On the heels of the last post, how can a pricing strategy be connected to an overall corporate strategy?
First, let me start by saying that a pricing strategy needs to be the result of a combination of considerations. Building this in isolation can be a fatal error in your interaction with the market.
Build whatever process works for your culture, but take the following into account when you do:
• What is your value discipline – this is the primary context for this decision
• Understand your internal cost structure, and what can be changed
• Understand your competitive environment (porter’s 5 is a good start)
• Understand your target market pricing sensitivities
• What are your profitability goals?
• What pricing strategy is likely to result in the achievement of your desired market positioning based on these factors?
Pricing is a critical strategic decision, and requires your sharpest minds. When you truly know your market, you can narrow your field of customers and deliver a more finely tuned experience. For most industries, you can be marginally relevant to a larger group or significantly more relevant to a smaller group.
With a product excellence strategy, you should be selling for more than the average to either early adopters or a very paritcular crowd. Being able to buy higher priced products makes people that can afford you feel distinguished. An additional benefit is that in a market with low cues for quality, higher pricing can create incredible margin if your brand carries an appropriate appeal. Tried selling a t-shirt for $300? Lots of people are buying them!
With a customer intimacy model, you need to avoid pricing too low. You’re trying to appeal to those who recognize the added value that your model brings. Generally, pricing average to above average will work depending on your competitive environment.
With an operational excellence model, you deliver commodities through a uniquely efficient model. Your customers expect low low prices. That’s the only way.
Price is a consideration in every purchase, but it’s not seen the same way by every consumer. While it’s subconscious and unspoken, many consumers want to pay more than other people pay. But when they do, they want you to make it worth their while. Tying your pricing model based on your corporate strategy is nothing short of essential.