Pricing is a technique that seeks to establish the optimal price for a product. Is important to measure issues such as competitors’ prices, substitute products, contribution margin, and sales strategy. Pricing strategy is a important part of a market strategy and shows whether there will be a profit or loss.
In this article we use a case study conducted with the pricing solution of the Supply Brain Plataform. The purpuse was recover profitability of a network of airport parking lots.
With the Covid-19 pandemic, the demand for airports spaces dropped significantly and in consequence, the client revenue was negatively impacted. As we will see, the proposed pricing strategy was able to reverse the situation and maximize profitability.
What was the pricing strategy suggested?
A good pricing strategy have four main results: sustain the cost of doing business, generate profit for the company, be aligned with the values of the competition and be perceived by customers as a fair value.
To do this, it is necessary to establish what kind of need your product meets. Parking is a functional product, consumed only by necessity. People use parking lots because they need to park there and not because they feel the desire to park.
It is important to consider these differences in consumer needs.
Below are some classifications that help clarify these differences:
- Functional: when the product have a particular purpose.
- Social: when the product satisfies a group’s demand.
- Symbolic: when the product helps achieving some status.
- Recreational: when the product represents a pleasurable activity.
These classifications can tell you, among other things, how elastic your product is, that is, how much the customer is willing to pay for the advantage your product offers. Unlike buying a car, done for status or desire, functional products tend to be less elastic.
Besides that, parking consumes a low percentage of the average income of the location evaluated. Studies suggest that the lower the percentage of income consumed by the product, the greater the tendency to inelasticity, due to the fact that the customer does not need to do much analysis to decide to buy.
How to build a pricing strategy?
First, we should strategically conduct the construction of the Consumer Reference Price, or CRP, which is the value that the customer perceives in the product offered.
This value is understood as the sum of a reference price, from the closest substitute, and a differentiation value, which is the attribute offered by the product that makes it more attractive to that market.
Factors taken into account include:
- Unique features: your product offers an advantage not easily copied by competitors.
- Functionality: everything that a product can do and the ability to perform these functions as specified.
- Time in market: products that already have a tradition differentiate themselves from others because they have already built a trusting relationship with the consumer.
- Size: the portability or robustness of a product influences how people use and how they perceive the product.
- Cost: whether the differentiation value of the product makes it more attractive to the public than competitors.
- Licensing: the ease and advantages of acquiring the original product.
- Support: the willingness and efficiency of the product’s supplier to solve working problems, answer questions and implement improvements.
It is important to remember that reducing the price is a simple activity easily accepted by customers. On the other hand, for the elasticity calculated, increasing the price leads to temporary loss of customers and demand, which does not necessarily reflect on the turnover as we seek to demonstrate.
The customer’s point of view
When the product has a calculated value on top of this market advantage, it forces competing prices to adjust accordingly. EVC is a way to better understand the customer’s expectations and wants, and from this to improve the product’s price.
Another important factor in decision making is customer sensitivity, which can be positive or negative. This measure represents the probability that a customer will switch from one product to another when the price change occurs.
The more important the price is to the customer, the greater the sensitivity. Those who favor product quality tend to be less sensitive to price change, while consumers who are willing to give up quality to get a better price are more sensitive.
How did our client increase its revenue by more than 20 times while raising the price?
One of the effects of the pandemic was a large reduction in demand for air travel, such reduction in 2019 was 75% for domestic flights and 95% for international flights. As travel decreased, so did the demand for parking lots near airports.
The analyses showed that the impact of distance on demand was much greater than the price, supporting the hypothesis of market inelasticity. The shorter the distance from the airport, the higher the price charged by competitors, and even so, demand continues to grow.
Considering the nature of the product, the most consistent market strategy is to increase prices and, consequently, revenues.
This strategy allowed not only to recover part of the revenue lost in the pandemic context, but also, in the long term, it may help to stabilize a CRP consistent with the product, without market degradation.
With the price increase, it was possible to notice that, even with a small drop in demand, the revenue continues to grow considerably.
From the simulations we conducted, we concluded that with a price twice as high as the one at the end of 2020, even in the most negative scenario, the revenue would be 50% higher than the one received.
In the estimated scenario, the optimal price would lead to a 260% growth in revenue. The suggested value, however, would represent a growth of 27.68% of the revenue received at that time.
How can Supply Brain help you define the best pricing strategy?
With Artificial Intelligence and statistical analysis, we perform:
- Break-even elasticity analysis;
- Recommendations for price adjustments;
- Price adjustment for market-share margin optimization;
- Product recommendations for promotions;