Many companies feel the need to improve their “competitiveness” in a downturn, and they think the best way to do so is to drop their prices. Wrong! Sure, in a recession your sales will drop, but if you also drop your prices, your contribution margin will drop even further, making your company less profitable and possibly resulting in a loss of profitability altogether. If you do, it means you have given up, and taken the easy road. You need to fight back. You need to utilize the recession as a way to improve your long term business results. Pricing champions do!
Pricing champions find ways to increase their prices, or increase their price realization. They fight back. They become even more successful and they increase their competitiveness by adding cash to their war chest, and improve and invest in product and market development.
Let’s take a look at two price champions:
Dow Chemicals, one of the largest chemical companies in the world, reported Q3 revenues that where up 13%, while volume went down 9%. In anticipation of the recession, the company increased prices by an average of 22% across the board.
Here is what Andrew Liveris, chairman and chief executive said:
“The company's ability to take protective measures has helped the company ward off the effects of the current economic downturn. The company has initiated two broad-based price increases and implemented aggressive cost controls.”
Dow is not giving up. They planned for the recession and they used pricing as a strategic weapon for that purpose.
The second pricing champion is a relatively unknown company called Parker-Hannifin, a diverse manufacturer and number 279 on the Fortune 500 list – probably the largest company people haven’t heard of. On October 16th they reported last quarters’ results - a 10% increase in sales over the previous quarter, and a 9% increase in profitability compared to a year ago.
So let’s see why. Here is what Timothy K. Pistell, EVP, CFO said in the prior earnings call, July 31, 2008
“Part of our “Win Strategy” is strategic pricing. We think we have done a very good job through this last fiscal year. The fact is that the gross profit margin improved in ’08 over ’07. Right now, we forecast our price increases will stay on pace with our cost increases.”
What they both have in common is that they do not drop their prices in a recession. They plan for price increases and cost control. They don’t give up. Certainly, they see a recession as a difficult time, but, they also realize that these difficult times are what weed out the long-term winners from the losers.
So you have a choice. You can follow the lead of the pricing champions, and use this economic downturn to your advantage or you can give up. What will you do? What long-term effect will strategic pricing have on your business? What will you do with all that extra profitability?
Again, the choice is yours.
With positive and "do-the-right-thing" regards,
Per Sjofors
Founder, Managing Partner
Atenga Inc
www.atenga.com
per@atenga.com
Friday, November 7, 2008
Monday, October 6, 2008
The top 5 reasons for implementing Best Practice Pricing Strategy in an economic downturn.
If you are like me, the financial turmoil and imminent recession is worrisome. How will it affect my business? How will it affect me personally? But I’m also thinking, “How can I use the current situation to my advantage? How can I grow my business despite the circumstance?” Well, in fact, Best Practice Pricing Strategy is a tool you can use now to gain the upper hand in your business. Here is why:
1 - Leverage: According to consulting firm McKinsey and Co, pricing has greater impact on your company’s profitability than any other strategy; three times greater than cost cutting; twice as much as sales volume increases.
2 - Competitive advantage: Only about 1% of companies have implemented and executed a pricing strategy based on an in-depth understanding of its customers’ decision drivers, perceptions and willingness to pay.
3 - Long term growth: Companies who implement best practice pricing strategies grow at approximately twice the rate of companies with simple pricing practices. As your competitors falter, your company should use pricing strategy to come out on top!
4 - Speed: A best practice pricing strategy can be implemented and executed in two months or less.
5 - Now is the time: With the financial market in turmoil and recession looming, if you have not yet implemented a best practice pricing strategy (and chances are significant that you have not) – now is the time that you need its benefits more than ever.
I hope the above points give you something to think about. You can see this economic downturn as a bump in the road or (I hope not) a disaster. Or you can see it as an opportunity to grow, to increase your revenues and profits, to increase your competitiveness. To come out on top.
Remember that the choice is yours.
