Anthony Davidson

Don’t leave money on the table

Are you leaving too much money on the table? Many businesses have an ad hoc approach to price optimisation, revenue management and profit maximisation. Associate Professor Len Coote showed MBA students how to take a more systematic approach to solving these complex optimisation problems.

A micro-economic lens enables business managers to better understand consumer demand, consumer willingness to pay, and consumer surplus. Determining the slope of the demand curve is a prerequisite for pricing policy and strategy. What is the price elasticity of demand, how sensitive are customers to changes in price, and at what price point is revenue or profit potential optimised?

More importantly, how willing are customers to pay for different product features and benefits? Do different customer segments exist in terms of their willingness to pay for different offerings? If so, what is the “consumer surplus” – the difference between the market price and the price customers are willing to pay.

This logic can be extended to the way we price new products as well. By testing consumer willingness to pay for different bundles of features and benefits at different prices, we can estimate which offering will create greatest return on investment.

It’s time to move from ad hoc pricing decisions to a systematic, evidence-based approach to price optimisation, revenue management and profit maximisation.

Thanks Len for your insights and methods in this critical area of marketing. #marketing #pricing #willingnesstopay