A Strategic Approach to Pricing a Product

It is a regular problem for anyone who wishes to sell a product or service to know how much to charge. In this article the factors that need to be considered are discussed.

Marketing Objectives

The first issue that needs to be cleared is that we need to decide on the target market and the positioning of the product or service. The marketing objective for each product can differ and has very little to do with the internal situation at the supplier. Some of the most common examples that has been successfully used by companies, individually or as part of a set of objectives is as follows:

Survival

This strategy can be utilized if excess capacity needs to be filled, when there is heavy competition or a consumer shift away from the particular product exists. To buy time to revive a product a low price is set, in the hope that the demand will increase. The idea is to fix the price at a point where the fix and variable cost can be recovered until such time as the conditions allows for reconsideration of the marketing objective. In some instances certain products needs to be cross subsidized for strategic reasons to ensure a recovery/renewal of the product over time.

Current Profit Maximization

As a result of increased demand for a particular product that may outstrip supply the pricing of the product could be utilized to control the demand to a level where you can supply the volumes. Utilizing this strategy, the ideal price is at a level where the profits are maximized and NOT the turnover.

Market Share Leadership

If it is the objective to be the market share leader with a specific product, the price of the particular product is reduced to the extent that the value added to the customer outstrip that received from substitute products and competitor products. This is normally done to strengthen a brand or allow other, more profitable, products to be sold to the same customers on the back of the market leader product.

Product Quality Leadership

Not all products delivered to the customers should have the highest possible quality. It is more important to pitch the product quality at a level that is tolerable for a given cost/price. Having said this, the supplier may decide that a certain product should be positioned as the product leader for quality. This is normally a longer term strategy requiring a lot of marketing communication and proof of quality in the marketplace. Once the product quality leadership position has been achieved the particular product can be sold at a premium price compared to the competitors.

Entry Barrier

Should the supplier be in such a position it may decided that it wants to prevent competitors to enter the market with a particular product. One way of achieving this is to make the business case as unattractive as possible by setting prices for the specific product at a level that will achieve this.

Market Stabilization

Some products may be so strategically important or fundamental to the continued existence of the seller than it may be necessary to stabilize the market. This can be achieved by setting the price at the competitors expected level. A proper monitoring system needs to be set up to ensure that the objective is maintained.

Market Penetration

With some products the marketing objective may be to rapidly penetrate the market. In cases like this the product should be priced on volume of order. This implies that a sliding scale is developed that takes the price sensitivity of the market into account. If nobody is ever going to send more that say 200 persons on a particular course it is meaningless to start giving significant discounts to customers sending 500 or more persons on the course.

Marketing Mix Strategy

Pricing of products is only one of the tools utilized to achieve the desired marketing objectives. The decision on the pricing of a product should be aligned with the product-positioning, -packaging and -promotion decisions to achieve the specific marketing objective for the product. This is necessary as these decisions all impact on one another. In a significant number of cases the pricing strategy is made first and later tested against the other factors.

Cost

As a rule the cost of a product set the basic price that the supplier should charge for a product. In order to ensure that all the costs are being included in the basic or starting price consideration should be given to all fixed and variable cost related to the product. If a cost plus strategy are being followed then this becomes even more important to get the basic price correct. In some cases a strategy of variable cost plus a larger percentage is utilized to ensure that correct pricing is achieved.

It is important to realize that the costs of delivering of the same product in various geographical areas where the supplier operate may differs. In addition to this the payment regimes of customers in certain geographical areas differs from those in others.

It may be necessary to develop different pricing strategies for the various regions where the supplier operate.

Pricing and client perception of product value

In order to establish the positioning of a product by utilizing the product price and the perceived value that the product is contributing to the client, a 3 X 3 matrix can be used.

The horizontal axis of the matrix could reflect the product pricing with the columns having high, medium or low heading respectively. The rows should reflect the perceived value added by the product again with a simple high, medium or low heading respectively.

In the matrix the potential resulting strategy of combination's of high, medium and low pricing against perceived high medium and low value addition are reflected as follows:

• High price - High perceived value = Premium Strategy
• High price - Medium perceived value = Overcharging Strategy
• High price - Low perceived value = Rip-off Strategy

• Medium price - High perceived value = High Value Strategy
• Medium price - Medium perceived value = Average Strategy
• Medium price - Low perceived value = False Economy Strategy

• Low price - High perceived value = Superb Value Strategy
• Low price - Medium perceived value = Good Value Strategy
• Low price = Low perceived value - Economy Strategy

Conclusion It should be noted that none of the pricing strategies is just good or just bad. Each pricing strategy can be the ideal strategy depending on the particular marketing objective, marketing mix strategy and the cost structures for a particular product.

For example a product that is priced high with a perceived low value being added to a particular client (Rip-off strategy) is not all over bad, as it may just be that the clients in a particular market segment perceives that low value is being added. This is not necessarily true for other market segments who may perceive the value being added by the specific product to be high, while the same product may be perceived to have a medium value addition to customers in a third market segment. The specific approach to sell the product to the first customer will be totally different that the approach utilized to sell the product in the second or third market segment.

©2009 Carl Marx