With positive and hopeful regards,
Per Sjofors
Founder, Managing Partner
Atenga Inc
www.atenga.com
per@atenga.com
1 - Leverage: According to consulting firm McKinsey and Co, pricing has greater impact on your company’s profitability than any other strategy; three times greater than cost cutting; twice as much as sales volume increases.
2 - Competitive advantage: Only about 1% of companies have implemented and executed a pricing strategy based on an in-depth understanding of its customers’ decision drivers, perceptions and willingness to pay.
3 - Long term growth: Companies who implement best practice pricing strategies grow at approximately twice the rate of companies with simple pricing practices. As your competitors falter, your company should use pricing strategy to come out on top!
4 - Speed: A best practice pricing strategy can be implemented and executed in two months or less.
5 - Now is the time: With the financial market in turmoil and recession looming, if you have not yet implemented a best practice pricing strategy (and chances are significant that you have not) – now is the time that you need its benefits more than ever.
I hope the above points give you something to think about. You can see this economic downturn as a bump in the road or (I hope not) a disaster. Or you can see it as an opportunity to grow, to increase your revenues and profits, to increase your competitiveness. To come out on top.
Remember that the choice is yours.
With positive and hopeful regards,
Per Sjofors
Founder, Managing Partner
Atenga Inc
www.atenga.com
per@atenga.com
Tuesday, September 30, 2008
You're dead! - No I’m definitely not! - Yes you are, you just haven't stopped moving yet.
Financial Times ran an interesting, if improbable, pricing story today. It teaches us that with the right price, you can sell anything.
You may remember the High Definition DVD format war from last year. Two electronics giants were offering their own formats for cutting-edge High Definition DVDs. In one corner we had Sony with its Blue-Ray technology, and in the other corner was Toshiba with HD-DVD. While each format provided identical image quality, and both were burned on the same size and type of disc, each format also has its own pros and cons when evaluating the technology and the manufacturing of the discs themselves.
In a re-cap of the Betamax vs VHS format war of the 1970s, in the fall of 2007, both proponents embarked on comprehensive and expensive advertising campaigns trying to get consumer pull while at the same time working to form exclusivity arrangements with the major film studios. From early on in the war Sony had been including a Blu-Ray player within its popular PlayStation 3 game console. This lead to a much higher installed base of Blu-Ray players, albeit not in standalone devices, but in the PlayStation 3, leading to higher sales of Blu-Ray movies. This eventually tipped the scale in favor of Sony, and on February 19, 2008, Toshiba admitted defeat and announced it would stop making HD-DVD players.
HD-DVD is dead. Long live HD-DVD!
So what Financial Times report today, surprisingly, is that sales of HD-DVD are up! Sales of both HD-DVD hardware and movie titles are actually increasing. But how can that be? Well, HD-DVD players, that also play regular DVDs, can now be bought for less than $60 while the cheapest Blu-Ray players are at a higher price point of around $250. Furthermore, while the movie selection on HD-DVD is limited (and no new titles are being released on HD-DVD) they are much cheaper than their counterparts. Blu-Ray titles can cost up to $40, with typical prices around $25, while the typical price for a HD-DVD is only $9.95.
With no new movie titles coming out on HD-DVD, there is obviously no long term future in the format. Sooner or later all the HD-DVD titles will have been seen by the people who want to see them. Yet, a number of quick moving entrepreneurs managed to see that there was a segment in the market, an HD-DVD bubble if you will, that are extremely price sensitive. They are so price sensitive, in fact, that they are willing to ignore that HD-DVD is dead . . . and are instead focusing on the fact that it has not stopped moving yet.
So how does this relate to your end-of-life products? Can you find new market segments for them? If so, are these segments price sensitive or not? Many times they are not, and you can instead, believe it or not, increase your prices. No matter what strategy you take, it’s important to realize that just because a product has been declared dead doesn’t mean it can’t have a few last breaths of profitable life.
