Choosing the Wrong Pricing Strategy
Choosing the Wrong Pricing Strategy Can Be a Costly Mistake: Knowledge@Wharton (http://knowledge.wharton.upenn.edu/article.cfm?articleid=792)
Choosing the Wrong Pricing Strategy Can Be a Costly Mistake
Published : June 04, 2003 in Knowledge@Wharton
Prices have been at the center of human interaction ever since traders in ancient Mesopotamia -- our modern-day Iraq -- began keeping records. Who doesn’t love to guess what something costs – or argue about what something ought to cost?
So it should come as no surprise that companies spend a lot of time figuring out how to price their products and services. But two professors in Wharton’s marketing department, Jagmohan S. Raju and Z. John Zhang, say firms do not always go about pricing the right way. Raju and Zhang say devising appropriate pricing strategies is more critical than ever in a world of hyper-competition. Pricing strategies also take on added importance at a time when central bankers and economists are concerned about the possibility of deflation – a broad, general decline in prices.
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According to Raju and Zhang, research suggests that pricing strategies can have a huge influence on company profits. They cite a study of more than 2,400 companies by McKinsey in 1992 showing the impact that various decisions would have on the bottom line: a 1% reduction in fixed costs improves profitability by 2.3%; a 1% increase in volume will result in a 3.3% increase in profit; a 1% reduction in variable costs will prompt a 7.8% rise in profit; but a 1% hike in pricing can boost profitability by 11%. “In recent years, business people have paid attention to many things that can influence their companies’ success,” Zhang says. “They’ve looked at organizational behavior, downsizing, benchmarking and
Choosing the Wrong Pricing Strategy Can Be a Costly Mistake
Published : June 04, 2003 in Knowledge@Wharton
Prices have been at the center of human interaction ever since traders in ancient Mesopotamia -- our modern-day Iraq -- began keeping records. Who doesn’t love to guess what something costs – or argue about what something ought to cost?
So it should come as no surprise that companies spend a lot of time figuring out how to price their products and services. But two professors in Wharton’s marketing department, Jagmohan S. Raju and Z. John Zhang, say firms do not always go about pricing the right way. Raju and Zhang say devising appropriate pricing strategies is more critical than ever in a world of hyper-competition. Pricing strategies also take on added importance at a time when central bankers and economists are concerned about the possibility of deflation – a broad, general decline in prices.
This is a single/personal use copy of Knowledge@Wharton. For multiple copies, custom reprints, e-prints, posters or plaques, please contact PARS International: reprints@parsintl.com P. (212) 221-9595 x407.
According to Raju and Zhang, research suggests that pricing strategies can have a huge influence on company profits. They cite a study of more than 2,400 companies by McKinsey in 1992 showing the impact that various decisions would have on the bottom line: a 1% reduction in fixed costs improves profitability by 2.3%; a 1% increase in volume will result in a 3.3% increase in profit; a 1% reduction in variable costs will prompt a 7.8% rise in profit; but a 1% hike in pricing can boost profitability by 11%. “In recent years, business people have paid attention to many things that can influence their companies’ success,” Zhang says. “They’ve looked at organizational behavior, downsizing, benchmarking and