The Pricing Game Part 1

Pricing, when done well, leads directly to a successful brand with short-term profitability and long-term value. Using the right strategy makes all the difference.

Several years ago while working for a beverage company, I wanted to design a model based on game theory for developing pricing strategies. After a fair amount of research and a number of drafts, a workable model emerged. With the help of the company’s president, who is a bit of a spreadsheet master, we were ready to test it.

First, a little about the brand. A steady, 10-year decline describes it best. We employed some strategies, such as removing redundant or not-productive spends and changing the packaging, slowing the decline and increasing profitability, with some success. We believed, however, that we were leaving money on the table.

Because the brand had been around for decades, we had a pretty good idea of what customers would be willing to pay. We also knew what our competitors were doing. What we didn’t know was where we could move the price and increase profits.

That’s where game theory came into play.

There were four choices we could make:

  1. Raise our price
  2. Lower our price
  3. Stay the same
  4. Pick number 1 or 2, then reverse course

In the end, we did all four. In separate markets, of course.

Depending on the market, competitors occupied different spaces within the category. Having a good idea of which competitors would make preemptive or reactive moves, and what those moves most likely would be, factored greatly into our decisions. And we had to make those choices market-to-market. Simply because a competitor makes a move in one market doesn’t mean they will make the same move in another. Even though it may seem to you the most rational choice, they have their own reasons for making decisions.

When the dust settled, we had slowed the rate of decline, raised the average price and increased overall profitability of the brand in the short- and long-term.

Our guesses were not perfect, but they were good enough. And they were good because we did our homework, focused on one market at a time and started with the price on the shelf in the store, not the profit we wanted to make. Yes, it took some time. It also involved everyone associated with getting the product to the consumer, making it easier to get buy-in along the way.

Success came down to how well we played the game.

Look for a step-by-step guide on using this approach for pricing decisions in a subsequent post and a full column on the subject at my website later this month listed under Pricing Strategy.

For more insight into game theory, Wikipedia (one of my favorite sites) gives a good primer with this entry. You’ll get a much more in-depth understanding from David Levine’s Economic and Game Theory Page.

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2 Responses

  1. […] Read The Pricing Game Part 1. […]

  2. […] is what you think potential and existing customers are willing to pay. (See my other pricing posts here, here and […]

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