“Strategy is about making choices, trade-offs; it’s about deliberately choosing to be different…” – Michael Porter
There is an art and science to pricing. The science of predictive analytics and calculating optimal prices often gets the headlines, but sustainable pricing success must merge the science of pricing tactics with the art of pricing strategy. Choosing to be different and taking, a different approach to your business is the first step to acknowledging a pricing strategy is needed.
However, conceiving a winning pricing strategy is not as simple as it may seem. Too often, companies become paralyzed by potential strategy pitfalls whether the strategy is too complex, or full of rules and exceptions that get in the way of execution.
Some companies may react too impulsively to competitor tactics, such as automatically matching a price decrease, promotion, or, shift strategies based on a short-term variation in the market and isolated customer feedback. However, in order to formulate a winning pricing strategy, companies must focus their attention on ensuring that their pricing strategy fits with both their customers and products.
Though avoiding strategy pitfalls are essential to your pricing strategy, you must first define what it is. If your goal is to increase market penetration, your pricing strategy should be a penetration pricing strategy and align to price sensitive customers, who are brand neutral, and price shoppers. Ideally, these customers would also incur a larger switching cost when changing products or suppliers. For example, a cable provider in a volatile and competitive industry may offer certain packages to new or returning customers to grow share in a new market or save share when competing with an aggressive competitor.
If you are a grocer, you might find that a high-low pricing strategy works best. With varying customer preferences and a high degree of substitutable and complimentary products putting low prices on high-demand products and higher prices on lower demand complimentary products can often achieve the greatest returns.
If you’re Wal-Mart, the winning strategy is simple: Low prices every day on all products, and minimize your costs to keep prices low, because your customers are price conscious and brand indifferent. It’s important to note that this strategy is only appropriate when you’re in a position to be the low cost leader and confident in that position across your portfolio of products and services.
Shoppers who gravitate toward premium products such as Tiffany’s, tend to be less sensitive to price, focused on quality, and loyal to brands. A premium pricing strategy for these shoppers should be considered, and helps to create a unique buying experience in line with buying a product or service of extremely high quality and in limited supply.
Finally, if you are a brand launching a new product or service with limited capacity, though have a competitive advantage, a skimming pricing strategy would allow you to target early adopters who are status conscious and price insensitive and fund future growth.
In the end, a winning price strategy is only attainable if you define your strategic objectives, avoid pricing strategy pitfalls, and align your pricing strategy with your customers and products.