Why is pricing important in the overall strategy of a product?


When different profit levers like price, variable cost, fixed cost, volume of goods sold are compared, studies show that a 1% improvement in price can create the maximum operating profit improvement of 11.5% compared to only 2.3% through fixed costs. This goes to show that pricing can have a monumental impact on the bottom line. 

This can be achieved by understanding different pricing strategies and how they can be executed through pricing tactics. The different pricing strategy includes using - 1. Cost-side factors (like fixed, variable costs, incremental break-even analysis); 2. Customer-side factors (like Economic Value Analysis (EVA); Price Elasticity of Demand; Measuring willingness to pay) 3. Competitive environment factors. 

Based on the business context, these strategies can be implemented with tacts like price discrimination (e.g., bundling); non-linear pricing; price promotions (e.g., hi-lo pricing); and most of all understanding consumer psychology with respect to pricing (anchoring effect, decoy pricing, compromise effect, charm pricing, etc).