The Pivotal Profit Possibilities in Pricing Plateaus
As CEO of a leading global pricing research company that has executed almost one thousand different projects I know that the two things clients want to know most are the precise position of a price wall and the length of a pricing plateau. Both elements, price walls and pricing plateaus are significant deviants in the expected, exact inverse relationship between price and unit volume; specifically the seemingly reasonable logical premise that the higher the price as charted along the Y axis, the lower the unit volume at any given point along the horizontal X axis.
Except that perfect inverse relationship almost never holds as expected, in part because customers and clients generally subscribe to the adage that “price connotes quality”. Too low a price can often scare prospects away who may question a wide variety of elements including product quality or customer support or company staying power; similarly too high a price may exceed the available budget for some customers. Prospects have a clear expectation of a reasonable price perimeter for a given product category and anything outside of that range will have a clear impact on purchase behavior.
Price walls as anyone who has read my previous byline on medium.com (https://robert-tinterov.medium.com/the-punishing-precision-of-price-walls-47893109e8b1) knows are those sharp “chart cliffs” that when breached can result in an immediate 10% or more drop in unit volume. For example if a price wall for a brand of golf balls is determined to be just under $20 per dozen, that company will likely experience a sharp sales fall off in unit volume immediately after the $20 price point. Indeed price walls can be so hard and set that even a .1% increase in price can result in a 10% or more drop off in unit volume.
Pricing plateaus are the antithesis of price walls in that unit volume stays the same for a range of price points. We believe they exist because customers have a “general” sense of what a reasonable price is, as opposed to price walls where they have a clear, more specific idea of what price point is too much. Using our example above there could be a price plateau for a brand of golf balls from $17.50 to $19.99 which means that unit volume would be roughly the same whether the price was $17.75 or $19.75. Of course the impact to the bottom line would be pivotal to the success of any enterprise given research from McKinsey Consulting that found just a 3% increase in price can result in a 30% jump in net profit. In our example the roughly 10% variance in price point would result in a doubling of profit for the average business.
Despite the above a high majority of businesses especially in a large market such as the US, fly blind on pricing and base it on gut feel or feed back from the field sales staff or competitive data etc. All these elements have some value but pricing is a very dynamic science that differs by company and product and life cycle and even marketing message. Given the advances in pricing research involving artificial intelligence and easily accessible, massive customer databases, companies don’t have to use guess work to calculate the location of a price wall or the magnitude of a pricing plateau. Pricing plateaus are pivotal profit opportunities for those companies that make them a priority.
Robert Tinterov,
CEO Atenga Insights
robert.tinterov@atenga.com
