Bounded Pricing

Description

Define limits and ensure the price falls one side of each limit. Ensure the defined limit is rational rather than something plucked out of the air.

You can have a lower limit, for example below which profit will be significantly damaged. You can have an upper limit, for example where sales will significantly drop off. You can also have both lower and upper limits.

Example

A retail store knows that customers will not pay more than a particular price for a given product, and that sales will drop off sharply above this limit. Their buying team negotiate with suppliers to ensure they can sell below this limit and with sufficient margin to make a reasonable profit.

A finance director calculates fixed and variable unit costs for a product range and insists that prices cannot go below a figure that covers these costs. This challenges the marketing department who decide to add 'prestige' as a part of the brand in order to help higher prices.

Discussion

There is usually quite clear reasoning when using lower or upper boundaries in pricing, and certainly the prices should be backed up with clear research and analysis. Sometimes, however, there are more subtle reasons, for example where a person or department sets boundaries based more on meeting personal goals than building a strong market position.

A danger with bounded pricing is that it can lead to other factors being ignored, such as competitor pricing and customer expectations. The boundary may acquire 'magical' properties where people stop questioning why it is as it is. In this way, boundaries that are set one year may sustain for a long time until they are properly challenged.

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Bounded Pricing

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