The six pricing myths that kill profits

Pricing is the most important driver of profits. Pricing is also, surprisingly, the area most executives overlook when implementing initiatives to increase profits. There is a reason: Research presented in this article suggests that most executives implicitly hold on to a series of weakly held assumptions about pricing that ultimately are self-defeating. These pricing myths are that (1) costs are the basis for price setting, (2) small price changes have little impact on profits, (3) customers are highly price sensitive, (4) products are difficult to differentiate, (5) high market share leads to high profits, and (6) managing price means changing prices. This research shows how executives can overcome these misconceptions and thus implement sustainable profit improvements via pricing.     

Firm entry and turnover: the nexus with profitability and growth

The paper presents a new sectoral taxonomy, which classifies industries according to the opportunity and cost of experimentation. Econometric tests show for a sample of 24 countries that in the 1990s ‘entrepreneurial’ industries with a mutable and growing firm population experienced the highest growth in terms of value added and employment, but also the lowest growth of labour productivity. ‘Entrepreneurial’ industries generally earned a better profit-ratio than ‘routinised’ industries with an inertial population. The results are consistent with entrepreneurial theories of market competition, which suggest that entry follows profit opportunities but does not deplete them.      

Sources of variation in firm profitability and growth

This article reports an analysis of the sources of variation in profitability and growth for manufacturing firms located in eleven European countries. A variance decomposition analysis determines the importance of the country, industry, corporate group and firm effects on profitability and growth. The analysis reveals evidence of differences between industries in the comparative advantage offered by different countries, reflecting a tendency for specialization and geographic concentration. However, as in several previous studies, the firm-level effects are the most important class of effect in explaining the variation in performance.     

Partitioned pricing: Can we always divide and prosper?

The widespread use of partitioned pricing by marketers may be the result of perceptions that it enhances the perceived value of the offer. This research identifies boundary conditions for the effectiveness of partitioned pricing by examining the role of the reasonableness of a surcharge and the need for cognition in consumers’ processing of pricing information. Three studies, each consisting of two experiments, examine the effectiveness of partitioned versus combined pricing and show that for high need for cognition persons, partitioned pricing has a more favorable effect than combined pricing when the surcharges are reasonable; these effects reverse when the surcharges are unreasonable. The studies indicate no differences between partitioned and combined pricing across surcharge conditions for low need for cognition consumers. A fourth study incorporating both reasonable and unreasonable surcharges in one experiment substantiates the conclusions of the first three studies. Finally, detailed process measures provide evidence that high versus low need for cognition persons evaluate partitioned pricing information differently in distinct surcharge conditions.     

Emerging trends in retail pricing practice: implications for research

This article represents the first of several editorials to appear in the Journal of Retailing designed to examine the nexus between retail practice and research, with the goal of stimulating further research. This essay on emerging trends in pricing discusses recent advances in retail pricing optimization. We begin with a review of how retailers typically make pricing decisions using time-honored heuristics and attempt to infer the optimal decisions. However, current methods are suboptimal because they do not consider the affects of advertising, competition, substitute products, or complementary products on sales. Most fail to take into account how price elasticity changes over time, particularly for fashion merchandise, or how market segments react differentially to price changes. In addition, many retailers find it difficult to know how to price merchandise when their suppliers offer temporary “deals.” They are also generally unaware of how their pricing strategy influences their overall image. As these issues demonstrate, optimal pricing is not a static problem. Retailers must be able to react quickly to changes in the environment or sales patterns. This paper also provides examples of the more sophisticated pricing techniques that are currently being tested in practice. Finally, we conclude with a discussion of the critical components that must be incorporated into retail pricing.     

Design and evaluation of road pricing: state-of-the-art and methodological advances

This article provides an in-depth review of the state-of-the-art and describes methodological advances in the design and evaluation of road network pricing schemes. A number of paradigm shifts from the two polar cases of the marginal social cost pricing of road traffic congestion and revenue-maximizing road toll pricing are analyzed, as induced by the need to address realistic design complexities and constraints. The crucial role of the joint consideration of pricing strategies with optimal capacity provision and several network management measures is manifested and an integrated evaluation framework is suggested to incorporate a wide range of road pricing impacts into the scheme design process.     

A membership pricing policy to facilitate service scale-expansion

This paper proposes a multi-year membership pricing policy for a service business like a gym chain. In the pricing policy, the equivalent membership price per year is relatively low to attract customers, and the multi-year membership fees must be prepaid in full. The prepaid cash provides resources for scale-expansion by opening new stores. We develop a nonlinear mixed integer programming model to formulate the pricing decisions. Numerical experiments reveal that the multi-year membership pricing policy, from a long-term perspective, is substantially better than the business-as-usual pricing policy (1-year membership) in cash balance, profit, and market share. Yet, the performances of the two pricing policies do not differ much from a short-term perspective. These findings indicate that the multi-year pricing policy may be a good strategy, because it initially attracts less attention of competitors; suddenly it emerges and substantially outperforms its competitors in cash balance, profit, and market share.     

