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The pricing renaissance: New ways to reduce risk and unlock value | McKinsey on Marketing & Sales

Pricing always involves risk and uncertainty. You make the best decision you can, but you can’t tell how it will play out until you put your price in front of customers and see how they react. That’s true whether you are changing list prices, adjusting discounts, altering your negotiating posture, or introducing a new pricing model. To get better at pricing, you need to get better at assessing and minimizing risks and uncertainties. As in a game of poker, your gamble has a better chance of success if you understand the strength of your hand.

In the past few years, massive increases in data availability and processing power, along with advances in predictive modeling and risk management, have given rise to a whole array of tools and solutions for assessing and quantifying pricing risks. What we are now seeing, in fact, is a pricing renaissance that opens up new opportunities to create more value from pricing without jeopardizing profits. In particular, applied technology offers a host of benefits to help companies manage pricing risk:

Deeper insights into what works. By making pricing and its impact more transparent, new analytic tools improve accountability and enable businesses to experiment with a range of price points to see how they affect sales. Consumer goods companies now have the data and tools to evaluate more than 90 percent of in-store promotion events, where not so long ago they struggled to reach 65 percent. At the same time, pricing simulators allow businesses to merge data on price sensitivity with analyses of switching behavior to predict how a product might lose or gain volume and share as prices rise or fall.

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The pricing renaissance: New ways to reduce risk and unlock value.

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