Join Stefan Michel for an in-depth discussion in this video Price management, part of Value-Based Pricing.
- The third pricing capability is price management. Price management kind of shows the difference between the price we set as the price we wanna charge and what is actually in the end in our bank account. So there's always some leakage of what we wanna charge and what we get. And this leakage is often a result of discounts. And I used to say based on my experience in practice, there only two types of discounts. Stupid ones and smart ones.
So if you understand which discounts make sense, you keep them and you try to get rid of the discounts that make no sense. That will be one aspect of price management. So I did a project for a bank and we realized that some customers are very profitable, some other customers are less profitable. And then we figured out what drives the profitability per customer. And what we realized is that the unprofitable customer got a lot of discounts.
So they got volume discount, although they were small customers. They get special deals, although they didn't deserve the special deals. So we try to figure out how is it possible that these customers get these low prices, despite the fact that they are small and not strategically relevant. Then what we find out is that these customers are often good friends with the relationship manager at the very same bank. So we try to optimize the profitability of those customers by taking away some of the discounts that they received which they did not deserve.
That would be one example of a stupid discount that you can eliminate.