Gross to Net - Using Data to Design Innovative Pricing Structure
Price is what you pay and value is what you get. If a business have to have a prayer session before raising price by 10%, then it has a terrible business
The company has maintained the same price for it's products for more than 5 years. Business leaders are afraid that adjusting the price would jeopardise it's long standing business. If you are a pricing expert, you would have heard of the failure of pricing up strategy by J.C Penny in 2012 cause a revenue decrease of 16%. On the other hand, the discount strategy by Abercrombie and Fitch in 2009 cause a fall in 21% net profit. So the concern of the business leaders are valid and here we will be using behavioural analytics to help us to design an innovative pricing scheme to reduce their gross to net by 2.1% (real results after one year of implementation)
How are we approaching it:
Overall pricing framework / Strategy
We are relying on the above framework to guide the design of our pricing strategy. As you can see from the framework, we need to take care of a variety of factors. How do we determine a good price so that it is a win-win for stakeholders in the ecosystem. Is the current pricing strategy fulfilling our short term goal (e.g giving a lot of discounts now to boost revenue) but put us at a disadvantage in our pricing power in the future? Also, we have to design a proper communication plan for our customers so that the price that we set matches the perceived value of consuming our products or services.
An illustration of a typical purchasing behaviour
The company offers a tiered pricing scheme - meaning, buy more get more discount. For this, you can see that customers only order enough to qualify for the discount in that tier. It informs us that, the behaviour can be shifted if the tiering change. But how to make changes on the existing scheme?
Examples of pricing scheme
From the current pricing scheme, it would not be a "win-win" if we reduce the the discount given to each tier directly. If we change the barrier to qualify for each tier, we will be giving more "discounts" as you now have higher volume at high tier discount.
In the new pricing scheme design, we also take into consideration on the frequency of purchase and also the "market share" information at a store-front. The rationale is we want to encourage customer to buy more regularly (rather than buying once a year in big amounts) so that the demand is more predictable. We also do not want to "punish" customers who already have our products occupying a big portion of the shop space and already had almost all customers buying our products
After multiple rounds of discussions with business stakeholders, we ran some simple simulations to maximise the revenue with a lower net discount we give to our customers. It has to be a scheme that take into consideration the best case for our customer and best case for the business.
This project took us about a month to analyse, interview stakeholders and to understand the business situation. There are of course many more things we look into it when implementing the new pricing scheme but I just wanted to give some flavour on how we are approaching it. Feel free to reach out if you want to understand more.