Pricing Strategy Examples
In this article, we cite pricing strategy examples because developing and implementing sophisticated pricing strategies, often with the help of pricing consultants, is becoming more of a necessity than a nice to have for most companies. Simple pricing strategies like cost-plus, feel-good pricing, or market pricing are no longer sufficient to drive a profitable growth rate.
Most companies have adopted rigid cost disciplines. In most markets, low costs are merely the price of entry; all the competitors have roughly similar cost structures; thus, a pricing strategy based on customers' value perceptions and willingness to pay must be adopted.
These are the pricing strategy examples of some pricing masters, those companies that have deployed willingness-to-pay and value-based pricing strategies and seen their profits multiply.
Pricing Strategy Example #1 - Pump Manufacture
This company's pumps supply pressure, temperature, flow, and level measurement instrumentation to fluid, chemical, and utility industries. The company is a subsidiary of a larger global manufacturing company. The pump manufacturer used to set their prices based on their costs. The new director of price improvement described the company's former pricing philosophy: "You developed a product, looked at its costs, and said 'I need to make X (profit) for it. So, you marked it up accordingly, and people would buy it." This is no longer true, and the company changed to value-based pricing. They aim to identify and capture the value customers place on their products and develop a value-driven pricing strategy. This new philosophy immediately began to uncover hidden profits.
The company developed a genuinely innovative and added-value product with a fluid pressure sensor that would detect dangerous conditions in chemical plants. The sensor could detect pressure anomalies that threatened to burst pipes, and it could also detect errors in chemical mixtures. Furthermore, it was smaller than its competitors. For the first time, the company surveyed the marketplace using a pricing consultant conducting willingness-to-pay research instead of basing the price on the costs. This research identified the specific added value these new features provided. The company's old cost-based formula indicated a price of $2,650; the value-based formula pointed to a price of $3,150. The additional $500 more than doubled the profitability of the product.
What Changed: Management decided to base the pricing decision on actual research into the customers' perception of value instead of costs.
Pricing Strategy Example #2 - Car Manufacturer
As followers of my writing know, a company's profit comes from only three variables: the total cost, the total sales volume, and the price of what is sold. The company's controller analyzed the effects of an additional 1% of the net profit margin. He wanted to see what would happen if the company could gain an extra penny of profit from each revenue dollar by an increase in price or decrease in discounting. (Called "price realization.") The result was unbelievable. A simple 1% increase in revenue would increase the net income by 33% and cash flow by 45%. It would increase the company's market value by 45%. (The author has run similar analyses for other companies. A 1% increase in price realization at Wal-Mart would increase its net income by 23%. A 1% increase at Hewlett-Packard would increase their net income by 10.7%. At GM, it would increase their profits by 16.5%, while Ford would see a margin uplift of an incredible 80%!)
The company launched a price realization strategy that was revolutionary. Three main parts were:
Sales Force Incentives
Use Discounts (only) to Up-Sell Customers
Restructure the Fleet Sales Mix
Sales Force Incentives. With variable profits ranging from less than $800 for a compact car to more than $12,000 for a luxury car, salespeople needed to understand where the company made its money. Further, their incentives must reflect the company's need for profits. Accordingly, the content was developed to encourage the form of messages, newsletters, and flyers for the salespeople to sell higher-margin vehicles and spend less time selling lower-margin alternatives. But, of course, he provided incentives, as well.
Discounts. Before the pandemic, the automobile industry was rightly criticized for its addition of discounts and rebates in its efforts to build sales volume. But this company changed how they used discounts. Instead of offering indiscriminate discounts, discounts were only available to specifically drive customers to purchase more profitable models with options bundled in. The results were dramatic. For example, the base model of one truck accounted for 60% of all sales. However, an option-filled premium version generated thousands of dollars in additional profits relative to the base model. Despite the discount to drive customers to the premium model, the profitability of the truck was still outstanding, and the volume of the premium model soared to 70% of all of the model's sales.
