What is a Pricing Strategy?
Every company that sells anything has a pricing strategy. It may be a simple strategy or a more elaborate pricing strategy. It may be developed with great care or more of an afterthought.
This blog post will examine what a pricing strategy is and what, ideally, it should be.
First, let's just start with the name. In particular, the word "strategy." The dictionary says that the word itself means: "a plan of action or policy designed to achieve a major or overall aim." In this context, there has to be something a company wants to achieve with its pricing strategy. Let's examine what a company might want to accomplish with its pricing strategy and how that affects what strategy it decides to use.
A company, or a division or business unit of a larger company, might elect to use a pricing strategy to meet any of these goals:
A pricing strategy that is simple to communicate internally and simple to understand for its staff members
Meeting the price of the competition
To maximize sales volume
To maximize revenue
To maximize profit
To maximize valuation
To take advantage of the network effect
To position the company in the desired way
To minimize the resources it takes to develop and maintain
To maximize competitiveness
Some of these goals can be achieved simultaneously; others can not.
Pricing as an Afterthought
Rarely, however, do companies think about pricing in this context. Instead, pricing is often an afterthought. For example, a rush decision when a product is about to be launched: or an ad needs to be made. Little thought or resources are applied to what pricing strategy to use when pricing is handled like an afterthought. Additionally, defining the company's pricing strategy might be done within a sub-par context. Let me give you an example:
Before I got into "pricing," I was the CMO of a tech company. We developed and marketed enterprise-class data storage systems. Despite "pricing" being part of the 4 Ps of marketing, it was the role of the Strategy Officer and CEO to develop the company's pricing strategy. Here is how they did it:
The typical price of raw data storage (the hard disk drives) by gigabyte was pretty well known.
The company tried to obtain competitors' prices list or prices from quotations, often from friendly customers or resellers. This was unsuccessful as only partial pricing information from several competitors could be captured, such as an incomplete price list of the previous year, the partial GSA schedule (special prices for the government), or an international price list. But a price list does not include discounts, bundles, or special deals a company does to close a deal. Thus, the data to inform pricing is pretty useless.
Based on product cost data, the price of raw data storage and the incomplete competitive pricing and estimation of the "market price" was developed. It was a guess. An educated guess, but still a guess.
From that wobbly platform, a “fluff factor,” based on “gut feel,” was added to the price as the CSO and CMO decided that the product was a little better than the competition in some aspects.
Then the salespeople could discount the product to almost any price just to "get the deal."
There was no "strategy" component in this pricing strategy more than "we need a price to be able to sell." What is especially missing is an understanding of what customers are willing to pay for the company's product and then base the price on that information.
A Better Way
So what is a better way? First, consider that a company's profit comes from only three variables: the total cost, its sales volume, and the price of what it sells. Of these three variables, pricing affects profits more than the other two variables. Because it works on the top line, it has the highest profit leaver. And profits are good. Profits give a company the resources to develop more products or define more services, spend more on marketing and sales, and overall become more competitive. Thus, it is essential to develop a holistic view of a company's pricing strategy and allow the pricing strategy to inform and become part of its entire go-to-market strategy. After all, it is about the top line and profits.
So what does all of this mean for the company's pricing strategy? First, these are questions to consider. These might look intimidating, but most of these questions are pretty easy to answer for most companies. And if they are not easy to answer, the company has a lot of work to do, as the answers will help elevate the business to the next level.
Consider how the company currently is positioned. Is it a high-value, high quality, or benefit option? Or the opposite - the low price or "value" brand? Or in the middle of the pack of competitors?
Is the current market position of the company the desired position, or have there been changes in the marketplace that made the company want to change its position? Are there opportunities to focus on a different customer profile to lead to higher sales volume and profits?
Is it re-pricing of an existing product or service? What spurred the re-pricing? More or less competition? Changes in buyer's purchase behavior? Changes in product or service cost?
Is it a new product or service? If a new product or service, does it appeal to early adopters or a mainstream market? Is the new product or service a replacement for an existing product or service? Or is it a line extension? If so, how is the new product or service positioned among other products or services? What is the desired outcome among different products or services? Maximize sales or revenue of the entire product line or focus on a particular (profitable) product or service? Or is the new product or service specifically defined to cannibalize competition? Does the new product or service open up the option to create new bundles that add specific value to the customer? Are the current sales channels and methods appropriate for the new product or service?
Will your sales organization be able to understand and defend the pricing strategy? Will they need training? If so, how should that be generated and delivered?
How does discounting fit into the pricing strategy? Who can offer discounts? Who manages discounts? How can your company ensure that discounts are strategic and not across the board?
Can current communication and sales processes be used, or do they have to be augmented? If new processes are needed, who develops and implements them? Is software required, or new software, or can an existing infrastructure software be used?
Questions, questions... And these are not all questions your company should answer as it considers its pricing strategy - there are inevitable company-specific questions too.
So, in closing, a company's pricing strategy cannot be divorced from the overall corporate strategy. If it is, the company will fail. Or at least, the products or services that do not fit into the overall strategy will fail.
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