Tag Archives: competitive pricing

Pricing Strategies– Think Thru Your Price Model: Change Irrational Guesswork to Rational Analysis and Relevance…

Pricing strategies, price models– One of the secrets to business success is pricing products properly and it’s probably the toughest thing there is to do…. Price correctly and that will enhance how much you sell and create the foundation for a prosperous business. Get your pricing strategy wrong and you may create problems that the business may never be able to overcome.

According to Charles Toftoy; it’s part art and part science– there’s no one surefire, formula-based approach that suits all types of products, businesses, or markets. Pricing usually involves considering certain key factors, including; pinpointing target customers, tracking how much competitors are charging, understanding the relationship between quality and price… The good news is that there’s a great deal of flexibility in how you set your prices, but that’s also the bad news… adopting a better pricing strategy is a key option for staying viable-relevant.

Merely raising prices is not always the answer, especially in a poor economy: Many businesses have been lost sales because they priced themselves out of the marketplace but on the other hand, many businesses and sales staffs leave money on the table because they price too low. One strategy doesn’t fit all– adopting a pricing strategy is a learning curve that can only be mastered by studying the needs and behaviors of customers, competitors, markets…

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In the article Time to Rethink Your Pricing Strategy by Andreas Hinterhuber and Stephan Liozu write: Companies differ substantially in their approach to price setting but most fall into one of three buckets: Cost-based pricing; Competition-based pricing; Customer value-based pricing. According to Warren Buffett; the single most important decision in evaluating a business is pricing power. If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. And if you must have a prayer session before raising the price by 10%, then you’ve got a terrible business. Yet pricing receives scant attention in most companies.

According to Professional Pricing Society; fewer than 5% of Fortune 500 companies have a full-time function dedicated to pricing… According to McKinsey; fewer than 15% of companies do systematic research on this subject… According to Association to Advance Collegiate Schools of Business; only about 9% of business schools teach pricing… This neglect is puzzling, as numerous studies have confirmed; pricing has a substantial and immediate effect on company profitability.

Studies have shown that small variations in price can raise or lower profitability by as much as 20% or 50%. Over the past 18 months, we interviewed 44 managers in 15 U.S. based industrial companies. These companies varied in size from about 50 to more than 2000 employees and dramatically different pricing capabilities. In the course of research, we found that pricing power is not destiny, but a learned behavior.

The companies we found that achieved better pricing all had top managers who championed development of skills in price setting (i.e., price orientation) and price getting (i.e., price realization). Regardless of their industry, the degree to which managers focused on developing these two capabilities correlated to their companies’ success in achieving a better price for their product than their competitors. Without managerial engagement, companies typically use historical heuristics, such as cost information to set prices, and yield too much pricing authority to the sales force.

In the article How to Price Products by Elizabeth Wasserman writes: The first step is to get real clear about what you want to achieve with your pricing strategy: The biggest mistake many businesses make is to believe that price alone drives sales. The ability to sell is what drives sales and that means– the right sales people and adopting the right sales strategy. At the same time, be aware of the risks that accompany making poor pricing decisions.

There are two main pitfalls you can encounter; under pricing and over pricing. According to Laura Willett; many businesses mistakenly under price their products attempting to convince the consumer that their product is the least expensive alternative and hoping to drive volume; but more often than not it’s simply perceived as being– cheap. Remember that consumers want to feel they are getting their money worth (i.e., value) and most are unwilling to purchase from a seller they believe to have less value.

On the flip side, over-pricing a product can be just as detrimental since the buyer is always going to be looking at competitors’ pricing… There are many methods available to determine the right price, but successful firms know that the key factor to consider is always the customer– first. The more you know about your customer, the better you’ll be able to provide what they value and the more you’ll be able to set your price higher… know the segments you’re targeting, and price accordingly…

The key is to be brutally honest in your evaluation: One size does not fit all. You can only go so far by pricing based on a fixed markup from cost. The price should vary depending on a number of factors including, for example: What the market is willing to pay. How the brand is viewed in the market. What competitors charge. The estimated volume-quantity you can sell. But as important, you must constantly review cost and continuously monitor price and the underlying profitability…

Remember: Listen to customers. Keep an eye on competitors. Have an action plan in place… Be relentless in managing pricing; how you set prices may very well be difference between success and failure of the business.

