It could be said that creating the perfect pricing strategy for a business is a bit like trying to hit a moving target. Understandably, it can be a complex task as it’s subject to various factors such as market trends, customer behaviour, and competition. This is where revenue management comes into play. It’s an intelligent, logical (though sometimes controversial) framework that helps businesses set the optimal price to maximise profitability.
Cutting through the jargon and into the layman’s world of revenue management pricing strategy, let’s break this thing down into easily digestible chunks and equip you with essential techniques to give your business the competitive edge it deserves.
What Is Revenue Management?
At its core, revenue management is a data-driven approach used to predict customer behaviour, optimise product availability and price to maximise revenue growth. The concept originated in the airline industry when selling flight tickets in the 1980s and has since been adopted by various other sectors including hospitality, retail, and even the broadcasting industry.
The Power Of Pricing
Pricing, when done right, can be a game-changer. It impacts your sales volume, revenue, profits, and brand perception. A robust revenue management pricing strategy helps businesses anticipate market demand, strategically adjust prices, and take full advantage of peak times to maximise revenue.
Ideal Strategies For Your Business
- Dynamic Pricing: With this strategy, the prices are adjusted based on supply and demand. Consider Uber; they use dynamic pricing where the rates increase during peak hours or when the demand for rides is high. This is also known as Surge pricing. Other dynamic pricing examples include the vast majority of major airlines, who use the strategy to set ticket prices, and the concert sales company Tickemaster, who have been criticised for their recent extortionate prices for the likes of Harry Styles and Bruce Springsteen gigs.
- Value-Based Pricing: This strategy places price based on how much the customer is willing to pay. A great example is Apple, known for their high-end products. They use value-based pricing, looking at the perceived value their customers place on their products.
- Bundle Pricing: This is where a group of products or services are sold together at a lower combined cost. Microsoft Office uses bundle pricing, offering Word, Excel, PowerPoint, and more in one package at a discounted price rather than selling them separately.
- Penetration Pricing: This strategy involves setting a low initial price to penetrate the market quickly and deeply. Amazon Kindle followed this strategy, launching their product at a considerably low price, aiming to capture a large share of the e-book market.
- Premium Pricing: Used when a company has a unique product or service. Luxurious brands such as Gucci and Rolex can price their products high due to their brand reputation and the perceived exclusivity of their products.
- Variable Pricing: This strategy offers different prices to different customers for essentially the same goods or services. Airlines frequently use this model, where prices vary based on when you book, choose your seat, or decide to include additional services.
- Segmented Pricing: Here, different amounts are charged for different versions of the same product. For example, in Adobe’s Creative Cloud package, they offer various pricing for students, individuals, and businesses.
- Cost-Plus Pricing: This involves adding a percentage (profit margin) to the cost of producing the product or service. Many restaurants use this method, marking up the costs of their dishes to cover overheads and make a profit.
- Geographical Pricing: In this strategy, price varies by location. One example is the variations in movie ticket prices, which often differ based on geographical location to adjust for discrepancies in average income levels.
Each strategy of course has its own benefits and is more effective for certain business models or in certain market conditions. Understanding which pricing strategy or combination of strategies to use is a crucial decision for businesses.
The Bottom Line
Revenue management pricing strategy isn’t just about how much you charge. It’s an intricate dance of understanding your customer’s needs and wants, paying attention to market fluctuations, and being vigilant about your competition.
By adopting appropriate revenue management pricing strategies, businesses can not only weather fluctuations in demand and competition but also establish a solid footprint, maximising their revenue potential and encouraging growth. Remember, it’s not about ‘one size fits all’, but more about finding the ‘right size’ for your unique business needs.
In the world of business, knowledge is power, and with these strategies at hand, you have the power to build a robust and prosperous pricing strategy for your business. Stay curious, stay adaptable and, most importantly, stay profitable. Good luck!