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Pricing effects
Pricing is said to be the most powerful profit driver in businesses: research shows a 1% price increase boosts operating profit by 11.1%, ahead of a 1% improvement in fixed costs (+2.3%), volume (+3.3%), or variable costs (+7.8%). While business is dominated by downward pricing pressure, analysing how higher prices might be achieved is an oddly neglected part of the marketing mix.
Too often prices are overly determined by a mark-up on costs or what competitors are charging, rather than an informed judgement of what customers will pay. A number of tips for smarter and higher pricing are suggested.
'Price stairways' counter the need to have competitive base prices: link the latter to tougher conditions and offer better features for price increments.
Defending against value-oriented competitors need not be about price-cutting - instead, identify critical benefits that customers forego with such offerings and respond with propositions based on those benefits. And lessen customer resistance to price increases by bringing in new benefits.
Smarter pricing
Tony Cram
The Ashridge Journal, spring 2006
Review by Steve Lodge
This article was first published on World Business
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