Taking a consumer-centric pricing approach increases return on sales
Reflecting trends in the industry, our cable client was coming to the end of a high-growth cycle, with new players entering the market and existing cable companies increasing promotional activities to compete for subscribers. In addition, increased programming costs were making the rate-setting process difficult. Client executives wanted to establish a sustainable ongoing pricing strategy for consumer cable rates, covering different divisions with different product offerings.
The McKinsey team pursued two objectives: supporting the upcoming year rate increase and developing an ongoing pricing strategy.
For the upcoming year increase, the team worked closely with the client to develop an approach based on historical information about consumer behavior. The team mined subscriber data and defined groups of subscribers that had undergone rate increases in the past. With this data in hand, the team developed price elasticity curves for each of the company’s divisions. These elasticity curves were then further modeled to show subscriber customer lifetime value and 12-month revenue and profit estimates for different potential rate increases.
For the ongoing pricing strategy, the team called upon proprietary McKinsey consumer research to develop a new pricing strategy, which included expanding the pricing architecture to include new high-end packages and taking steps to communicate value to consumers more effectively. The team also worked with the client to understand the organization’s historical approach towards rate-setting and how best to transition to this new consumer-centric price philosophy. The team provided support to help embed new pricing capabilities within the organization.
The client implemented the recommended three part strategy: tailoring price increases to the product range and price sensitivities in each geography, expanding the price architecture, and better executing promotions. These activities brought the client increased return on sales, and established a sustainable long-term approach.