Price creatively to protect your margin

Is your pricing optimal? A recent McKinsey study showed that by increasing their prices by just 1 percent, Global 1200 companies would improve their operating profits by 11 percent. The author of "The 1% Windfall" calculated that a price increase of 1% would increase Sears’ operating profit by 150 percent, Whirlpool’s by 34 percent, and Amazon’s by 23 percent!

Estimates like these are very enticing. But how realistic are they? Faced with consumers who can compare prices in just a few clicks, how much leeway do companies really have? Won’t consumers most likely reject the more expensive brand?

Yet, price wars can be avoided. Some companies adopt original pricing methods to avoid comparisons. Others capitalize on new technologies, such as auctions and customized discounts, to take full advantage of variable pricing policies on a massive scale. Generally speaking, the most effective strategies enable companies to set their prices as closely as possible to the value perceived by the individual customer. Above that price, customers won’t buy; but below, the company cuts its margins unnecessarily.

We have gathered a range of approaches to avoid the risk of direct price wars:

- Dare to adopt breakthrough pricing in your market. This will encourage your customers to decide based on the value you are offering, rather than simply on price.

- Personalize your prices to match them more closely to what each individual is willing to pay, according to their sensitivities.

- Why not let customers set their own prices? Although this approach might appear extreme at first glance, it can work very well in some situations.