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.

Friday, April 17, 2009

Beginners guide to price elasticity

I promised that I would report back to you, the reader, the results of the price increase at iTunes. And after the first week, the results are in:

Of the top 100 selling songs, 33 were increased to $1.29 while 67 remained at the old price of $0.99.

  • Sales of the 33 songs at $1.29 where down 12.5%
  • Sales of the 67 songs at $0.99 where up 9.9%
  • Leading to an overall a drop of 0.5% sales volume
  • Resulting in approximately 9.5% increase in revenues

It certainly appears, from this first week, that the labels and Apple did the right thing, Worries that the price increase would force people to migrate to file sharing sites appears to be unfounded as overall track sales (not only the top 100) where up 3%.

Remember that this price change was forced by the labels, which thought that the $0.99 price was too low and did not fully maximize their revenues. With these results, Apple and the labels made an additional $450,000 in just one week on this price change.

So… do you know the price elasticity of your product or service? If you don’t, there’s no way you can know if your prices are optimized to maximize revenues or profits. You may well be leaving significant money on the table, and you are definitely shooting in the dark.

With whistling late Friday regards,

Per Sjofors
Founder/CEO
Atenga Inc
per@atenga.com
818 887 4970
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2 comments:

Aravind S said...

Per Sjofors,
I am almost always elated when I read blog posts from you saying that you can determine price elasticity and price your product optimally. I am always at a loss on methods and tools to determine the price elasticity of my enterprise product / service.

I mean, Its easier for an FMCG product like iTunes to determine price elasticity by tweaking prices for specific customers/ products there by determining the elasticity. What should people like us, who hardly talk to 10 new far more precious customers a month do about price elasticity?

April 18, 2009 at 9:13 PM
Per Sjofors said...

Hi Aravind,

You can assess the price elasticity and cross price elasticity also when you sell enterprise products by anonymously conducing willingness-to-pay focused research into your entire marketplace; your customers, prospects, lost contacts, and people like them that never heard about your company. (This is my company's business)

I agree that Apple has an advantage in iTunes (and, as I covered in an earlier post, the App store) as they can test new pricing more easily. A way you can achieve the same is with bundles and promotions (to test lower price points) and with un-bundles (to test higher price points). Obviously there need to be a plan in place and you have to note the demand as you try with different bundles and promotions. This method takes longer time and is more expensive (in terms of lost revenue) then research, but for some companies it might be the only choice.

Please let me know how it goes.

Best regards,
Per Sjofors

April 21, 2009 at 4:57 AM

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