Pricing performance KPIs
It is widely known that the pricing strategy is one of the core elements of marketing. Dr. Philip Kotler, the father or modern marketing, considers it of the four Ps within the Marketing Mix.
Creating an deploying a pricing strategy can be a complex task, where fundamentals and consequences are to be seen interdependently. A sound pricing strategy ought to consider costs, consumer acceptance and competition prices.
Implementation of the pricing strategy is a homogeneous part of product positioning, therefore things are quite complex. Here are several metrics that help measuring performance and soundness of the pricing strategy and serve as foundations stones for decision-making.
- # Relative price, also known as # Price premium, compares the price to a benchmark price, most commonly the average price on the market. Construction of this metric is done by dividing the difference between the price and the benchmark price to the latter one. Also, calculation can be done by dividing the % Revenue market share (market share in terms of sales value) to the % Unit market share (market share in terms of sales volume). If the result equals 1, there is no price premium. Price premium exists only if value share is greater that volume share. If the result is negative, then there is no price premium, so it means that consumers are not quite willing to pay extra for your product. What ought to be carefully considered here is the price we take into consideration: is it the charged price or the price actually paid by customers? Usually, it is much easier to gather data on the prices that are charged by competition and calculate an average price based on these.
- $ Reservation price represents that maximum level of charged price above which consumers are not willing to pay. This metric helps understand the value the consumer places on the product, being useful in estimating demand as a function of various price levels. Finding each customer’s reservation price is extremely difficult and costly, therefore marketers usually resort to measuring another metric: % Good will. This involves focusing on a population on which to test several price levels, asking the respondents whether they consider these levels of “good value” or not.
- # Price elasticity reflects how consumers respond to small changes in price levels. Calculation is done by dividing the % change in quantity demanded to the % change in price. The result can help anticipating how sensitive will be the demand in case of price changes.
These are three major performance measures that are of great use in assessing pricing strategy effectiveness and consumer responsiveness to this. Of course, other issues can arise in management of pricing strategies. For example, for an interesting article on a particular issue that can arise in pricing – the prisoner’s dilemma – we recommend you read more about the pricing war between Wal-Mart and Amazon on top-selling hardcover books.
- For more insight on pricing, we recommend: De Michael V. Marn, Eric V. Roegner, Craig C. Zawada (2004) The price advantage. John Wiley & Sons, Inc., Hoboken, New Jersey
- If you are a pricing professional or your activity involves in pricing-related issues, you might find of interest visiting the Professional Pricing Society.