Pricing strategy is more than setting a price. It influences revenue, profitability, customer perception and market position. And a little research can help you find the price that will help balance market strategy.
Pricing strategy and market strategy have an interactive relationship. So, while price strategy can have an impact on market strategy, it’s more accurate to say that pricing strategy and market strategy work together for success.
Finding the Right Price Point
Traditional demand theory says that the ideal price point is where cost, volume and demand meet. Instead, price usually behaves in bell curve.
So, the closer you are to the peak, the more you will sell. And moving away from the peak lowers sales. It seems odd that selling at a lower price can cause lower sales, but research shows this to be true. And there are valid reasons why this happens.
- Lower prices can cause buyers to question the quality
- A lower price can push retailers to carry a higher margin product
- Less revenue can cause force you to sacrifice product features or service levels
- low prices are seen as “low class” for premium goods such as art, furniture and clothes
4 P's Marketing Mix
Market Strategy focuses on the 4 Ps of Marketing – Product, price, place and promotion. As one of the 4 pillars of marketing, pricing strategy is a key piece of a marketing mix.
The purpose of an effective market strategy is to maximize sales, profits and market share. And balancing the 4 P’s of marketing is key to building a solid market strategy.
It is common practice to build a product and then “set” a price. This can work, but it fails to incorporate price as part of a full market strategy.
Balancing Price and Product
Good quality product supports premium pricing. And premium prices generate enough revenue to produce a quality product.
It is common for product teams to build a product roadmap and back into a pricing strategy. Or reach a price point in the market and back into a product mix. This often leaves money on the table.
Many successful companies build their price and product strategy at the same time. And the best way to start is with some basic market research. The right type of market research can help provide clarity to both.
Price point and sales volume influence the quality and scope of product or service. Similarly, product features and related services influence how much can be charged for a product. Building both together allows a company to sync price and product strategy for maximum revenue and profit.
- Benchmark your competition – Competitor pricing sets customer expectations. Knowing your competitor mix can help guide your strategy.
- Understand your costs – Know what your costs are and plan accordingly.
- Talk to Potential Customers – You don’t need an in-depth study to get started. Just talk to a few customers and see what they think. This will help you understand where the gaps are in the market.
Price- Channel Strategy
Pricing is also part of your distribution channel strategy. And the reason is simple. Where you sell your product says a lot to consumers. So, product carried in Nordstrom will be seen as better than product carried in bargain stores.
Targeting your mix for a specific sales channel can lead to better results. So, a bargain price and quality are best for a bargain chain while premium prices and quality are best for high-end stores.
Another channel consideration is web channel. The choices are selling direct or through marketplaces. Selling direct brings high profits, but it takes time to build your web volume. While selling through a marketplace such as eBay or Amazon brings higher volume but requires a marketplace selling fee.
Distribution can also affect cost and service levels. An efficient channel lowers costs and increases service.
Pricing and Promotional Strategies
Promotions fall into two groups- Demand Generation and image advertising. Pricing is important to demand gen in a couple ways. First, a good price helps increase the success of demand gen activities. Second, a good pricing strategy generates the revenue to support demand gen activities.
Where pricing and promotional strategy are most important to align is in brand advertising. The brand image set for a brand has a big impact on price strategy.
Brand advertising helps create a brand image and a customer expectation of the price of your product. And a good brand image allows companies the opportunity to charge outsized prices for their product. Some examples of brands that allow the brand owner to charge a premium price are Nike, Apple and Coca Cola.
Some of keys to a good brand strategy are:
- Set your Target Image – Lexus has one brand image and Kia has another. They are very different, but both are successful. And both are carefully crafted to set a value and price image.
- Be consistent – Build and maintain the brand. Communicate brand guides to employees and distributors.
- Don’t Confuse your Brand Selling premium and value products under the same brand reduces value. This hurts sales and pricing strategy
- Set a good budget: Spend the money to set the image with the market.
- Protect your Brand: Register your trademark. And join an industry trade group to battle counterfeit.
A good Product Marketing Strategy helps build a good value proposition for your customers. So, the role of Product Marketing is set an image for each of your products.
For example, GM sets a certain quality and engineering image that applies to all of their vehicles. And under the Chevrolet brand, the Corvette and Volt carry unique product images. All three tell a different story and collect a different price.
Price Strategy Examples
Price Skimming Strategy
Price skimming sets a high introductory price and reduces strategy as the product ages. Apple Computer offers the best example of successful price skimming. So new iPhones are introduced at a high price and the pricing drops after it has been on the market for a while.
Penetration Price Strategy
This strategy sets a price to sell a lot. Offering a quality product at a reasonable price is an example of a penetration pricing strategy. Companies that have good penetration strategy are Kia and Kirkland Branded product.
Low Price Leader Strategy
A low-price leader strategy offers a handful of products at a great price to lure customers. These products are often sold at a loss. Costco is a company that has a great low-price leader strategy.
Costco sells rotisserie chickens, pizza and other key items below cost. This brings customers into the store to buy more goods.
Luxury Price Strategy
A luxury price strategy establishes a high value to connect with a high dollar customer base. This strategy takes investment and a strict focus on the target market.