With still warm late September regards,
Per Sjofors
Founder & Managing Partner
Atenga Inc
www.atenga.com
You may remember the High Definition DVD format war from last year. Two electronics giants were offering their own formats for cutting-edge High Definition DVDs. In one corner we had Sony with its Blue-Ray technology, and in the other corner was Toshiba with HD-DVD. While each format provided identical image quality, and both were burned on the same size and type of disc, each format also has its own pros and cons when evaluating the technology and the manufacturing of the discs themselves.
In a re-cap of the Betamax vs VHS format war of the 1970s, in the fall of 2007, both proponents embarked on comprehensive and expensive advertising campaigns trying to get consumer pull while at the same time working to form exclusivity arrangements with the major film studios. From early on in the war Sony had been including a Blu-Ray player within its popular PlayStation 3 game console. This lead to a much higher installed base of Blu-Ray players, albeit not in standalone devices, but in the PlayStation 3, leading to higher sales of Blu-Ray movies. This eventually tipped the scale in favor of Sony, and on February 19, 2008, Toshiba admitted defeat and announced it would stop making HD-DVD players.
HD-DVD is dead. Long live HD-DVD!
So what Financial Times report today, surprisingly, is that sales of HD-DVD are up! Sales of both HD-DVD hardware and movie titles are actually increasing. But how can that be? Well, HD-DVD players, that also play regular DVDs, can now be bought for less than $60 while the cheapest Blu-Ray players are at a higher price point of around $250. Furthermore, while the movie selection on HD-DVD is limited (and no new titles are being released on HD-DVD) they are much cheaper than their counterparts. Blu-Ray titles can cost up to $40, with typical prices around $25, while the typical price for a HD-DVD is only $9.95.
With no new movie titles coming out on HD-DVD, there is obviously no long term future in the format. Sooner or later all the HD-DVD titles will have been seen by the people who want to see them. Yet, a number of quick moving entrepreneurs managed to see that there was a segment in the market, an HD-DVD bubble if you will, that are extremely price sensitive. They are so price sensitive, in fact, that they are willing to ignore that HD-DVD is dead . . . and are instead focusing on the fact that it has not stopped moving yet.
So how does this relate to your end-of-life products? Can you find new market segments for them? If so, are these segments price sensitive or not? Many times they are not, and you can instead, believe it or not, increase your prices. No matter what strategy you take, it’s important to realize that just because a product has been declared dead doesn’t mean it can’t have a few last breaths of profitable life.
With still warm late September regards,
Per Sjofors
Founder & Managing Partner
Atenga Inc
www.atenga.com
Saturday, September 27, 2008
But I know what my market will bear….
This blog is supposed to comment on pricing stories and pricing news. I follow the media closely, but have not seen anything really interesting lately. Maybe most journalists are following the financial meltdown and the few who are not have been assigned to the election. So, in their absence, I hope you’ll bear (sic!) with me as your source for another true story…..
One of the most common objections we hear about value based pricing is individuals (typically founders, CEOs or CMOs) saying “I have 10 – 20 - 30 years of experience in this market and I know what the market will bear”. Are they right? I don’t think so. First off, in my experience, individuals making these kinds of comments are rarely working at the market leader, rarely at a market innovator, or even at a fast-growing company. No, a response like this almost always comes from an executive from the lagging company, the runner-up. They think they know but they don’t. Sure, they have all the “right” answers, but can’t seem to find success in their chosen industry.
So are they right? Of course not. If you are in a stable market and you have lots of experience in the market, your prices are typically within 15% of the optimum market price. Not a big deal, you may say. But think about it? 15%. What could getting that additional 15% of optimization do for your company? Will it really make a substantial difference?
Let’s look at a real world example to find out. One of Atenga’s recent clients wished to determine the optimum price for their consumer electronics product. Before retaining us, they had been selling the product at $200 because it felt like a nice round number, and it drove a retail price of $399.95 They were considering dropping their price to $170 (for a retail price of $339,95) to try and improve sales volumes and profitably. We examined the market preferences and buying behavior, and concluded that this company’s marketplace (with in +/- 15% of the current price) had a price elasticity of 1. This means that a 1% change in price will result in a 1% sales volume. So with that information it becomes easy to plot a number of different price points and conclude the results. Here is what our research concluded, both for their lower price point, as well as for the optimum price we discovered.
