Marketing & Sales
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Profit Parabolas

Bringing Science to the Art of Pricing
September 15, 2003 by Peter Stanger, Marin Gjaja, and Wouter-Jan Schouten
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  • A company with a strong pricing capability can sharpen customer segmentation and use its knowledge of each segment to fine-tune prices.
  • It can monitor competitors’ prices and learn how their pricing affects its own position, enabling it to respond intelligently to competitors’ moves or ignore them.
  • Also, such a company can orchestrate the implementation of pricing policies and strategies throughout the organization in a disciplined, timely fashion.
 

Pricing is rapidly becoming more science than art. But because the science is complex, most managers still rely far too heavily on art—or instinct. As a result, they almost always miss the pricing sweet spot and leave millions of dollars of profit and several points of share on the table. Learning and applying the science of pricing are opportunities to create a new kind of competitive advantage.

Pricing scientifically begins with asking two simple questions:

  • If I increase my product’s price by 1 percent, what will happen to profits?

  • If I decrease my product’s price by 1 percent, what will happen to profits?

If the answer to both questions is that profit declines, you’ve reached the point of maximum profit. In our experience, however, fewer than 10 percent of managers responsible for pricing decisions can answer either question with any degree of confidence. A powerful, fact-driven tool called the profit parabola can help.

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AMERICAS
EUROPE AND THE MIDDLE EAST
  • Partner & Managing Director
  • Amsterdam