Optimizing Pricing Strategies

Businesses today are implementing sophisticated pricing practices tailored to industry development and trends, competition dynamics, and regulatory environment. Industries like banking, retail, and telecom, equipped with advanced technological infrastructure and extensive clientele, lead the way in developing robust pricing tools and practices.

The foundation of pricing any product lies in its perceived value, a subjective assessment varying among consumers. Historically, prices were set empirically, considering production costs with markup to secure profitability. Initially, a singular price prevailed, adjusted based on market benchmarks or inflated for future discounts. Over time, competition spurred the development of tools for price differentiation, such as personalized offers and segmentation through targeted levels of discounts.

However, traditional discount mechanisms like "3 for the price of 2" are losing relevance. Contemporary approaches involve trial periods or free value-added services. For instance, in banking, customers are offered discounted movie tickets inside banking applications or simple access to an FX or equity market for more advanced clientele. As data on client behaviour accumulates, products are tailored to specific segments, leveraging advanced algorithms for individualized pricing and offering.

Examples from Recent Trends

The lending market is traditionally regulated at the legislative level: the state controls interest rates, sets maximum loan costs, introduces standards and seeks to control the consumption of loan products by increasing banks’ costs for lending to certain categories of clients. With increased competition, lowering rates became inevitable, but some banks found a way to overplay both regulators and competitors: they combined lending and insurance into a single product. The loan rate decreased, and the cost of the insurance offer increased and was included in the package offer. This is classic behaviourism: the consumer saw a favourable rate, say 9% instead of 16%, but part of the bank’s profitability in reality was transferred to another product. The seller earned the same amount, and in pursuit of “favourable” conditions, the client switched to those who were among the first to implement the described approach. A low loan rate in the first year is another example. The second and next years' rates remain the same or even become higher, but in the first year, they are either minimal or zero. This mechanism had a major effect on those who planned to pay off the debt in a year or year and a half and even dream of making money on a loan, which, as real statistics show, is utopian. Also, such proposals stimulated the emergence of various refinancing programs, which redistributed value towards the client as a normal reaction to the strengthened competition.

Mobile operators and some advanced MFI companies began offering a range of tariff plans: premium, medium, and basic. The first ones wanted to increase the average bill, and the second wanted to increase the amount of the average loan. The price for the premium tariff was obviously too high, and the functionality of the basic package was not enough, so companies pushed the user to choose the medium offer. Psychologically, a person is inclined to choose favour of the middle option. Moreover, in addition to the initial goal, companies did inflate the price of the average tariff and earn more revenues.

By the way, at the same time, the idea of selling custom phones appeared: the consumer chooses the perfect camera and saves on the battery, or, on the contrary, overpays for the battery but leaves oneself without professional photos. The idea was to inline the value of a product and its price for each buyer. It didn’t work: the production of custom devices was expensive, the manufacturer was unable to reach industrial scale, and most importantly, the variety of Chinese smartphones made it possible to choose a phone for specific needs at a more reasonable price.

Ongoing Pricing Trends

• Personification is king: Tailoring prices to individual consumers helps address the classic problem of price discrimination while enhancing the consumer's perception of a personalized relationship with the company.
• Invest in customer loyalty: Shifting part of the created value to the client by old-fashioned discount or bundling a core product with a value-added one is a good investment in increasing retention rates, fostering long-term relationships, and making it challenging for competitors to lure clients away.
• Consumer-to-consumer (C2C) transformation: In some cases, involving consumers in the business, such as telecom's exchange of minutes or data between clients, serves as both an anchor for them and a market mechanism for tuning price and product content.

From Theory and Examples to Practical Implementation

1. it is important to understand your current and potential target audience. It happens that a premium segment company increases the price of a product or service, but an inelastic consumer does not notice this. On the contrary, in the case of mass-market goods, a slight increase in price may have the same effect but also may provoke a sharp outflow. It is important to assess how the cost correlates with the situation in the business niche where the company exists. You can set the highest price for a product or service on the market but offer an extended service, for example. But in this case, work on elasticity will be limited. Usually, both a decrease and an increase in price for such segments will go unnoticed, leading to incorrect conclusions. It is also worth considering that for any segments, the effect may become noticeable in 3-6 months; at first, nothing will change, and then there will be a sharp outflow or influx of audience. The introduction of discount mechanisms can cause addiction: the audience begins to expect benefits of a certain level, and the company is forced to inflate the base price and increase the discount percentage, but such a race is always finite, discounts above a certain level stop working effectively.
2. Do not forget about the theoretical foundations of statistics and the principles of decision-making regarding elasticity. It will not be possible to implement data-driven solutions on a specific client immediately; it is more rational to scale them to groups of people, check their effectiveness, and then progressively narrow the segment. It is also important to have high-quality information about working with direct competitors’ pricing in order to assess the effectiveness of your solutions correctly. Imagine: the price point was reduced by 10%, and the closest competitor reduced it by 20%. The company’s income fell, the point was returned to the beginning, but everything is getting worse: both clients and turnover are decreasing. It comes from the fact that the market equilibrium price has decreased, but without this information, the conclusions might be absolutely invalid.
3. It is worth analyzing how the target audience interacts with each other. The development of social networks has led to a close connection between consumers of the same goods and services, so the final personification of prices for each specific person is complicated: you can lose trust if clients unhide the discrimination mechanism. Social network analysis and geolocation tracking help aggregate target audience segments and work with the elasticity of demand within a group of people with close connections within. Discussion of price levels, earnings and other monetary issues is still taboo in markets like Russia, for example, so this factor can be more insightful for other markets.
4. Opportunities for price competition relate to business model efficiency and constant reduction in relative costs. As an example, automobile manufacturers are investing large sums of money in creating platform solutions to build car lines more efficiently: years ago, 3-4 different engines were available for each model, but now the difference in power is provided by electronics and minimal differences in components such as turbines. All this provides more space between the current market price and cost, which becomes a lever for price competition.

Effectively working with the elasticity of demand, loyalty, and engagement mechanics requires aligning the value consumers receive with the offered price. Pricing strategies are not static comparisons but an ongoing experimentation, data analysis, and decision-making process, facilitating balanced and harmonious business development.