Example A: Lowering Price to Gain Market Share:
Cost of your product: $100
Price of your product: $200
Gross margin per product: $100
Price elasticity: 1
Sales volume: 10,000
Revenues: $2,000,000
Overall gross margin: $1,000,000
New lower price: $170
Gross margin per product: $70
Sales volume: 11,500
Revenues: $1,955,500
Overall gross margin: $805,000
-or-
Example B: Raising Price to Optimum (based on independent market research)
Cost of your product: $100
Price of your product $200
Gross margin per product: $100
Price elasticity: 1
Sales volume: 10,000
Revenues: $2,000,000
Overall gross margin: $1,000,000
New optimum price: $230
New gross margin per product: $130
Sales volume 8,500
Revenues: $1,955,500
Overall gross margin: $1,105,500
So in the first case, lowering the prices by 15% -- a typical quick-fix solution at struggling companies – and where the company planned to move the price - the sales volume will go up, but the result will be an almost 20% decline in margin. In the second case, market research shows that raising the price 15% to the optimum will instead result in a 10% improvement from the original margins. (For this company, the per-unit cost did not change much depending on volume). And just as important, a nearly 40% rise in margins from the company’s “we know that the market will bear” strategy to lower the price. Not bad! Just a little bit of market research, and now everyone at this electronics firm can see that huge holiday bonus coming right around the corner.
Consider the huge difference this will make, compounded over multiple years. Where do you want to be? Using your experience, your gut feel, your “I know my market” strategy. Or, do you really want to find out with hard, independent, unbiased data where the optimum price is? In looking at the data above, the answer’s pretty clear.
With warm late September regards,
Per Sjofors
Founder & Managing Partner
Atenga Inc
www.atenga.com
One of the most common objections we hear about value based pricing is individuals (typically founders, CEOs or CMOs) saying “I have 10 – 20 - 30 years of experience in this market and I know what the market will bear”. Are they right? I don’t think so. First off, in my experience, individuals making these kinds of comments are rarely working at the market leader, rarely at a market innovator, or even at a fast-growing company. No, a response like this almost always comes from an executive from the lagging company, the runner-up. They think they know but they don’t. Sure, they have all the “right” answers, but can’t seem to find success in their chosen industry.
So are they right? Of course not. If you are in a stable market and you have lots of experience in the market, your prices are typically within 15% of the optimum market price. Not a big deal, you may say. But think about it? 15%. What could getting that additional 15% of optimization do for your company? Will it really make a substantial difference?
Let’s look at a real world example to find out. One of Atenga’s recent clients wished to determine the optimum price for their consumer electronics product. Before retaining us, they had been selling the product at $200 because it felt like a nice round number, and it drove a retail price of $399.95 They were considering dropping their price to $170 (for a retail price of $339,95) to try and improve sales volumes and profitably. We examined the market preferences and buying behavior, and concluded that this company’s marketplace (with in +/- 15% of the current price) had a price elasticity of 1. This means that a 1% change in price will result in a 1% sales volume. So with that information it becomes easy to plot a number of different price points and conclude the results. Here is what our research concluded, both for their lower price point, as well as for the optimum price we discovered.
Example A: Lowering Price to Gain Market Share:
Cost of your product: $100
Price of your product: $200
Gross margin per product: $100
Price elasticity: 1
Sales volume: 10,000
Revenues: $2,000,000
Overall gross margin: $1,000,000
New lower price: $170
Gross margin per product: $70
Sales volume: 11,500
Revenues: $1,955,500
Overall gross margin: $805,000
-or-
Example B: Raising Price to Optimum (based on independent market research)
Cost of your product: $100
Price of your product $200
Gross margin per product: $100
Price elasticity: 1
Sales volume: 10,000
Revenues: $2,000,000
Overall gross margin: $1,000,000
New optimum price: $230
New gross margin per product: $130
Sales volume 8,500
Revenues: $1,955,500
Overall gross margin: $1,105,500
So in the first case, lowering the prices by 15% -- a typical quick-fix solution at struggling companies – and where the company planned to move the price - the sales volume will go up, but the result will be an almost 20% decline in margin. In the second case, market research shows that raising the price 15% to the optimum will instead result in a 10% improvement from the original margins. (For this company, the per-unit cost did not change much depending on volume). And just as important, a nearly 40% rise in margins from the company’s “we know that the market will bear” strategy to lower the price. Not bad! Just a little bit of market research, and now everyone at this electronics firm can see that huge holiday bonus coming right around the corner.
