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Literature summary - pricing and revenue analytics
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Summary of all compulsory readings and all tutorial readings of pricing and revenue analytics.
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PRICING AND REVENUEANALYTICS
COMPULSORY LITERATURE – SUMMARY
,WEEK 1 – INTRODUCTION TO MODERN PRICING STRATEGIES
READING TUTORIAL 1
Price sensitivity = the extent to which customers respond to changes in prices for brand,
products, or services.
Based on standard economic theory, we would expect that price and demand move in
opposite directions. However, consumers will not respond in the same way to each price
change. To quantify how demand changes as a reaction to a change in price, we often
rely on the economic concept of a “price elasticity.”
In economics, an elasticity measures how the percentage change in one economic
variable is influenced by a percentage change in
another variable.
Own price elasticity is measured as the percentage
change in demand sales volume (denoted with Q) in
response to a percentage change in price (denoted
with P) of the focal brand.
There are 3 possible outcomes (assuming that price and demand will move in opposite
directions:
- Price elasticity > -1 (and <0): demand is price inelastic = the quantity demanded
changes less than the price does.
- Price elasticity = -1: demand is unit elastic = the quantity demanded changes by
the same percentage as the price.
- Price elasticity < -1: demand is price elastic = the quantity demanded changes
more than the price does.
Understanding customers’ price sensitivity allows you to strategically manage pricing to
maximize revenue
Type Direction Relationship P and Q Revenue implications
(if price changes with a
small amount)
Inelastic E > -1 & E < Q changes less than P If the price
0 increases/decreases, the
revenue will
increase/decrease.
Unit E = -1 Change in Q is equal to If the price
elastic change in P increases/decreases,
revenue will stay about
the same.
Elastic E < -1 Q changes more than P If the price
increases/decreases, the
revenue will
decrease/increase.
THE SIX PRICING MYTHS THAT KILL PROFITS – ANDREAS HINTERHUBER
The article delves into a crucial, but often overlooked aspect of business strategy:
pricing. Despite being the most critical driver of profitability, pricing rarely receives the
, attention it deserves from executives. Surprisingly, fewer than 5% of companies have a
dedicated Chief Pricing Officer, leaving pricing decisions fragmented across departments
like sales, marketing and finance. This lack of focus often results in suboptimal
strategies, guided more by outdated myths than by scientific principles.
To illustrate the consequences of poor pricing strategies, contrasts two automotive
companies: General Motors (GM) and Continental AG. GM’s obsession with market share
led to aggressive discounting, which treated cars as commodities and eroded
profitability. Conversely, Continental AG implemented a disciplined, value-based pricing
approach, investing in systems, tools and salesforce training. This method allowed them
to effectively communicate the value of their products, contributing to their status as one
of the most profitable global automotive suppliers.
Six myths are identified that undermine pricing strategies:
1. Costs are the basis for pricing – Many executives mistakenly set prices based
on costs rather than customer value. While costs determine the lower limit of
pricing, they are irrelevant to customer, who base their willingness to pay (WTP
on perceived value. Successful companies like Nike and Hugo Boss have
transitioned from cost-based to value-based pricing, resulting in significant
profitability improvements.
2. Small price changes have little impact – Another misconception is that minor
price adjustments barely affect profitability. Research shows the opposite: even a
1% price increase can lead to profit growth of 5-20%. Companies must recognize
that fighting for small pricing improvements across transactions can have an
outsized impact on the bottom line.
3. Customers are highly price sensitive – Contrary to popular belief, most
customers are not acutely aware of prices. Studies show that over 50% of
shoppers cannot recall the price of items they just purchased. This myth stems
from managers projecting their own price awareness onto customers. In reality, a
significant portion of customers prioritize benefits like convenience, quality, and
service over price.
4. Products are difficult to differentiate – Even in competitive markets,
differentiation is achievable. For example, Shell successfully marketed its V-power
fuel as a premium product, emphasizing performance benefits despite minimal
technical differences from standard fuels. The perception of differentiation –
whether real or symbolic – is enough to justify premium pricing.
5. High market share equals high profits – Many CEOs equate market share
with profitability, a notion stemming from outdated research. In practice, the
pursuit of market share often leads to aggressive discounting, which erodes
margins. Companies like Apple and Lego focus on excelling in customer insights
and value creation rather than chasing market share, leading to superior
profitability.
6. Managing price means changing prices – Effective price management is not
solely about adjusting prices. It involves enhancing systems, processes, and the
ability to communicate value. For instance, equipping sales teams with tools to
quantify customer benefits can shift the focus from price to value, reducing the
need for discounts and improving profitability.
These pricing myths endure due to historical practices and flawed assumptions. For
instance, cost-based pricing was once a logical strategy when accurate cost data was
hard to obtain. However, clinging to these outdated methods ignores advances in value-
based pricing techniques and customer insight. Similarly, the emphasis on market share
reflects a misunderstanding of its correlation with profitability. Argued is that breaking
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