr. Dennis J. Crane of the Business Navigation Group, details here.  Thanks Dennis!

A recent and an excellent report from UK's Office of Fair Trading, "The impact of price frames on consumer decision making" here, defines the various pricing strategies of retailers into price frames.  These are:

"A baseline treatment in which consumers see straight per-unit prices.

Drip pricing where the consumers see only part of the full price up front and price increments are dripped through the buying process.

Sales in which a sale price is given and a pre-sale price is also given as a reference to the consumer, 'was £2 is now £1' (actual pricesare identical to the baseline treatment).

Complex pricing where the unit price requires some computations, '3 for the price of 2'.

Baiting in which sellers may promote a special price but there is only a limited number of goods actually available at that price.

Time limited offers where the special price is only available for a pre-defined short period of time."

The report is extensive in its details on the process used.  Tabular formats break down the complexity of the analysis and the results.  Couple of key conclusions from the report are:

"The evidence from the controlled experiment shows that, in contrast to the predictions of standard economic theory, price frames do matter for consumer decision making and welfare. Consumers make more mistakes and achieve lower consumer welfare under the price frames we investigate as compared to straight unit pricing (the baseline)."

"The ranking of the price frames, starting with the worst – that which causes the greatest welfare loss - is as follows:
(1) drip pricing
(2) time limited offers
(3) baiting
(4) sales, and
(5) complex pricing."

If you are interested in a quick review of the report, please see the Economist article "You've been framed" here.  The Economist concludes that:

"Although consumers clearly lost out there were no corresponding overall gains for retailers. Sales volumes were virtually the same whichever way prices were presented. The main effect was on the distribution of sales. The first shop to lure shoppers sold many more goods, as consumers grabbed at poor deals. That made some firms better off but others (which would have offered better deals) were worse off. Most price frames made for lousy matches between shoppers and retailers, a bad result all around."

Do the manufacturers become the winners in the end?  Should manufacturers remain with the business they know?  Is a combination of an organization that is a manufacturer and a retailer work best?  That is, WalMart, Tesco, etc. with private labels or P&G with its eStore.  Questions abound, experiments continue...