Defining a pricing strategy is essential to your organization. Your approach should align with your targeted customers and product(s), but what’s next? Pricing tactics can produce pricing actions within the boundaries of your pricing strategy. Leveraging analytically-driven pricing tactics will give you a competitive advantage and help you achieve significant revenue uplift.
While most companies have a pricing strategy, few have instituted foundational pricing tactics that are critical to sustaining their pricing strategy and drive revenue in dynamic markets. In order to remain competitive and exercise profitable growth, organizations should employ these three foundational pricing principles:
- Measuring demand vs. inventory/capacity: Understanding how much a product or service you have available to sell compared to demand for that product/service is a critical pricing principle. For example, an airline facing weak demand on tickets at higher price points might find itself forced to respond to a competitor lowering its prices. On the other hand, a retailer with limited inventory of the Apple watch might choose not to match an online competitor’s price reduction, since the retailer has ample demand to sell its remaining inventory at the higher price point. Measuring demand vs. capacity in this case is critical – striking the balance is vital to ensure success.
- Measuring price sensitivity: Having a keen sense of how demand changes in relation to price, or your price position vs. competitors, is integral to growth. Understanding price sensitivity is required to make good pricing decisions. For example, the automotive industry is prone to extreme price sensitivity. Auto manufacturers can significantly drive demand and take market share with incentives such as cash back offers or zero percent financing. If an auto manufacturer is too aggressive on incentives, profitability will suffer dramatically, but if not aggressive enough, they will be stuck with excess inventory that must be sold at a deep discount. Measuring the relationship between price and demand is extremely difficult in a dynamic market where many competitors are taking actions, but doing so effectively will isolate price sensitivity and produce better pricing decisions.
- Measuring competitor price positioning: Price transparency has made it very easy for consumers. Instead of seeing prices in a vacuum, they view it as a function of what the competition is charging. For example, if you’re a retailer selling a wearable fitness device for $99 – but your competitor lowers its price to $89 – your price position has now changed. In effect, the competitor has raised your price – though you did not take any pricing action. Companies must remember that transparency extends to competitors who can see their pricing – creating more dynamic markets and intense price competition.
Sophisticated companies are building proprietary analytics and pricing systems that automatically account for these three foundational pricing principles to make price recommendations and/or actively change prices. However, even companies who utilize a manual approach to pricing can increase revenue performance by applying these three principles to each pricing decision.