Alternative marginal-cost pricing for road networks

In the literature, several studies have algebraically characterized the set of toll vectors or patterns that, when added to a user equilibrium problem, its solution would be system optimal. Toll vectors in this set are termed “valid.” While the toll vector commonly advocated in the literature, i.e., one that equates the toll on each link to its marginal external cost, is always valid, other valid toll vectors generally exist and many leave some utilized links in the network untolled. On the surface, this may appear unreasonable and seems to violate the principle of marginal-cost pricing. This note shows that, when travel demands are elastic, all valid toll vectors satisfy this principle, in that the total tolls for each path equals the congestion externality an additional traveler on the path imposes on others.     

Trade credit and determinants of profitability in Europe. The case of the agri-food industry

The objective of this paper is to analyse the effect that trade credit has on the determinants of profitability during the crisis period in Europe. We use panel data for a total of 24,177 European agri-food companies from 2010 to 2014. Among our main contributions, we highlight that we isolate the sector effect and study the country effect by separating the different policies and customs with respect to the granting of trade credit. The results confirm, in general, that trade credit affects profitability depending on the country and the characteristics of size, specificity, market power or reputation.     

The changed legality of resale price maintenance and pricing implications

From 1911 until 2007, minimum resale price maintenance agreements between manufacturers and resellers were illegal under federal antitrust law. This handicapped manufacturers which sought to exert control over how their products were priced and promoted through the distribution channel. In June 2007, the United States Supreme Court—via the Leegin case—ruled that bilateral minimum resale price maintenance agreements would no longer be automatically illegal. Rather, they would be legal if their net impact is pro-competitive, and illegal only if the net impact is anti-competitive. This ruling empowers manufacturers to use resale price maintenance to create value for their customers and consumers. However, not all stakeholders—including some state legal systems—have embraced the Leegin ruling, thereby creating uncertainty regarding its final impact. Despite this uncertainty, the opportunities created by Leegin are worth exploring and acting upon. Since the Leegin ruling 3 years ago, a new landscape for resale pricing maintenance has been evolving. We discuss this landscape and the considerations for using resale price maintenance within its ambit. For many manufacturers, the chance of benefitting from Leegin outweighs any potential risks.     

中国演出产品定价机制及完善对策探究

在文化消费多样化和移动互联网技术兴起的发展趋势下,中国演艺市场面临着高成本、低回报的经营困境,作为新兴产业的演艺行业,不管是运行秩序还是行业规则方面,都有需要完善的地方。以演出产品定价为主要研究视角,提出了演出产品定价存在机制不完善、价格水平整体偏高、炒票现象严重等问题,并从建立演出产品价格管理体系、实行差异化定价策略、科学管理演艺市场3个方面提出了建议。笔者将鲍莫尔的病态成本理论作为演艺产品差异化定价的理论依据,菲利普·莱斯利的百老汇价格歧视作为将科学管理手段应用于演出产品价格管理的例证,对演艺产品定价机制及完善对策进行了初步探究。     

扩展保证产品定价策略分析

对产品保证与扩展保证进行了对比分析,揭示了产品扩展保证的特征和价值。从保证成本、市场需求、营销目标等多个角度剖析了扩展保证定价影响因素,基于扩展保证的多重功效,综合考虑扩展保证销售目标、需求者风险特征等的不同,详细分析了不同情形下扩展保证的定价策略。     

Price developments after a nominal shock: Benford's Law and psychological pricing after the euro introduction

Retail managers use psychological pricing to make the prices of goods appear to be just below a round number. The euro introduction in 2002, with its various exchange rates, distorted existing nominal price patterns while at the same time retaining real prices. We studied consumer prices before and after the introduction of the euro by using Benford's Law as a benchmark for price adjustments. Results indicate the usefulness of this benchmark for detecting irregularities in prices, and a clear trend towards psychological pricing after the nominal shock of the euro introduction. In addition, the tendency towards psychological prices results in different inflation rates in dependence of the price pattern.     

