Pricing Strategy – Evaluating the case for regional price discrimination

How best to price a pizza?

It can certainly help an organisation’s bottom-line if there is effectively uniform pricing in a region of operations for a good or service; many otherwise variable costs (such as promotions, communication) can be standardised.

But uniform pricing may not be ideal when you have a local monopoly – why charge $10 when there is such demand that you can easily get away with charging $15?

Take pizza – if you a franchisee in a country town where you are the only ‘branded’ provider of pizza, the appeal of charging what the market will bear is strong. Being price restrained by a national franchisor uniform price edict would be frustrating – to say the least!

A national pizza brand had grown organically, allowing franchisees the freedom to set their own prices. However, as the brand grew, there were uncomfortable situations where two franchisees of the same brand in the same town would be charging different prices. Not only did this confuse the local market, but nationally it severely limited the promotions that the brand could offer. This limited their competitiveness significantly against the larger national competitors.

a&b, with a depth of price modelling experience, was asked by the pizza brand senior management team, to explore the business consequences and advantages of instigating a national uniform pricing policy and the case for and against permitting local monopoly price distortion. Freedom of price setting, whilst driving high profitability for isolated franchisees, was hurting the competitiveness and profitability of the overall network.

The solution

Using a large-scale choice-based pricing experiment, we developed a national pricing model to understand detailed catchment differences in demand and price. We built this into a nationwide revenue model that allowed us to predict the impact of a uniform pricing system against a number of hypothetical competitor price strategies.

We then integrated these demand side economics to our client’s supply side costs of sales to fully understand the overall effect on revenue and profit.

The action

We concluded that a national pricing strategy would significantly benefit the brand’s revenue and profitability through enhanced efficiencies and competitiveness through the ability to nationally advertise and promote.

However, we also recommended that some existing franchisees who have defined catchment monopolies should be compensated for a loss of opportunity.

Our client adopted these recommendations and saw an immediate positive response in business metrics.

To find out how a&b can help you establish an optimal pricing strategy, contact us today.
+61 (2) 8227-5400