Why It May Be Time To Rethink Your Pricing Model

Meghan Fiore Truchan is Head of Procurement and Portfolio Connect at Bain Capital in Boston, a board member at the Institute for Supply Management of Greater Boston, and a member of the MIT EMBA class of 2017.

When it comes to pricing, a lot of people base it off of cost, competition, or customer valuation. If you’ve been doing this, it’s time for a new model.

Think prices should be based on costs? No. Costs can be unstable and it’s difficult to grow price in alignment with costs. How about asking customers what they would pay? No. Subliminally, they always want to feel like they’re getting a deal. Additionally, customers don’t always know what they want. Think of Henry Ford’s famous quote: “If I had asked people what they wanted, they would have said faster horses.” Should companies look to competitors’ prices to set their own? Again no. They’d be ignoring their unique value proposition and the competitor’s likely response. Instead, the focus in pricing should be on economic value.

Diving into this area in a Pricing elective, my learnings turned out to be tremendously valuable for my work as a board member at a local nonprofit association. By applying my new knowledge about pricing and tapping into other lessons from my EMBA studies, membership in the association has increased by 30%. Here are a few insights I gained from the Pricing class:

Start with economic value

When it comes to pricing, it’s important to start by understanding the value being created for customers, considering those customers’ alternatives to the product or service, and focusing on the output rather than the input. What is the actual value of that output? The answer to these questions becomes the guidelines for the analysis.

Analyze (as we do at MIT)

For my final paper in the class, I looked at pricing optimization for the nonprofit where I am a board member. This professional affiliation charges an annual membership fee for access to the local procurement community via events, communication channels, roundtables, etc. Although there wasn’t enough time to conduct a pricing survey on our members during the course, I was able to use historical pricing and membership levels to conduct a price elasticity study. This is when you look at how customers react to price changes and subsequent effects on revenue. It’s common to read about elasticity with products like fuel. If you change the price of fuel, people still need the product and will continue to buy it; hence it is inelastic. However, other products are elastic and can be substituted with other products or simply not purchased, thus the price can’t be easily increased.

My analysis showed that our price elasticity of demand was relatively inelastic and as a result the nonprofit could actually raise the annual membership fee without driving members away. With that knowledge in hand, we questioned why we were offering promotions and discounts.

Make changes

After reflecting on the results of the pricing study and other learnings from class, it was time to make some changes at the nonprofit association. First, we eliminated most of our promotions. Not only did the pricing study predict that we wouldn’t lose out on potential members, we also realized that promotions were diluting members’ confidence in the standard rate. Second, we stopped allowing guests to attend our events for free, as that was giving the impression there wasn’t a benefit to becoming a member and paying the annual membership fee. We began charging a fee for nonmembers to attend our events and those guests actually perceive a higher value as a result. By doing this, we have increased the guest attendance rate and helped the organization cover the costs of those events. Now that we’ve segmented our member base and started to dive into pricing strategies, we’re planning to conduct a pricing survey to test some additional pricing hypotheses.

Our Pricing elective was just a two-day session, yet it triggered immediate actions and changes that yielded financial value.

How does your organization price?