Heuristic algorithms for a second-best congestion pricing problem

Designing a congestion pricing scheme involves a number of complex decisions. Focusing on the quantitative parts of a congestion pricing system with link tolls, the problem involves finding the number of toll links, the link toll locations and their corresponding toll level and schedule. In this paper, we develop and evaluate methods for finding the most efficient design for a congestion pricing scheme in a road network model with elastic demand. The design efficiency is measured by the net social surplus, which is computed as the difference between the social surplus and the collection costs (i.e. setup and operational costs) of the congestion pricing system. The problem of finding such a scheme is stated as a combinatorial bi-level optimization problem. At the upper level, we maximize the net social surplus and at the lower level we solve a user equilibrium problem with elastic demand, given the toll locations and toll levels, to simulate the user response. We modify a known heuristic procedure for finding the optimal locations and toll levels given a fixed number of tolls to locate, to find the optimal number of toll facilities as well. A new heuristic procedure, based on repeated solutions of a continuous approximation of the combinatorial problem is also presented. Numerical results for two small test networks are presented. Both methods perform satisfactorily on the two networks. Comparing the two methods, we find that the continuous approximation procedure is the one which shows the best results.     

人民币国际计价功能的特点研究

随着中国对外开放程度不断提高,人民币逐渐走出国门,特别是党的十八大以来,人民币加入特别提款权(SDR),其国际货币的地位初步奠定。目前,人民币已成为全球第五大支付货币,全球已有60多个央行或货币当局将人民币纳入外汇储备。本文结合人民币国际计价功能的发展,对其特点进行了具体分析。研究发现:人民币计价功能的区域性特征明显,人民币在国际金融计价中的比重增长较快,增加人民币供给为其实现国际计价功能提供了有力保障,互联网和移动支付是实现人民币计价功能的重要通道。     

Effects of pricing on Internet user behavior

The INternet Demand EXperiment (INDEX) conducts experiments to measure demand for quality-differentiated Internet access as a function of bandwidth, traffic volume, applications, and pricing structure. This paper presents an overview of results based on aggregated data from five pricing experiments. In these experiments, pricing is based either on time, volume, a combination of both, or a flat-rate buy out option. Quality of Service (QoS) is differentiated by varying bandwidth for incoming and outgoing traffic. After describing the experimental design and characterizing our subject pool using demographic data, we examine the change in service usage by comparing the five experiments in terms of traffic generation, QoS selection, and expenditure.     

基于心理暗示的定价研究

由于信息不对称的存在,消费者无法获知商品的真实价格,在购买前会先对商品进行主观估价,进而形成感知价格的心理变动。价格不确定性和价格感知变化性的交互作用是商品定价对消费者购买决策影响形成心理暗示的现实反映。运用这套作用机制,商家可以通过价格心理暗示方式改变消费者购买决策。本研究通过对文献的归纳和实验研究结果的整理,总结出四种价格暗示方式,并深入分析四种方式作用机制,同时提出价格暗示的应用误区。     

Evolutionary game-theoretic model for dynamic congestion pricing in multi-class traffic networks

This paper describes an evolutionary game-theoretic learning model for dynamic congestion pricing in urban road networks, taking into account route choice stochasticity and reliability considerations, and the heterogeneity of users, in terms of their value of travel time and real-time information acquisition. The learning model represents the dynamic adjustments of users to travel cost changes which may take place in the day-to-day as well as the within-day timescales. The implementation into a simplified and a real urban road network signifies the important implications of modeling the dynamic and stochastic learning components of users’ behavior for accommodating the efficient deployment of congestion pricing schemes.     

New product pricing strategy under customer asymmetric anchoring

Potential customers' willingness to pay (WTP) for a new product can be affected by their observing a posted price and this can be modeled in terms of an anchoring mechanism. A theoretical argument and mathematical proof are developed, showing that if customers use an asymmetric WTP anchoring mechanism, it will normally be optimal for firms to price higher than otherwise. Experimental evidence is provided supporting the notion that an asymmetric anchoring mechanism can be involved in purchase decisions.     

Pareto-improving and revenue-neutral congestion pricing schemes in two-mode traffic networks

This paper studies a Pareto-improving and revenue-neutral congestion pricing scheme on a simple two-mode (highway and transit) network: this scheme aims at simultaneously improving system performance, making every individual user better off, and having zero total revenue. Different Pareto-improving situations are explored when a two-mode transportation system serves for travel groups with different value-of-time (VOT) distributions. Since the congestion pricing scheme suggested here charges transit users negative tolls and automobile users positive tolls, it can be considered as a proper way to implement congestion pricing and transit subsidy in one step, while offsetting the inequity for the poor. For a general VOT distribution of commuters, the condition of Pareto-improving is established, and the impact of the VOT distribution on solving the inequity issue is explored. For a uniform VOT distribution, we show that a Pareto-improving and revenue-neutral pricing scheme always exists for any target modal split pattern that reduces the total system travel time.