Consider the huge difference this will make, compounded over multiple years. Where do you want to be? Using your experience, your gut feel, your “I know my market” strategy. Or, do you really want to find out with hard, independent, unbiased data where the optimum price is? In looking at the data above, the answer’s pretty clear.
With warm late September regards,
Per Sjofors
Founder & Managing Partner
Atenga Inc
www.atenga.com
Thursday, August 28, 2008
The lost art of raising prices
For many years, as inflation was low, corporate gains in efficiency, cost cutting and outsourcing exercises made it possible to maintain or increase dollar-for-dollar profitability. Unfortunately, under current economic conditions, this is no longer possible. Amidst a rise in inflation, the cost of raw materials, and the cost of transport and energy, companies face, for the first time in many years, the dread of increasing their prices.
But there are several positive aspects of price increases.
Share price:
For example, yesterday, Chemtura Corp., a global producer of specialty chemicals and polymer products announced a price increase of approximately 15%. The result – shares immediately gained 2.8%, and have continued to raise today.
You deliver results:
Furthermore, your customers are doing business with you because you deliver results. Your product or service provides value to your customers, and the vast majority of your customers want to continue to do business with you. They want you to take care of your business so they can continue to gain value from what you deliver to them.
Stronger customer relationships:
Announcing a price increase also gives you the opportunity to remind your customers about the value you provide, and have provided for a long time. And, by telling customers all the things you’ve done to avoid price increases until now, your relationship can grow stronger. But this is a message your salespeople are not used to delivering, and they will need the right ammunition and training to do so effectively and successfully.
Revisit your pricing strategy:
As you revise your pricelist, it is also a good idea to look for methods through which you can tweak your prices in such a way as to drive customers to buy more profitable products or services from you -- ways in which you can change the product mix you are selling to become more profitable overall.
So there are several aspects to a price increase – and when it comes down to it, they are mostly positive. But a successful price increase needs to be carefully planned; salespeople need the appropriate training and you need to ensure you plan thoroughly to convert the looming price increase into a positive opportunity for your company to gain further profitability.
With warm summer regards,
Per Sjofors
Founder & Managing Partner
Atenga Inc
www.atenga.com
- Sales people dread price increases because they forgot how to defend them a long time ago. And as their customers are no longer accustomed to “the annual price increase”, sales people believe they will face strong resistance.
- Executives dread the price increases because they think their competitiveness will suffer.
But there are several positive aspects of price increases.
Share price:
For example, yesterday, Chemtura Corp., a global producer of specialty chemicals and polymer products announced a price increase of approximately 15%. The result – shares immediately gained 2.8%, and have continued to raise today.
You deliver results:
Furthermore, your customers are doing business with you because you deliver results. Your product or service provides value to your customers, and the vast majority of your customers want to continue to do business with you. They want you to take care of your business so they can continue to gain value from what you deliver to them.
Stronger customer relationships:
Announcing a price increase also gives you the opportunity to remind your customers about the value you provide, and have provided for a long time. And, by telling customers all the things you’ve done to avoid price increases until now, your relationship can grow stronger. But this is a message your salespeople are not used to delivering, and they will need the right ammunition and training to do so effectively and successfully.
Revisit your pricing strategy:
As you revise your pricelist, it is also a good idea to look for methods through which you can tweak your prices in such a way as to drive customers to buy more profitable products or services from you -- ways in which you can change the product mix you are selling to become more profitable overall.
