Strategic Pricing’s 3 Keys

A survey from the Chartered Institute of Marketing suggests marketers are lost when it comes to setting prices for their products.

According to the report, the most extensively used technique for pricing was ‘face-to-face research’.

A report from consultants McKinsey observed that many firms set prices based solely on anecdotal evidence.

You will struggle to find a marketing textbook that defines the ‘face-to-face’ approach or explains the role of anecdotal evidence in marketing decisions because, of course, both are hallmarks of marketing managers who don’t have the faintest idea.

Times are changing, however. The introduction of the euro, in particular, has ensured that most European marketing managers have been faced with a huge number of simultaneous price changes and very few ‘anecdotal’ guidelines to help structure their thinking.

There are three key constructs to consider when setting a price. The first task for any pricing decision is to determine the value of the offering to the customer. Inevitably, any market research into this area will reveal that different customers can derive very different utility from the same product or service and thus a hallmark of a good pricing strategy is that it is usually combined with the parsimonious segmentation of the market.

Value, of course, is relative and that leads us to our second consideration: competitors. Strategic pricing usually depends upon clear and up-to-date competitor analyses. This is simple in the business-to-consumer world where prices are advertised and rarely altered, but in the fascinating world of business-to-business, prices are almost always open to rebate and off-price discounts.

I once worked with a large US B2B company whose pricing systems were so complex that it once celebrated a six-year, multi-million dollar contract win, only to realize weeks later it was losing money on every order placed.

We must therefore also consider a third factor in the calculations: our costs. This entails first estimating a break-even calculation to ensure that the price charged exceeds the fixed and variable costs of production.

But then comes a second more subtle cost: that of changing prices in the first place. In many instances firms incur greater losses by increasing their prices than leaving them at the same level. Because the physical, labor and communication costs associated with a price change often exceed the marginal increase in revenues.

Hope is at hand however with Electronic Shelf Labels, ensuring that supermarkets can cut the incompetent marketer out of the pricing task altogether. Prices are displayed in the supermarket on small LCD panels. As goods are scanned, computers at head office make a calculation based on the remaining supply of goods and the predicted demand and alter the price in each store. Not to be outdone, Coca-Cola is testing a prototype vending machine that increases the price of each can as the temperature gradually rises. Pure, perfect, elastic pricing will soon be ours and economists will rule the world! You have been warned.

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