Tupelo Medical: Managing Price Erosion

Abstract

Robert Davidson, pricing manager for Tupelo Medical, was concerned about the variability in price paid for its top-selling product, the Micron 8 Series blood pressure monitoring system. Using historical transaction data, Davidson must determine the appropriate price floor. Setting a price too high risked the loss of a large number of customers, putting the company at substantial risk due to the importance of the product. Setting a price too low would impact Davidson's ability to meet the stated objective of increasing margins by 3 percent. He wondered what the optimal price floor would be and what the expected profits would be for that new price floor. Additionally, the company's business varied considerably by geographic region, account size and account type. As a result, he needed to consider whether it made sense to set a single price floor or whether he could improve profits by allowing some variability in the price floor by customer segment. To illustrate how one can build a data-driven pricing model to study the tradeoff between margin and probability of winning a sale in a B2B market To quantify the value from implementing a price floor with a B2B sales force To demonstrate the incremental value of implementing a price floor that varies by customer segment.