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.