Why Differentiated Pricing Models Are So Effective
By: LMA International on Feb 12, 2013
Why differentiated pricing models are so effective - Feb 8
Category: Firm Economics/Profitability
When most managers think about pricing, they harken back to their days of Economics 101: a rote downward sloping demand curve and an asterisked point labeled "perfect price." At this optimal price, elasticity is such that it does not make sense to raise price (because the extra per unit profit is overshadowed by lost sales) nor discount (because increased sales don't compensate for lower profit margin). By relying on the approach suggested by this graph, pricing has traditionally been thought of as a simple search for one perfect price, but ends in a "Pricing Catch-22, according to pricing strategy consultant Rafi Mohammed. He says that no matter what price is set, it inevitably creates missed profit opportunities. The way to break out of this Pricing Catch-22, Mohammed notes, is to offer good-better-best prices.
Source: Harvard Business Review
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