Pricing Concept: Understanding the Difference Between Price Level & Price Structure (PREVIEW)
A thoughtfully designed complex price structure can increase realized prices and profit without raising asking prices.
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Pricing is a complex activity. Managers can approach pricing decisions with different mindsets. When considering a price increase, they can ask, “By how much should we raise our prices?” Or they can frame the challenge as, “How can we improve our (realized) prices without raising our (asking) prices?”
These two questions highlight the distinction between the price level and the price structure. The price level involves thinking in averages, totals, and percentage changes. The price structure is a more sophisticated and powerful approach. It considers assortments, price-benefit combinations, and pricing variations and offers.
The Price Level
In everyday conversations, we often frame our discussions using price levels. For example, a recent story noted that the average price of a wedding in the United States declined from $28,000 in 2019 to $19,000 in 2020 because of the Covid-19 pandemic. Another story reported that despite the declining costs of coffee beans, Starbucks raised its prices by 1% because its labor and rent costs were increasing. These stories are about the price level, defined as “the average price that a company charges for its products.”
The value of the price level lies in quickly providing an overall picture of the company’s prices and pricing performance. It is a helpful, if somewhat crude, tracking variable. However, the price level has at least three serious limitations.
This is a preview of the full post that is available to all subscribers, free and paid, of The Pricing Conundrum. To read the full post, please subscribe and support my work.