Price Metrics - Article from SPG Insights Page 1 of 5...

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Article from SPG Insights (,0,w ) May 15, 2005 ARE YOUR PRICING METRICS AN UNTAPPED OPPORTUNITY FOR PROFITABLE GROWTH? WHY PRICING MORE PROFITABLY DOESN'T MEAN HAVING TO RAISE PRICES by By Brad Bray, Peter Walsh and John Hogan, Strategic Pricing Group In today’s competitive environment, where companies aggressively pursue every opportunity to grow revenue and profit, executives continue to miss a critical insight that could significantly improve their bottom line performance: pricing more profitably doesn’t mean having to raise prices. In our experience of working with hundreds of clients across a variety of industries, we see that price metrics (the unit of measure for charging prices) represent one of the biggest payback opportunities, yet is most frequently overlooked. On a daily basis, purchases are made based on a predetermined unit of measure, what we call a “price metric”. The metric is the means by which a customer is charged for the use, purchase, or consumption of a product or service. Gasoline, milk, and paint are charged by the gallon. Long distance phone service is charged by the minute, concrete by the yard, and seafood by the pound. For the most part, consumers don’t analyze the price metric because they see some correlation between the unit of measure and the consumption of the product or service. However, for sellers, the price metric can have as much impact on the overall profitability of a product or service as the actual price point. What’s more, consumers are far less likely to object to a price metric than the actual price. Yet surprisingly, companies continue to ignore the metric and focus solely on price. Across a broad range of industries, as technologies advance, markets evolve, and competitors shift, pricing metrics based on historic industry practices may no longer be appropriate and could be damaging your overall profitability and position in the market. In some cases, using a faulty price metric can actually accelerate the commodization of your products and services. A great illustration of this happened in the aircraft engine industry several years ago. GE Aircraft Engines turned the industry on its head and created a tremendous competitive advantage by changing the way they charged customers for their aircraft engines. Instead of using the traditional industry metric of charging a fixed price for an aircraft engine, GE changed the metric to better track with the value it delivered. It introduced the concept of “on wing” pricing, which meant customers were charged for engines based on the hours of the engine’s use. This move brilliantly highlighted GE’s claim that its engines were of superior design and would fly longer with less maintenance than those of its competitors. In one simple but strategic pricing move, GE advanced its value proposition while simultaneously diminishing that of its competitors. This
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This note was uploaded on 05/12/2010 for the course MAR 5805 taught by Professor Sawyer during the Fall '08 term at University of Florida.

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Price Metrics - Article from SPG Insights Page 1 of 5...

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