Confessions of the Pricing Man: How Price Affects Everything

by Hermann Simon

Westendorp Price Sensitivity

they prefer that option over the others. The options present a mix of product characteristics such as product

methods is conjoint measurement . Its

Second, under inflationary conditions I strongly recommend a series of small, regular price increase s instead of fewer significant changes. The series of small changes allows you to keep pace and to avoid the need to overcompensate for lost time and money with a big price adjustment later. You should start these increases and establish the rhythm as early as possible

her maximum price.2 In order to get our profits closer to what the profit triangle promises, we need to charge different prices for the same product or for slightly different variants. The phrase “from profit rectangle to profit triangle” makes one point very clear: the profit increase that we can realize from differentiated prices is greater than the profit increases we can get from fine-tuning our way to an optimal uniform price .

maximum price s (willingness to pay ) than the individual prices do. By charging individual prices, the seller sacrifices profit potential both at the high end and at the low end. Consumer

But the profit situation gets even better when the seller practices “mixed bundling ,”

The additional revenue from the packages offset the cost of the bundle discount by a wide margin. The car manufacturer saw other advantages from its mixed-bundling approach. The optional packages proved to be easier to advertise and sell than individual options. The higher level of standardization via the option packages also reduced the cost and complexity of internal logistics. This case again illustrates very clearly the kind of

the customers’ willingness to pay . I recommend to consider unbundling under these conditions:

There are essentially two forms of volume discount s: full-volume and incremental discount s. The full-volume variant means that the discount rate applies to the entire purchase volume. The incremental rebate means that the discount rate applies only to the incremental volume, not the full volume. This difference may sound harmless, but it is quite powerful.

Penetration strategy means that a company sells the new product at a relatively low price, in order to achieve a high

market penetration quickly and ignite a contagion effect as positive feedback about the product spreads. Penetration is also the recommended strategy if there are strong experience curve effect s or economies of scale .

The low introductory price helped ease the Lexus’s market entry and helped it both gain attention and start building its enviable reputation.

The risk in employing a penetration strategy is that one sets the launch price too low. This is an easy mistake to make with a new product.

Using a penetration strategy is recommended for experience goods. These are products which require a consumer to gain some experience with them in order to understand their true value. A low price at launch motivates more customers to give the product a try, and can create a multiplier effect if customers have a positive experience