Kyle McNamara

I had lunch the other day with a friend who just got a job as an electronics buyer for a major retailer, and we got to talking about demand forecasting and pricing models. She has some interesting challenges ahead – consumers are more cost-conscious in this slow economy, and even with our stimulus checks, flat panels and Wiis seem like a luxury that many people will forego in order to keep food on the table. I was reminded of a post I’d recently read, encouraging companies to raise prices significantly and frequently. This is not an activity that should be undertaken lightly, and I got to thinking about the intelligence required to do this well.

Rising Costs are Here to Stay

Consumers and businesses are already feeling the impacts of the current economy – disposable income is shrinking due to rising oil and commodity prices, and our summer European vacations have to be scaled back due to a weak dollar. Many of the causes of this – from rising commodity demand in China and India to the Iraq War – aren’t going away anytime soon, so both groups need to adopt a long-term view and adjust their economic decisions accordingly.

Unfortunately, consumer incomes and business profits are not rising as fast as prices, so the proverbial “pie” is shrinking – which means companies’ pricing and positioning decisions have to be smart in order to maximize market share and profits.

Prices Need to Consider Customers and the Competition

Customers are likely to cut back on luxury items, focus on the essentials, and increase their use of discounts and coupons. But not all customer segments act the same, so companies will need understand the needs and preferences of each segment, including the products they value, then determine which segments they want to be in and adopt appropriate strategies. As an example, American Airlines is experimenting with software to identify flights for which passengers will pay extra. This insight will allow them to more aggressively market high-margin flights (products), as well as identify the customers willing to pay the premium. Applying even stronger analytical techniques to this data could help them determine the variables leading to consumer willingness to pay a premium, which they can use to enhance the margins of other products.

Competitors will be increasing their vigilance – looking for ways to keep their share of the shrinking pie and to steal a few bites of the rest. Without actively managing prices while costs are rising, competitors will eat your lunch by adopting smarter pricing strategies. It doesn’t just have to be the customer-facing price that goes up; companies use other techniques such as new package pricing, consignment pricing, fees vs. list prices, reducing product size, and cutting back on promotions. I did some research on using Behavioral Economics to present offers that maximize profits. Actively monitoring the techniques your competitors are using and the success they are having will also provide valuable insights into market activity.

This Capability Needs to be Developed, Institutionalized, and Continually Managed

Amassing this insight about customers, products, competitors, and overall economics is no small task, and there is no off-the-shelf solution that will get you there. Instead, companies should be developing or enhancing their forecasting and pricing models to take advantage of the all of the data available. In a recent article in Consulting Magazine, a senior executive in Accenture’s pricing group mentions that more companies are addressing pricing “not as an initiative but as a capability they want to build.” He goes on to say that they are embedding it into the C-level, as through a chief revenue officer or chief pricing officer. This type of action helps ensure active pricing management becomes a part of a company’s overall strategy and helps maintain a competitive edge.