May 19, 2016

What Pizza and Breadsticks Can Teach Everyone About Price Bundling – Inc.

Do you consider yourself a pricing guru? Someone who can take reliable data about what customer segments are willing to pay, and use it to construct a pricing plan that maximizes revenues?

The experts at Simon-Kucher & Partners–the world’s largest pricing consultancy, based in Cambridge, Mass.–hear such bluster from entrepreneurs all the time. And they think it’s nonsense. After more than 30 years in business, they have encountered their fair share of founders who fail to properly price their innovations. In a recently released book called Monetizing Innovation, partner Madhavan Ramanujam and co-CEO Georg Tacke provide several examples of how the science of pricing is more nuanced than you think.

One of these examples involves a quiz about the smartest way to maximize revenues by bundling pizza and breadsticks. Fewer than 10 percent of executives who take the quiz figure out the best bundling formula. Think you know better? We’ll see about that. Grab your calculator. Here’s the setup:

You own a pizzeria. Like any smart entrepreneur, you’ve studied your customers’ spending habits, and divided them into segments based on what they’re willing to pay for certain products. For the sake of easy math, assume each segment has exactly 100 customers.

Segment A loves pizza. They’ll pay $9 a pie. But they don’t love breadsticks quite as much. They’ll pay $1.50 for them.

Segment D (yes, D) loves breadsticks. They love them so much, they’re willing to pay $9 for them. And yet, incredibly, the customers in this segment are not crazy about your pizza. But they will reliably pay $2.50 a pie.

As for the two other segments–B and C–they are between these two extremes, in terms of what they’re willing to pay for both pizza and breadsticks. All told, then, here’s what your segments look like:

Segment A: 100 customers, willing to pay $9 for pizza, $1.50 for breadsticks

Segment B: 100 customers, willing to pay $8 for pizza, $5 for breadsticks

Segment C: 100 customers, willing to pay $4.50 for pizza, $8.50 for breadsticks

Segment D: 100 customers, willing to pay $2.50 for pizza, $9 for breadsticks

Read the complete article at Inc.