Fleet Sales. The company also looked hard at fleet sales to car rental companies. These companies were the least profitable segment but accounted for a substantial portion of all sales. By holding prices to a higher level and aggressively supporting the other segments, the company reduced rental fleet sales by about 25% and increased commercial and government sales accordingly.
Results. These initiatives were tested in a few of the company's sales divisions. The results were that the regions doing business as usual missed their profit targets while those who used them beat their profit target. When the initiative was implemented in all divisions the following year, profits increased by billions. Net revenue per vehicle increased by 19%.
These strategies have now become more commonplace, as seen in the price increases and reduction, or in many cases elimination, of discounts during the last year or so's pandemic and supply chain issues.
What Changed: The company actively adopted an aggressive pricing strategy, researching and aligning prices with the value perceptions of its customers. In addition, they made salespeople part of the price realization process and gave them information and incentives to enable and encourage them to help the company win greater profits.
Pricing Strategy Example #3 - Hot Glue
A well-known chemical company had developed a new hot-melt adhesive for use in sealing cartons. The adhesive would seal boxes of consumer goods such as cereals. It had several specific advantages over existing products. It was lighter, lower-density, stronger, and more stable at extreme temperatures. The challenge was how to price it.
The chemical company initiated a research project to visit the packaging lines of its major customers. They worked with the purchase managers to analyze the financial impact of the new glue. As a result, they identified three advantages: (1) It stuck better. This meant fewer boxes would fail, and there would be fewer returns. (2) The glue reduced factory maintenance because it was less prone to clog the nozzles. And (3) the higher thermal stability meant a better appearance for the final product; there was less discoloration.
The company conducted willingness-to-pay research and precisely understood the premium its market was willing to pay for the benefits, and it set its pricing strategy according.
The result was a price approximately 40% higher than a cost-based price would have been.
What Changed: The company decided to base its pricing on the customers' value perceptions rather than costs. The result was considerably higher profits and a sales process where salespersons could focus on the specific benefits of this new product.
Pricing Strategy Example #4 - Insecticide
A startup company developed an insecticide that was somewhat--but not dramatically--better than existing products. Management set a goal of pricing it at ten times the competitors' price. Product managers examined the value proposition that such products carry: "Our product kills bugs." They decided to re-state the value proposition to "Eliminates Pests. Guaranteed." The company conducted willingness-to-pay research to identify a customer segment where the guaranteed elimination of pests was critical, and customers were willing to pay extra for the absolute, guaranteed elimination of pests. The marketplace was restaurants and hotels. These facilities have no tolerance for bugs.
The company configured itself to serve the exact needs of this market segment. Product marketing, documentation, packaging, and delivery were explicitly designed for restaurants and hotels. The company trained its "application engineers" in the use of the product and the laws as well as the processes of the industry. Inspection services were bundled into the product's price, thus appearing "free" to the customer. Application engineers were taught the nuances of applying the chemical in food-preparation areas. All this created enormous value in the perception of the food-service managers and enabled the company to meet its goals.
What Changed: The company, by researching its market carefully, was able to create value and earn a price fully ten times that of its competitors. In so doing, it could generate the funds to support a more costly infrastructure and deliver on its promise.
Conclusion
A company's pricing strategy should be based on careful willingness-to-pay research. The research enables a company to identify customer value drivers to make buying decisions. Once those are identified, their value can be quantified. Prices can be set according to those values rather than "gut feel" or costs. Value-based prices are nearly always higher than cost-based or "gut feel" prices.
Once the prices are set, they must be realized in the marketplace. Price realization is the set of strategies to actually earn a portion of the value you have created. Price realization strategies may include messages, packaging, delivery, sales, marketing, bundling, and segmentation. It may also touch on product development.
A slight increase in price realization can lead to outsized increases in contribution margin, profits, net revenue, and valuation. Management effort spent on pricing strategies – price setting and price realization—will produce a higher payoff than time spent on cost-cutting or sales volume increases.
Download our Guide to the 7 Easy Steps To Successfully Increase Prices.
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