So there are several aspects to a price increase – and when it comes down to it, they are mostly positive. But a successful price increase needs to be carefully planned; salespeople need the appropriate training and you need to ensure you plan thoroughly to convert the looming price increase into a positive opportunity for your company to gain further profitability.
With warm summer regards,
Per Sjofors
Founder & Managing Partner
Atenga Inc
www.atenga.com
Update on Dell and Apple - Drop your margin 3% and lose $14b!
I thought it is appropriate with a update on my Dell and Apple story from July 22. See below.
Dell on Thursday reported a fiscal second-quarter profit of $616 million, or 31 cents a share, on $16.43 billion in revenue. During the same period a year ago, Dell earned 33 cents a share on revenue of $14.77 billion. The result was an immediate -1.8% drop in share price.
Per Sjofors
Dell on Thursday reported a fiscal second-quarter profit of $616 million, or 31 cents a share, on $16.43 billion in revenue. During the same period a year ago, Dell earned 33 cents a share on revenue of $14.77 billion. The result was an immediate -1.8% drop in share price.
Per Sjofors
Wednesday, August 13, 2008
The AppStore, a microcosmos for understanding price elasticity
On a number of technology blogs, a bit of grumbling has started over the price of software bought from Apple’s AppStore. So let me just explain what this is.
I’m sure you are aware of the iPhone, one of the hottest consumer electronics products in the last 12 months. About a month and a half ago, Apple introduced an updated version of the product, the iPhone 3G. As the phone is basically a small portable computer, Apple also introduced what they call the AppStore, a section of iTunes where iPhone users can download small software applications. The AppStore has been a huge success, with hundreds of these iPhone applications available, selling more then $30m worth of software in the first month despite the fact that a majority of the apps are available for free.
Each developer set his or her own application price, or decides to give the app away for free, though most chargeable apps sell for $2.99 – $9.99. And on various technology blogs, I'm starting to hear about one of the world’s most common pricing mistakes. Developers are complaining, to whomever wants to listen, saying things like “I used my gut feel to price my app at $9.99 and it did not sell very well, so I dropped the price to $2.99 and sure I’m selling more but I’m getting less revenue”. This is a classic example of the perils of price elasticity. Price elasticity is a fancy name for how the demand of a product or service changes with the price. If the demand changes little with the price, then the price elasticity is low (or inelastic); if it changes a lot, price elasticity is high (elastic).
Once the elasticity curve is known, it is easy to generate a revenue curve. The revenue curve points out the best or optimum price, where the combination of price and demand generates the maximum revenue. If your market is elastic, and most markets are, selling your product at the optimum price point is crucial for the business results of your company, and can easily mean the difference between market leadership and marginalization.
These AppStore developers have a very unique advantage in the way they can discover the price elasticity curve for their product by simple trial and error. An advantage virtually no other company has. They sell software, so revenue max is also profitability max, they promote their product to a “closed” marketplace as they only compete with other software companies in the AppStore, and they can change the price as often as they wish.
So an AppStore developer can start with a price of, say, $9.99, wait a month, note the demand, change the price to $6,99, wait a month, note the demand, change the price to $4.99, wait a month note the demand and so forth. After plotting 5 to 6 demand points, all with prices taken out of thin air, it will be easy to set the optimum price, the price that will give the developer maximum revenue and profits. Of course, during this process, the company is losing revenue; leaving money on the table to define the lower-than-optimum demand points and forsaking sales volume to define the higher-than-optimum demand points.
Any company can do the same. Whether you are selling farm equipment, data storage, shovels, or boxed software the process is identical, but, because you don’t have the advantages of easily changing your prices on a platform like the AppStore, the process will be longer – probably a few years. And chances are that by the time you are done, your marketplace will have changed so much it will be time to start the process all over again. Not to mention that in the process, you will give up millions in lost revenues and margin.
