Insights from Pricing Strategy Advisors: What is a Pricing Strategy?
In today's fiercely competitive market, pricing strategy advisors have become crucial for businesses striving to excel and outperform their competitors.
To some extent, every company adopts a pricing strategy, which can range from simple methods like applying a fixed margin to costs or basing prices on competitor price lists to more intricate approaches. Although simple pricing strategies offer benefits such as ease of understanding, implementation, and resource management, they come with significant drawbacks. Pricing strategy advisors predict that these strategies can lead to reduced sales levels, missed revenue opportunities, and contribute to the acceleration of market commoditization. Consequently, companies relying on simple pricing strategies often find it challenging to compete and grow, struggling to allocate resources for sales, marketing, and product/service development. The absence of resources for innovation further hinders their profitability.
On the other hand, based on our pricing strategy advisors' many years of experience, data indicates that companies that adopt sophisticated and optimized pricing strategies tend to be market leaders. They serve as the role models that other companies aspire to become, generating substantial revenue and experiencing rapid growth. Price-savvy companies possess the necessary resources to drive innovation and, in turn, create higher shareholder value.
So, what exactly does an optimized pricing strategy entail? The term "optimized" refers to making the best or most effective use of a situation, opportunity, or resource. In the context of pricing, an optimized strategy means the price of your product or your service provides you the opportunity to capture a portion of your customers’ willingness to pay. When your pricing strategy is optimized, you make the best use of that opportunity - capturing the maximum possible willingness to pay.
To achieve this, pricing experts recommend that an optimized pricing strategy needs to encompass a well-designed pricing structure that accommodates various pricing actions and strategies, strategically calibrated pricing levels, and discounting policies aligned with the company's overarching goals. Moreover, it guides the company to focus on the portion of the market where customers demonstrate a higher willingness to pay, influencing sales compensation and sales training accordingly.
Now, let's explore each of these variables in greater detail to understand how they contribute to the overall success of companies employing optimized pricing strategies.
Pricing Structure
The pricing structure is fundamental to an optimized pricing strategy, as it underpins various tactics and approaches that influence customers' willingness to buy and willingness to pay. Without a supportive pricing structure, companies relinquish control of their pricing, allowing customers to dictate the terms.
An optimized pricing strategy hinges on a well-structured approach, including good-better-best offerings, bundles, price imaging, options, and differentiation, all presented with clarity to influence customer decisions.
A good-better-best offering can cater to buyers with diverse needs and varying willingness-to-pay levels, streamlining sales processes without resorting to discounts. Bundles and unbundles play a crucial role in the pricing structure, providing flexibility in offering products or services either as a complete package or as individual components, thereby avoiding unnecessary discounts.
Price imaging is another essential aspect, capitalizing on human psychology, where offering a higher-priced alternative alongside the desired product can make the latter appear more affordable, positively influencing buying decisions. It can also reshape buyers' reference price, making them more accepting of premium offerings.
Options within the pricing structure create opportunities for up-selling, leveraging the buyer's decision-making mindset to add convenient features or services. On the other hand, a differentiated pricing structure can be effective in commoditized markets, making it challenging for buyers to compare offerings solely based on price, thus capturing a unique segment of the market.
However, amidst all these strategies, clarity is of paramount importance. Overcomplicated price lists may confuse customers, leading to indecision and potential loss of sales. Simplicity and transparency in pricing help customers make informed decisions and ensure a favorable buying experience.
Optimized Price Levels
The price of a product or service communicates its value, with high prices often associated with exclusivity and quality, as seen in the case of Prada, where a Prada handbag may be 3 - 5 -10 times that of a “generic” non-branded handbag. Optimized pricing involves setting a price point where buyers perceive good value, balancing affordability and exclusivity.
Trial and error in pricing can be costly and ineffective, leading to lost revenues and confusion for customers. For this reason, Sjofors&Partners has developed a well-designed approach, as is the willingness-to-pay research, including artificial Intelligence analytics with our Predictive Sales Engine™. Our methodology encompasses a comprehensive process that includes conducting willingness-to-pay research through online digital polling in a marketplace. This method accurately determines optimized prices through anonymous surveys.
Discounting
Discounting can have a significant impact on company profits. A one percent increase in discounts can lead to a 10% reduction in profitability, while a 5% increase can halve profits. Optimized pricing strategies, such as good-better-best offerings and un-bundling, are crucial to avoid excessive discounting and maintain profitability.
Despite the power of discounting, it should be controlled and used strategically. Indiscriminate discounting can harm a company's reputation, leading to a downward pricing spiral and commoditization. Instead, discounting should encourage profitable customer behavior and be targeted to specific products or services.
Executive management often allows sales organizations free rein in discounting, but understanding the impact on profitability is essential. Implementing pricing structures that support value-driven strategies can ultimately benefit the company.
In summary, "You get what you price for" - Pricing sends a strong message about product quality and sets customer expectations, influencing a company's business strategy. Alignment between price and strategy is crucial to avoid alienating customers.
Apple exemplifies this by refusing to offer low-priced products. Instead, they focus on providing high-quality products for customers willing to pay a premium. This strategy has allowed them to innovate and achieve remarkable financial success. On the other hand, Dell operates in the commodity space, catering to price-driven customers.
The key to successful price optimization lies in detailed knowledge of price elasticity, willingness to pay, value drivers, and the decision landscape of the marketplace. Anonymous third-party price-specific market research is essential to obtain accurate and unbiased data. This data, combined with industry experience pricing experts, can lead to improved pricing decisions and increased profitability.
At Sjofors&Partners, we offer pricing recommendations and valuable insights from statistically significant data gathered through market research. By incorporating this data into your corporate strategy, you can achieve excellence and potentially become a market leader.
Request pricing consulting services to find growth opportunities today.
