About Best Practice Pricing

In today's economic environment companies must make every possible effort to retain and if at all possible, increase, their profits. Instituting good pricing practices is one of the most powerful ways to combat the rising costs of energy, transport raw materials, just to name a few. Yet, only a small number of companies seem to care at all about best practice pricing, resorting to erroneous methods they are familiar with, like "gut feel", "market price" or "cost plus". Why? Well, because cost cutting has been the mantra of business for the last 30 years or more, and most companies don't really know what best practice pricing means.

Tuesday, January 20, 2009

When it comes to pricing, tech writers are in the dark

So I’m reading this story about how Amazon.com dropped the price of a one-year Microsoft Xbox Live Gold subscription from $50 to $30. This subscription gives the user 12 months of Xbox Live service which includes online multiplayer gaming access, video chat, game and video downloads as well as Netflix's online streaming video service (though a Netflix subscription is required for that).

The journalist makes the statement that this is not good enough and that it should be offered for free. Why does he think Microsoft should give away a service for free? Because a prime competitor, Sony, does not charge anything for their similar on-line game service, so Microsoft shouldn’t either. And then he goes on telling us that the XBox 360 outsold the PlayStation3 by 8 million units -- 28m to 20m.

So why on earth should Microsoft give away their on-line game service when they don’t need to? Just because a journalist says so? Both Microsoft and Sony are in business to make money and in this case, Microsoft found a way to unbundle a portion of their product in such a way as to increase their revenues. This unbundled service can capture a higher portion of their customers willingness to pay, and, especially when compared to a free service, bring in much higher revenues. I assume that Microsoft did not make the decision to charge for the on-line service by gut feel or winging it – as many companies do. Instead, they must have used research, sound analytics and behavioral market simulations to test several things:

  • Is a charge for the on-line service acceptable?
  • For what percentage of the market is it acceptable?
  • What price for that on-line service will maximize revenue while not affecting market share?
With more than 10 million subscribers to the Xbox Live service, Microsoft pockets another half billon dollars a year, which, even for a gigantic company like Microsoft, has a significant impact on their bottom line. So for your company, what services can you unbundle from your product? Or if you are a service company - can you unbundle services from your current offering and charge extra for them? How will it affect your sales level? Your revenues? Your profits? Do you know how your customers will react? Have you tried it? If you have not tried it, it is probably because you are worried it may backfire. That’s where research and market simulations come in to play. With the help of an independent, third party firm, you can find out exactly what will happen in the marketplace without taking on any of the risk that a price change may cause.

So you can have your cake and eat it too.

With sunny Southern California regards,

Per Sjofors
Founder, Managing Partner
Atenga Inc
www.atenga.com
per@atenga.com
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