So when you priced your product, did you use some combination of “gut feel”, “I know exactly what the market will bear”, or the all-too-frequent “our cost plus x % markup”? If you did, what are the chances that by sheer luck you will hit the optimum price point? If you were one of the very few who found that price point by luck, you probably have revenues beyond your wildest dreams. But if not, chances are much higher you are struggling to meet the numbers. If your company is like 99% of companies out there, you can easily gain 10% – 20% in revenue, double your growth rate, and double profitability by knowing the price elasticity of your product, and optimizing your price accordingly. Think about it. What would price optimization mean for your company?
And if experimenting with different price levels and seeing how they affect demand is not a realistic possibility at your company, as the cost in lost business is too high, how will you be able to define the optimum price?
With warm summer regards,
Per Sjofors
Founder & Managing Partner
Atenga Inc
www.atenga.com
I’m sure you are aware of the iPhone, one of the hottest consumer electronics products in the last 12 months. About a month and a half ago, Apple introduced an updated version of the product, the iPhone 3G. As the phone is basically a small portable computer, Apple also introduced what they call the AppStore, a section of iTunes where iPhone users can download small software applications. The AppStore has been a huge success, with hundreds of these iPhone applications available, selling more then $30m worth of software in the first month despite the fact that a majority of the apps are available for free.
Each developer set his or her own application price, or decides to give the app away for free, though most chargeable apps sell for $2.99 – $9.99. And on various technology blogs, I'm starting to hear about one of the world’s most common pricing mistakes. Developers are complaining, to whomever wants to listen, saying things like “I used my gut feel to price my app at $9.99 and it did not sell very well, so I dropped the price to $2.99 and sure I’m selling more but I’m getting less revenue”. This is a classic example of the perils of price elasticity. Price elasticity is a fancy name for how the demand of a product or service changes with the price. If the demand changes little with the price, then the price elasticity is low (or inelastic); if it changes a lot, price elasticity is high (elastic).
Once the elasticity curve is known, it is easy to generate a revenue curve. The revenue curve points out the best or optimum price, where the combination of price and demand generates the maximum revenue. If your market is elastic, and most markets are, selling your product at the optimum price point is crucial for the business results of your company, and can easily mean the difference between market leadership and marginalization.
These AppStore developers have a very unique advantage in the way they can discover the price elasticity curve for their product by simple trial and error. An advantage virtually no other company has. They sell software, so revenue max is also profitability max, they promote their product to a “closed” marketplace as they only compete with other software companies in the AppStore, and they can change the price as often as they wish.
So an AppStore developer can start with a price of, say, $9.99, wait a month, note the demand, change the price to $6,99, wait a month, note the demand, change the price to $4.99, wait a month note the demand and so forth. After plotting 5 to 6 demand points, all with prices taken out of thin air, it will be easy to set the optimum price, the price that will give the developer maximum revenue and profits. Of course, during this process, the company is losing revenue; leaving money on the table to define the lower-than-optimum demand points and forsaking sales volume to define the higher-than-optimum demand points.
Any company can do the same. Whether you are selling farm equipment, data storage, shovels, or boxed software the process is identical, but, because you don’t have the advantages of easily changing your prices on a platform like the AppStore, the process will be longer – probably a few years. And chances are that by the time you are done, your marketplace will have changed so much it will be time to start the process all over again. Not to mention that in the process, you will give up millions in lost revenues and margin.
So when you priced your product, did you use some combination of “gut feel”, “I know exactly what the market will bear”, or the all-too-frequent “our cost plus x % markup”? If you did, what are the chances that by sheer luck you will hit the optimum price point? If you were one of the very few who found that price point by luck, you probably have revenues beyond your wildest dreams. But if not, chances are much higher you are struggling to meet the numbers. If your company is like 99% of companies out there, you can easily gain 10% – 20% in revenue, double your growth rate, and double profitability by knowing the price elasticity of your product, and optimizing your price accordingly. Think about it. What would price optimization mean for your company?
And if experimenting with different price levels and seeing how they affect demand is not a realistic possibility at your company, as the cost in lost business is too high, how will you be able to define the optimum price?
With warm summer regards,
Per Sjofors
Founder & Managing Partner
Atenga Inc
www.atenga.com
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