Pricing A Failure to Communicate Effectively
Have you ever thought that you were overpaying for a service that you wanted? If so, you may have been purchasing from a supplier who ignored all of the data they possessed on the issue. Here is the story of one business with a lesson.
The Ozannes were asked to help better understand the impact of price on retention rates for an important business to business supplier of information. The business was convinced that it possessed a large market share (it turned out to be 25%) and that its competition was extremely limited. Since it believed it was unable to meet its revenue targets through business growth, senior management was determined to increase prices to meet the growth targets.
Of course, there are many elements that drive retention and price is but only one portion of the value/price relationship. With that in mind, we set about to attempt as best we could to isolate the impact of price with the client understanding we would error in our final assessment.
The assessment showed that their was relatively unitary elasticity in the relationship between customer retention and price at a price increase of between 4% and 6.7%; with greater than unity retention at rates below 4%; and a dramatic falloff of about 1.3/1 at rates between 6.7% and 10%. Above that point, there was no useful data. Utilizing this analysis, marketing recommended that the price increase be held to less than 6.5%. Upper level management overruled this recommendation and price increase were established at 8% to 10% over the next 4 years.
While changes in other dimensions of the market had influence, market share declined to something under 14% and loyal customer retention dropped from the mid 90% to the low 80%. First year customer retention dropped more dramatically from the low 70% to below 50% while revenue dropped considerably as measured in constant terms. Marketing management has since departed and major changes elsewhere are coming. Here, the Ozannes failed in their obligation to convincingly established the validity of their argument. Now, the challenge is help find the keys to save the business.
While pricing was not the only issue, and it never is, other problems were exacerbated as a result of a pricing decision based upon internal business drivers rather than market conditions.
Super informative writng; keep it up.