On Pricing

Firms should develop a pricing strategy. Setting prices at the same level as rivals, or discounting to land business, is not a pricing strategy,

Price is the translation of a strategic position. A firm’s strategy will determine its pricing. If a firm is positioned to offer unique value, that value will command a price premium in the marketplace. Conversely, if a firm is positioned to serve its customers with equivalent value as rivals but at a lower total cost, its price will be discounted below that of the competition.

How a firm creates these relative price differentials (price premium or discount) is a key element of strategy. Raising prices without a value proposition that supports a price premium will fail, as will discounting prices without a lower total cost structure to support the lower prices.

Few firms know the price sensitivity of their customers. A question I always ask client firms is, what would happen if you raised all your prices by 1 percent? Few can answer this question. Not only must a firm know its demand curve, it must also know its price elasticity of demand and by able to predict how the quantity demanded will vary if the price is changed.

Another common mistake is underpricing – where a firm sets its price too low relative to the value being offered. Often this is done in the mistaken belief that a higher price will make the firm uncompetitive with rivals. Price always has to be related to value and how unique that value is relative to the competition.

Competing on price is a dangerous game. Undercutting rivals on price and hoping to pick up additional volume can provoke undesirable competitive responses which can depress everyone’s profitability. Similarly, firms that charge premium prices which are not supported with sufficiently differentiated value may create a price umbrella which allows lower-cost rivals to roll up market share. Price must always flow from strategy and not be determined arbitrarily or by imitating the pricing policies of rivals.

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