PRICING - 05.03.2018

Is teaser pricing worth trying?

Pricing strategy

The price you set for your products or services is one of the most important decisions a business can make. Many companies do not spend enough time explicitly considering the strategy around the pricing of their products or services. There are several pricing strategies falling under four general umbrellas:

• cost-based pricing strategies, e.g. cost-plus pricing
• value-based pricing, e.g. premium pricing for exclusive products
• strategic pricing, e.g. predatory pricing to drive competitors out of the market with low prices
• teaser pricing, e.g. loss leader.

Teaser pricing

The MD wants to introduce teaser pricing. She is trying to decide which product to select as the loss leader. A loss leader teaser strategy offers special deals on a few items with all other prices at market rates. Tip 1. Start by collecting a pricing data bank for the MD. This should include for each of your products or services: the current price, cost and sales volumes, the price history and historic sales volumes and the prices offered by your main competitors. The pricing data bank should help you to work out what happened to sales volumes when prices changed. Tip 2.  Meet the MD with your data bank and ask her whether there is any other data she would like to see. For example, she may wish to see the data split by location or region.

Price and volume

Now that you have collected the base data, the next step is to consider the impact of the revised prices on demand.

Tip 1. Remember that the purpose of loss leader teaser pricing is to influence sales volumes of the item being priced as a loss leader and generate increased sales volumes of all the other items. You will need to open a workbook in your pricing databank to handle the impact on sales volumes of different prices.

Tip 2. For each item, you will need to deal with two variables: price and volume. The volume response to price changes will need to be based on a set of assumptions. The MD, sales director and marketing director will have to supply these assumptions and alternative prices to you.

Tip 3. The analysis is going to be complex so create three worksheets, one for the assumptions, one for the data and a third for the outputs. The assumption worksheet should include at least two assumptions. Firstly, the assumed prices of each item under each pricing scenario you are considering. Secondly, the percentage change in volume of each item in response to the changes in the price of the loss leader. The output sheet should show the sales totals per product in the different scenarios.

Tip 4. Don’t forget that as volumes change, cost will also change so include a costing section in the output sheet so you can calculate profits.

Which should be the loss leader? The item to select as loss leader will be the one showing the greatest profit.

For a sample loss leader selector, visit http://tipsandadvice-financialcontroller.co.uk/download (FC 10.06.02).