Should your pricing strategy be about getting to a “correct price”, or should you be thinking about the question of an ideal price more broadly?
I am sometimes asked to identify the “Correct Price” for a product or service. Is this possible? In theory, yes. But practically, you will find that there are many correct prices depending on who your customers are, when the product is being sold and who your competitors are at the time of sale, to name but a few considerations.
Therein lies the beauty of pricing strategy. You do not have to settle for a particular price at a specific margin all the time. Depending on the available opportunities and the added value you can offer, such as the convenience that you’re offering to customers, you have the opportunity to price differentially.
Some real-life examples to show how timing and location offer pricing opportunities
Think about what you would pay for a slice of cake at a fine restaurant, versus a coffee shop, versus a supermarket. Chances are that the cake across all three locations is relatively similar in quality. Yet there may be a 300% difference in price between the fine restaurant versus the supermarket offering. So, what changed? The ambience within each particular location and the expectation of what you would probably pay at each location, as well as the range of competing alternatives would be price determinants. You would probably also believe the pricing to be acceptable given the circumstances and not question it further.
What about the bottle of headache pills you need to buy urgently in the middle of the night from a garage convenience shop? Compare this to the same bottle of headache pills being sold at the supermarket? The only difference is that one was made conveniently available to you at an unusual hour while the other was not.
Should you try to be idealistic about getting to the perfect price, or should you be pragmatic about how you consider this opportunity?
I could provide many more examples as those mentioned above. The bottom line is the following… Don’t be obsessed with the demand curve that you have seen in an Economics 101 course (you know the one that matches Price to Quantity sold and varies based on the curve’s elasticity).
You probably know what the current market pricing is and what volume it will generate. You may understandably want to know what a change in pricing will do to change your sales volume. Yes, these curves exist and can be generated with the right data. But chances are you may not have access to the correct data to do this. Should you get access to sales data, you may not even know not know what that demand curve looks if various price-sales scenarios that involve sales timing, location and channel have been mixed together. Econometric models claiming to do this may also not be too convincing once you dig into how they have been built. How then do you get to a practical solution that makes financial sense?
As a more convenient alternative, start to think about the different ways that your customer and prospect base can be segmented in terms of their needs and how you may be able to price differentially based on those needs. Then think about how the demand curve mentioned above is likely to shift left or right or up or down based on the particular segmentation scenario you have in mind and amend your thinking along those lines.
Finally, start to create actionable plans that will enable you to execute this in the marketplace. For instance, consider:
- Consumer segments that may pay more for whatever amendment you are making. E.g. 100% organic.
- Channels that will add value such as convenience.
- Pack sizes that lend value to easier product movement by consumers with limited access to transport.
- Pack sizes that may be smaller and more affordable but could command higher margins.
These are just a few of many approaches. Be creative and you will find that many prices options exist that can boost your margins.
About the author
Alan Ohannessian started WisdomInc in 1999. WisdomInc focuses on Pricing Strategy, Brand Strategy and Analytics. He has consulted to over 70 global and local brands across 15 industries during this time.
Prior to this, he started a Customer Relationship Management consultancy within the Ogilvy Group in the mid-1990s and worked within the Ogilvy Group over a 5-year period. He was also lecturing Marketing Strategy, Consumer Behaviour and Retail Marketing during the early 1990s at the University of the Witwatersrand, Johannesburg.
He has a B Comm. (Hons) from the University of the Witwatersrand in Manufacturing Strategy where he focused on how to mass customise products at competitive prices. He also has a Master of Commerce degree from the University of the Witwatersrand which focused on distribution channel strategy and logistics.