Last summer, after running a print ad for a women's midriff T-shirt, Nordstrom got an unexpected heads-up from its online customers. Women shoppers were flocking to the store's Web site to check out what marketing executives at first thought was the T-shirt itself. But when they looked closer, they realized the shoppers were actually asking for the jeweled navel ring the model was wearing in the ad. Not for sale at the time but clearly in demand, Nordstrom execs scrambled to make the ring available online. Then, using its online data about customers to test various prices with a variety of different buyer groups, they priced it to move. The ring rang up fast profits: a lesson in how the Net can make you smarter about both products and price.
To be sure, the Net boom has cooled considerablybut not without upending the staid world of pricing for businesses old and new. Upstarts such as Priceline.com, whose name-your-own-price model once threatened to shift pricing power to buyers, are now only shadows of their former selves, and scores of online bidding B2B exchanges have folded after burning through millions of dollars. But the revolutionary ideas and technologies unleashed by these pioneers live on. Even as the dot-coms crashed, the Internet quietly redefined the way even traditional businesses price goods, in profound and lasting ways.
Now, amid recessionary pressures, company strategists are looking to the Net not just to cut costsbut also to harness their warehouses of customer data, faster computers and new kinds of slice-and-dice software to price their goods more strategicallyonline and off. "Today's economy is pushing people to find every opportunity they can to improve profitability," says Craig Zawada, associate principal at McKinsey & Co. in Pittsburgh. "In the 1990s, most companies attacked cost. Pricing remains one of the few untapped levers." Adds Rashi Glazer, codirector of the Center for Marketing and Technology at the University of California at Berkeley's Haas School of Business: "In a recessionary environment, everyone starts focusing on cost, but the real news is pricing."
Indeed, paying more attention to pricing may be the best thing a company can do in a flat or eroding economy (see chart). Even small adjustments to price can have a big impact: A McKinsey study found that a 1 percent change in price could result in an 8.6 percent change in profitability. By comparison, says Zawada, tinkering with costs has much less impact. A 1 percent improvement in fixed costs generates only a 1.7 percent increase in operating profits, while the same 1 percent improvement in variable costs (including raw materials, labor, etc.) begets a 5.9 percent rise in operating profits. "Price is the largest lever on profitability," he says.
By understanding promotions better, for example, a specialty retailer might be able to drop the price of a $5 item by 10 percent and increase weekly profits by $14,000, says Eric Mitchell, founder and president of the Professional Pricing Society, an association of marketing and pricing executives. Used selectivelyknowing, say, which customers are likely to pay more and whenIT-powered pricing strategies can have a big impact on the company's bottom line. "Price elasticity is all," says David Trounce, a pricing expert with Mercer Management Consulting. "Technology is giving businesses everywhere the option of measuring price elasticity for the first time in an inexpensive and fast way, and many are just starting to take advantage of itfrom promotions to discounts to sticker strategies."