So, you’re about to set price for a new product or change your existing price, right? How to price a product clever? Should I give a discount to reach larger sales quantities? But would increased turnover compensate the profit deficit?
Or maybe you’re going to raise your price believing that extra margin will cover the loss of a few customers? Both approaches make sense but in certain conditions. The problem is that an average manager picks one of those ways without evaluating the market situation and sets the new price just according to his gut feelings or following the competition.
Changing price smart is to take into account a product’s price elasticity of demand, competition power, market share, current margin, and other influencing factors. All this should be counted altogether to get the most precise result. Relying just on a couple of factors will lead to false conclusions. Some marketers evaluate the price elasticity of demand and think that the model is sufficient for decision-making. Take a look at the example that simply proves the opposite.
You’ve decided that your customer’s demand is elastic enough and will react to a price change. The plan is simple: drop the price a bit to grow the quantity, and win the market share! “Science” behind it is simple and is easily reflected on the demand elasticity graph:
However in reality your competitor reacts and drops the price as well. As a result, you have a much smaller price difference, which is insufficient for the customer. For instance, we decrease the price by 5% and our competitors follow with a 4% decrease, which makes only a 1% difference and little to none sales boost.
Another point of view to the problem is that we focus on sales or price, but don’t calculate profit over time. Also we don’t know exactly how far we can go with our pricing change.
You decide to increase your price as your customers are rather loyal and will stay with you anyway. And it works: after a few percent raise your sales quantities don’t drop, and increased price gives extra margin. However, if you don’t evaluate your price sensitivity, brand loyalty, competition power, you may miss the moment when volumes dip and your overall profit follows down (dotted line on the picture).
So, we get the profit curve by calculating the expected profit volume for every price value. The peak of this curve helps us to define the best possible price at which we balance our margin and sales quantities to reach the biggest profit mass.
And this is exactly what the Price Changer tool does – takes your market data, analyzes, and finds the largest profit point (= best price). As a result, you obtain a pricing solution with the ideal balance between profit margin and sales volume.
Please give Price Changer a try! Follow the link and register to get free trial access to the tool.
I want to add that this tool shows you optimal price but it doesn’t show you how many steps you should make to reach it. You may give a single significant change and overwhelm your customers. If the advised % change is large, it might be reasonable to have a few smaller price hikes or drops. Read more on this at Enterpreneur.com