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In the article Pricing Strategy by Scott Allen writes: The most difficult yet most important issue in business is pricing– how much to charge for product, service… Pricing is tricky, but you’re certainly entitled to make a fair profit and even a substantial one, if you create value for customers. But remember, something is ultimately worth only what someone is willing to pay for it…

While there is no one single right way to determine  pricing strategy, fortunately there are some guidelines that will help with the decision. Here are some basic factors that should be considered:

  • Positioning: How are you positioning in the market? Is pricing going to be a key part of that positioning? The pricing has to be consistent with positioning. People really do hold strongly to the idea that you get what you pay for.
  • Demand Curve: How will pricing affect demand? You must do some basic market research to find this out, even if it’s informal. Get a good sample of people to answer a simple questionnaire, asking them: Would you buy this product/service at X price? Y price? Z price?
  • Cost: Calculate the fixed and variable costs associated with the product, service… determine the cost of goods, fixed overhead… Remember that your gross margin (price minus cost of goods) has to amply cover your fixed overhead in order to turn a profit…
  • Environmental factors: Are there any legal or other constraints on your pricing? For example, for doctor’s insurance companies and Medicare will only reimburse a certain price… Also, what possible actions might competitors take?  Find out what external factors may affect pricing.

The next step is to determine pricing objectives. What are you trying to accomplish with pricing?

  • Short-term profit maximization: This approach is common in companies that are bootstrapping, as cash flow is the overriding consideration. It’s also common among smaller companies hoping to attract venture funding by demonstrating profitability as soon as possible.
  • Short-term revenue maximization: This approach seeks to maximize long-term profits by increasing market share and lowering costs through economy of scale. For a well-funded company or a newly public company, revenues are considered more important than profits in building investor confidence.
  • Maximize quantity: There are a couple of possible reasons to choose this strategy. It may be to focus on reducing long-term costs by achieving economies of scale. Or it may be to maximize market penetration– particularly appropriate when you expect to have a lot repeat customers…
  • Maximize profit margin: This strategy is most appropriate when the number of sales is either expected to be very low or sporadic and unpredictable.
  • Differentiation: At one extreme being the low-cost leader is a form of differentiation from the competition. At the other end, a high price signals high quality and/or a high level of service…
  • Growth: In growth situations you must be flexible in pricing, such that– all costs are covered and the business can still sustaining the growth trajectory…

Once you’ve considered the various factors involved and determined your objectives for the pricing strategy, here are four basic ways to calculate prices:

  • Cost-plus pricing: Set the price with the production cost, including; cost of goods, fixed costs… plus a certain profit margin. So long as you have costs calculated correctly and accurately predicted sales volume, you will always be operating at a profit.
  • Value-based pricing: Price based on value created for the customer. This is usually the most profitable form of pricing, if you can achieve it. The most extreme variation on this is pay for performance pricing, in which you charge on a variable scale according to the results achieved.
  • Psychological pricing: Ultimately, you must take into consideration the consumer’s  perception of price, figuring things like: Positioning— If you want to be the low-cost leader, you must be priced lower than your competition. If you want to signal high quality, you should probably be priced higher than most of  your competition. Popular price points– There are certain price points at which customers become much more willing to buy a certain type of product… Fair pricing– Sometimes it simply doesn’t matter what the value of the product is, even if you don’t have any direct competition: There is simply a limit to what customers perceive as fair. A little market testing will help determine the maximum price customers will perceive as fair.

In virtually every facet of business, companies develop strategies based on the truism that customers differ from each other. Diverse customers are courted with a variety of products (e.g., styles, colors, add-ons…), mix of marketing strategies, multiple distribution points… However, when it comes to pricing, companies behave as though customers are identical by just setting single prices. However, an epiphany to better pricing is to understand and actually to embrace the same insight that companies use to create strategies and profit in other areas of their business…

The strategy of pricing involves acknowledging customers have different pricing needs and making efforts to profit from these differences. According to  Mat Marquis; Strategic pricing comes with practice and skills will grow over time. Pricing is a discipline that anyone can learn: But, first and foremost– do customers a favor–  charge  customers what you’re worth that’s proportional to your value  (i.e., don’t over or under price) and you will both be happy…

According to Tejvan Pettinger; optimal pricing strategy will depend on the type of business… For example, for premium brands– cutting price could be perceived as disastrous– as you lose brand image and fail to increase sales… For normal goods, with businesses looking to increase market share and gain more market dominance, it’s more important to offer competitive prices, and using strategies such as; penetration pricing, loss leaders…

According to Nick Wreden; crafting the right strategies will not only strengthen the business, today; but it will also prime it for sustained growth…. Remember the big picture– profitability is not the only prism through which you should view pricing. Other important perspectives include: Impact on customer relationships, impact on the industry…  Also, don’t fight today’s sales wars with yesterday’s pricing strategies– review pricing strategies and models, and make adjustments, now… Pricing is life blood of profitability– it must be monitored, adjusted, kept relevant…