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Middle East Firms Must Increase Profits, Not Prices

Middle East Firms Must Increase Profits, Not Prices

Introducing a new product line-up will boost profits, write Lovrenc Kessler and Ekkehard Stadie from Simon-Kucher & Partners.

Companies are constantly searching for ways to improve their bottom line. That’s why they’ve been focusing for so long now on cutting costs and increasing operational efficiency. In the meantime, pricing ‒ a key profit lever – has been completely overlooked.

The impact of pricing on a company’s revenues is often grossly underestimated. Let’s have a look at a few businesses in the UAE. At the Dubai-based airline Emirates, a mere two per cent revenue increase, generated by smarter pricing, would subsequently lift its profits by 20 per cent. A similar two per cent revenue increase at the online bank Emirates NBD and the telecom provider du would result in profit increases of 14 per cent and 10 per cent, respectively (earnings before taxes (EBIT), numbers taken from 2011 annual reports).

Raising profits by increasing prices, however, is not the best way, since customers typically have a strong allergic reaction to price increases, even to minimal ones. Still, it is possible to boost revenues without increasing your prices. It just takes a smart offer structure – one of the key elements to achieve pricing excellence and tap unexploited profits.

Companies are currently using a three-tier product line-up, i.e. offer structure, of “good/better/ best” as a global blueprint and large-scale solution to successfully serve multi-faceted markets. Such an approach provides all consumers, from bargain-hunters to premium shoppers, a full range of product offerings. At the same time, it also defines a clear customer migration path to premium products. And best practice studies show that just the evolution from a two-tier to a three-tier offer structure can improve revenues already by up to 25 per cent.

Biggest, brightest…“bestest”?

Recently, companies in UAE have begun to segment their offer structures more strategically to effectively target the increasingly ultra-premium and status-driven consumer segment in the Middle East. Indeed, this new trend in the offer structure of GCC companies is a great opportunity in a market where a unique culture and heavily skewed income distribution promote high demand and a willingness to pay for the biggest, brightest, and even “bestest” offers.

Introducing a “bestest” product to the traditional “good/better/best” product mix serves two primary purposes. First, it generates additional revenues and margins from high-value customers whose needs are not met by the existing premium offer. Second, it improves the overall product mix. When presented with the traditional “good/better/best” product line-up, customers typically select the better product. However, with the addition of a fourth tier, i.e. an even better offer, customer choice will change. Automatically a certain percentage of them will migrate from the better to the best offering, because it now looks relatively more attractive. Adding the fourth tier just creates a more consumer-friendly product mix.

The incremental costs of offering a “bestest” product are far outweighed by the price premium it can achieve over the former top offering. Consequently, the “bestest” tier presents a significant margin opportunity for the seller while simultaneously providing the buyer with further choices and value: a perfect win-win situation.

For example, the Middle Eastern chain Vox Cinemas, owned and operated by Majid Al Futtaim Ventures, utilizes a four-tier offer structure. Prices range from Dhs30 for a standard ticket to Dhs120 for the gold offering, dubbed the “ultimate cinema experience” and featuring waiter service, a fully reclining seat, and an exclusive lounge.

Still, only very few companies have integrated a “bestest” offering into their existing three-tier structure. Sega Republic, a Sonic-themed indoor amusement park, for instance, only employs a “good/better/best” offer structure, although offering an “ultimate Sonic experience”, a premium offer with ultra-premium margins, would potentially reshape the product mix.

Pricing excellence – just a tier away

When it comes to building a “better than best” product offering, the stakes for companies are high and there is little room for error. Several have already fallen victim to typical pitfalls such as an overly homogeneous top-tier offering, a lack of a clear upsell path, and the failure to create an innovative and compelling offer that meets complex customer needs. But the good news is that, with experience and a proven set of scientific tools, offer excellence is no longer rocket science; it can be done. GCC companies should not ignore the opportunity at hand. They must take swift and immediate action to capture the major revenue and margin boosting potential at stake. The next phase in the evolution of product pricing has arrived.

Lovrenc Kessler is managing director of Simon-Kucher & Partners’ office in Dubai and Ekkehard Stadie is partner with Simon-Kucher & Partners and responsible for the Middle East.

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