I was at dinner recently with the head of a global transportation company. He was complaining that they weren’t getting the prices they deserved for their products. I asked whether their prices were constrained more by competitors or their own confidence in asking for more. He sheepishly replied that more than half was probably self-imposed constraints.
Many companies have them. Self-imposed constraints on pricing that were born from emotion rather than strategic or scientific decisions.
They tell themselves that the price of X cannot exceed $100, or that the absolute ceiling for Y is $1000. Or that their price must be within $50 of their strongest competitor. Or that their price must be pegged to historical pricing or another product they sell.
You could call these phantom business rules. One of our clients refers to those self-imposed constraints as “tribal wisdom.” They’ve evolved over time and have become entrenched in the organization. They are unnecessary and undesirable barriers that constrain revenue streams and greater profitability. They may be costing you millions.
Overcoming these phantom rules requires a disciplined Revenue Management approach. You can kick-start the process with a thorough analysis that eliminates the unknowns and helps you separate real constraints from perceived constraints.
This is easier said than done. One of the biggest problems you face is the asymmetrical information flow on pricing. That is to say, you only hear from customers if they think the price is too high. Never, ever do they tell you that they are willing to pay more and that you could raise your price.
That’s what makes rigorous data analysis critical. The data will reveal what your customers will do–not just what they say they will do–in response to price changes.
Instead of only listening to complaints about higher prices, you should watch for certain tell-tale indicators of pricing opportunity. Examples include when you’re out of inventory, when there’s a wait-list for your product, or when there’s a demand spike that shows a sense of urgency for your product or services.
More clever analyses will reveal even better clues. For example, you could directly measure price elasticity– although that’s more difficult because you’d need sufficient observations and you need to normalize the data for non-price demand drivers. You could also perform a statistically-derived behavioral segmentation analysis which will tell you which customers are willing to accept a price increase and how much more they’d pay.
Phantom business rules drain profits. It’s essential to eliminate the unknowns about self-imposed pricing constraints that have ruled your company for years. Banish those phantom business rules and drive organic revenue growth.