By Paul Hunt – President
Pricing strategy is a hot topic these days. Over the past 20 years, we have helped many companies develop, refine or transform their pricing strategy, but today we get requests for help more frequently than ever before. So why the surge of interest now?
There are several reasons.
Globalization: Companies are having difficulty managing price gaps between emerging and mature markets, so they need a pricing strategy to help them consciously make these trade-offs.
Competitiveness: In today’s fast-paced environment, decisions must be made with unprecedented speed. If organizations don’t have a clear, well conceived strategy, they may find themselves reacting to the competition, rather than taking a proactive approach to pricing.
Growth: Dramatic growth necessitates a sharp increase in the number of pricing decisions that must be made and in the number of different situations that may arise that could cause an inferior pricing strategy to unravel.
Economy: It is easy to fall into a pattern of “fear-based pricing” in a bad economy if companies don’t have a pricing strategy designed for tough times.
All of these factors contribute to a loss of control in pricing. And when that happens, it means you either don’t have a strategy or it is not working.
As you develop your organization’s pricing strategy, here are four questions you should answer:
1. What are our share objectives? A dominant market share usually brings superior profits. However, many companies blindly chase share, which often leads to disastrous price wars. As one executive put it, “Share is vanity, profit is sanity.” Setting realistic share objectives is an important step in developing an effective pricing strategy.
2. What are our profit objectives? I often ask senior executives what their priorities are. Typically, they respond: share, profit and margin. But good strategy necessitates tradeoffs, often between price and volume. It is a fundamental law that as you raise price, demand goes down, and as you lower price, it goes up. So when developing a pricing strategy, you need to consider that relationship and your profit objectives for both the short and long term. Most companies can grow profits in the short term by taking a price increase, but that often hurts their longer-term viability. A pricing strategy prevents a “knee-jerk” reaction of raising prices to “fill a profit gap,” focusing instead on both the long and short term.
3. What is our competitive position? Building a pricing strategy based exclusively on the competition is generally not the way to go because it means you are reacting to your competitors rather than charting your own course. However, developing a pricing strategy that is oblivious to the competition is even worse. It is critical that you see it from the customers’ point of view. How do they consider their options? Which competitors do they consider? What is their perception of the relative differences? Once you can answer these questions, you can establish your competitive position and develop a pricing strategy that is durable and that can be adapted to changing competitive conditions.
4. Who is our core customer? A good pricing strategy is built upon a strong understanding of your core customer. I wrote an earlier article for this newspaper titled “Want a Pricing Strategy? Fire A Customer!” Companies often try to sell their products and services to everyone, which waters down their value proposition. Some customers simply don’t value your offering as much as others, so if you are not careful, you will end up selling your highly valued item to one customer at a very high price and to another at a very low price. The high-priced customer will find out and either stop doing business with your company or demand similarly low prices.
In summary, you have probably heard the saying: “I’d rather have an average strategy with great execution than a brilliant strategy with poor execution.” That implies that execution is more important than strategy. Hogwash! Both are critical, and that’s why pricing strategy is so hot right now. Companies are struggling to find their way, and without a robust pricing strategy, they will waste time and alienate customers no matter how well they execute.
So I would rephrase the statement as follows: “I’d rather have a great strategy with good execution than a good strategy with great execution.” A great strategy puts the wind in your sails – and that gives you momentum and leverage.
Paul Hunt is the president of Pricing Solutions, an international pricing strategy consultancy dedicated to helping clients achieve world class pricing competency. His pricing column appears monthly in the Financial Post, and he is a regular blogger at the FP Executive blog. Article originally appearing in the National Post