How a Price Strategy Boosts Market Share, Revenue and Profit
- A price strategy is the overarching framework that defines how the company will use price to increase market share, revenue and profit. Some price strategies go further and define how to penetrate new markets or defend markets from competitor encroachment.
- Price optimization finds the highest price a customer segment will pay for a product or service. It models the pricing factors that impact quantity sold. It statistically measures how customers respond to price changes. It compares alternative price scenarios to achieve financial goals. And it identifies the optimal item sale amount and forecasts how sale amount changes impact revenue and profits.
- Systemic and continuous revenue growth can be achieved with pricing strategy and optimization. Research shows the adoption of a formal pricing strategy with active price optimization increases annual revenues by 2 to 8 percent and nearly all of the increase falls straight to the bottom line.
A Not So Elusive Revenue Growth Opportunity
Price strategy and optimization are powerful but underutilized revenue growth levers for most companies. Using price to predictably grow revenues requires specialized skills so many companies instead revert to pricing based on their cost, competitors or anecdotal experience.
That's unfortunate, as this strategy isn't really that complex. And failing to optimize item or service pricing misses a significant and sustained revenue and profit growth opportunity.
Even small changes to average sale amount deliver a linear impact to profits. Many years ago Harvard Business Review published a study which found "a 1 percent increase in price resulted in an average profit increase of 11.1 percent." Or from a slightly different perspective, the study also stated the flip side, that a "1 percent price decrease would destroy 11.1 percent of the company's operating profit." While that study is dated, the math hasn't changed.
Price strategy and optimization research shows that companies that implement strategic pricing with optimization achieve greater sales agility, more value from their goods and services, higher customer affinity and top line revenue growth of 2 to 8 percent annually.
But achieving these types of results starts with a clear understanding.
A pricing strategy shows how the company will use a systemic pricing method to increase market share, revenue and profit. There are many types of price strategies to consider. But irrespective of the specific strategy, the point here is that companies that shift from subjective pricing to an objective and measurable method take the first step to using price as a revenue growth lever.
Price optimization uses data to calculate the optimal sale amount for each product or service to maximize company revenue or profitability. It uses pricing software to ingest customer and market data into a data model and applies price-related conditional rules or artificial intelligence (AI) algorithms to identify optimized sale amounts for goods and services. It quantifiably identifies how changes in sale amount impact customer purchase decisions and company revenues.
Item or service sale amount optimization models show how to capture the maximum revenue from a specific customer segment or the total addressable market. They can be adjusted to show how short-term changes or alternative scenarios impact or accelerate revenue generation or enable different profit driven goals.
Price Strategy + Price Optimization = More $
The strategy and optimization are separate but symbiotic.
The strategy without optimization can create price consistency and gradual improvement to financial objectives but will take the long route to maximize revenue and profit goals.
Price optimization without strategy can increase individual product sale amounts but fails to achieve the bigger objective of sustainable growth in market share, revenue or profit. This path also tends to be aimless and deliver inconsistent results.
Here’s how they come together in a one-two punch.
The strategy is based on a value-based selling proposition and is tightly integrated with the company's brand, competitive advantages and unique value proposition. Only when all of these factors come together will the company maximize its value perception, lower overall product portfolio elasticity, increase customer willingness to pay, and maximize financial contribution to the company.
The optimization drills down to set the optimal sale amount for each product or product combination. It's based on price elasticity models that show how changes in sale amount impact the quantity sold for different customer segments and item clusters.
This allows price-level improvements to be calculated by customer segment, product, geography or any other factor in the model. It also identifies revenue uplift opportunities for each factor and makes pricing dynamic and real-time.
The Point is This
Pricing strategy and optimization unequivocally deliver sustained financial improvements.
However, the process is not easy, which is why it is underutilized by most companies, and why it becomes a sustainable competitive advantage for those that overcome the challenge.