Summary
An aircraft tire manufacturer approached Revenue Management Labs to reach a 30% margin and optimize the price of a new and innovative product that was just coming onto the market. The tire manufacturer had developed an innovative tire that contained 20% less rubber than the tires already on the market and doubled the tire’s lifetime as compared to its main competitor. The new tire formulation was lighter and more durable but also had increased the costs of manufacturing. The industry pricing norm for aircraft tires dictates that the price of a tire is tied to the cost and content of rubber. If the tire company were to price its new tire product according to industry best practices, it would have a negative margin.
Challenge
The airline tire company had set a target of 30% margin on the new tire product but would not be able to reach this goal with the current pricing strategies in place. The company had historically used either a margin-based pricing or a market-based pricing, both of which proved problematic for differing reasons. The margin-based pricing strategy would reach the needed 30% target but when viewed against competitor offerings, it comes in at a significantly higher price point and without justification. The market-based pricing strategy refers to pricing tires according to the cost and content of rubber. The price point is more competitive but would result in a negative margin due to the higher manufacturing costs.
Solution
The new pricing strategy had two components: the price and the selling story. The price was based on a customer analysis that identified the financial value of a higher price point than competitor tires, while accounting for other adjustment factors related to size, certainty, and speed. The new value-based list price was more than double the main competitor’s. The second component to the pricing strategy, the selling story, was developed in collaboration with the sales team to effectively communicate the financial value of the innovation and overcome any skepticism related to the potential savings. To shift from a cost-based and market-based pricing strategy, Revenue Management Labs focused their analysis on the airline tire company’s customer base to identify their value drivers. The main financial value of the tire would come from reducing maintenance and fuel costs, as the tire’s durability meant it could double the lifetime of its main competitor and potentially save customers $1,570, with an additional $666 in fuel savings for a total of $2,236 in savings. After accounting for all price and non-price related factors, the company landed on a list price of $2,471 as compared to the competitor’s $1,270.
