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Rafi Mohammed
Harper Collins , New York, 2010 , paperback , 211 pp. , $27.99 ,
ISBN: 978-0061684326
Small differences in a product's price(s) can have extraordinarily high financial impacts on a firm's bottom line. Despite this, many companies don't invest in improving their pricing strategies, tactics, and ultimately the profitability of their prices with nearly the same focus that they do in other areas. Those firms that do make significant investments in price optimization seem to be the exception rather than the rule and they are typically well rewarded for their efforts.
Consider the following example. A firm charges US$3.89 for a product whose cost is $3.59. So, for every unit it sells, it makes a profit of $.30; the profit margin is 8.4 per cent. Suppose the price is increased by 1 per cent to $3.93, resulting in a 6 per cent drop in demand. What happens to the firm's revenues and profits? Although revenue decreases by more than 5 per cent, the firm's profits increase by more than 6 per cent! Somewhat counterintuitive, this example serves as an excellent reminder that the impact of a price change on revenue can differ from its impact on profits. Table 1 (See PDF) extends this example to multiple demand scenarios, all of which demonstrate that small price changes can have very big impacts. Further, when margins are relatively small, profits can increase even when revenues and demand experience a sizeable decrease. As highlighted in Table 1 (See PDF) , even if demand drops by 10 per cent, resulting in more than a 9 per cent decrease in revenue, profits increase by almost 2 per cent! Now, in practice, how many companies would easily accept a 10 per cent decline in revenues even if it meant an increase in profits?
If small improvements in price have...