Companies use analytical tools to optimize the cost-side of operations. It is equally important to look at how the revenue side can be optimized. In a seminar on February 18, Professor Lidija Polutnik gave a seminar to invited guests from companies to discuss new pricing practices. In a survey among American multinationals, 84% of managers said that they were well-informed on the variable cost of providing a product. Only 21% of the same managers were well-informed on consumers’ willingness to pay. The lesson is that managers need to pay more attention to understanding customer value. According to Professor Polutnik, pricing strategy cannot exist in isolation but needs to be closely aligned with corporate and marketing strategies. All too often, companies have old ways of setting prices. By analysis of the value a product creates for the customer, it is possible to set prices that capture more value, thus improving the business performance.

Recent macro-economic changes (such as globalization and price transparency due to the Internet) sharpen the focus on value-based pricing. Companies need to improve their customer segmenting and convey value to each segment. Prices should be based on the value per segment.

Companies should avoid price competition since long-run costs often outweigh short-term benefits. Instead, companies should look for ways of improving customer segmentation, product differentiation and bundling.

A recent development is the dynamic pricing enabled by the Internet. Companies like Amazon changes prices of products many times even within a single day, e.g. the price of a microwave oven can be changed nine times a day. The dynamic pricing allows Amazon to maximize its profit.

This was the first seminar that we had on pricing. We already work with a customized programme on pricing for one client. We now consider doing more in this space. Many companies could improve their performance by better pricing strategies and we believe that there is potential to deliver more executive education.

Professor Lidija Polutnik lectures

“The first thing you should think of if you run a business is harvesting” says Professor Lidija Polutnik´, Babson College. “Begin with looking at how your revenues can be maximized by strategic pricing.” Companies need to look carefully how they set prices of their products to optimize long-term profitability.

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