Month: July 2015

Strategic Pricing

WHAT IS STRATEGIC PRICING?

The word “strategy” is used in various ways to imply different things. Here we use it to mean the organization of otherwise independent activities is to achieve a mutual goal. For strategic pricing, that objective is profitability. Achieving outstanding profitability requires managing much more than just price levels. It requires ensuring that products and services include features customers are willing to pay for, without unnecessary drive up cost by more than they add to value. It requires transforming the differentiated benefits your company offers into customer perceptions of a fair price for those benefits.
It requires the business owner to be creative in collecting revenues so that customers receive more value from your differentiation to pay more for the product or the service. Although more than one strategy can achieve profitable results, even within the same industry, nearly all successful pricing strategies include three principles and they are value-based, proactive, and profit-driven.
Let us look at each principle and what it means.
Value-based means that differences in pricing across customers and changes over time reflect differences or changes in the value to customers. For example, many managers ask whether they should lower prices in response to reduced market demand during a recession.images
The answer is if customers receive less value from your product or service because of the recession, then prices should reflect that. However, the fact that fewer customers are in the market for your product does not necessarily imply that the customers value it less than before. Unless a close competitor has cut its price, giving customers a better alternative, then there  no value-based reason for you to do so.
Proactive means that companies anticipate disruptive events and develop strategies in advance to deal with them. For instance, foreseeing, that a recession or a new competitor is entering the market will cause customers to ask for lower prices so, a proactive company develops a lower-priced product or service.
Profit-driven is that the company evaluates its success at price management by what it earns relative to alternative investments rather than by the revenue, it generates relative to its competitors.
Pricing strategically is essential to the success of any business. Reflecting, on the rise of competition, and the increased information that is available to customers today it is more of a reason to reflect on pricing strategy.

Hogan, J. E., Ph.D., Zale, J. (2011), Strategy and Tactics of Pricing: A Guide to Growing More Profitably
Posted by Carmel Speruggia in Pricing Strategy, 0 comments