Pricing is possibly the biggest profitability lever in your business! At first glance this finding is often surprising. We know that pricing affects competitiveness and overall profitability.
Yet, shrewd pricing can often be the fastest way to improving growth and profitability. This is because the mechanisms around pricing need not necessarily require other complicated processes to work, to achieve success. Many of us would be familiar with the studies that have shown that a 1% increase in price can result in operating profit increases that may range from 16% to 155% across a variety of Fortune 500 organizations.
However, many of us will acknowledge that pricing is often something we consider last when compared to the more exciting aspects of doing business” such as launching a new product or developing an ad campaign. In fact, pricing is often done on a relatively arbitrary basis in many organizations. Some organizations have however noted the opportunity and acted on it.
Pricing can play a key role in a business
Pricing at all extremes can yield desirable results. Consider profitable digital businesses that have managed to achieve scale through globalisation. They grow their businesses exponentially by charging prices that were previously considered unthinkably low. They have shown what could happen when you price at a level that enables consumers – who would have never considered entering a particular category – to do so.
On the other extreme, consider luxury brands that offer high quality products or services. Although their quality differentiates them, it has to be acknowledged that the premium pricing plays a big role in the cachet which makes them so attractive.
Sadly, many other businesses in between do not pay sufficient attention to how they price and why they price that way. For instance, some will follow conventional industry practice while others will focus on traditional cost plus accounting approaches. These are not necessarily wrong, but they ignore so much opportunity.
A common weakness is that many marketers will develop a product or service, price it and then hope it sells. When the sales do not follow, prices are either cut, more is spent on the communications budget or additional new products or services are developed using the same approach. So how can you rethink your current pricing approach?
An alternative approach to pricing
Some businesses have flipped this problem on its head and started out in the opposite direction. They understand the price point at which they are likely to attract a large concentration of consumers in a category. They then develop a product or service that is desirable at that price. This forces them to focus on what matters and what doesn’t in terms of features.
By doing this, unnecessary features that are often part of any new product or service are culled. This is a strategy that has been adopted for the last century by a number of successful businesses such as McDonalds and IKEA. Yet, it is an approach that is often not widely appreciated.
Although this approach places pricing first, it is not the only approach to being successful, as not all pricing decisions revolve around prices. Some will focus on features first. What this approach teaches us however is one of the fundamental tenets of pricing strategy that is broadly applicable:
- Understand the price at which you can attract sufficient customers to create a viable business.
- Understand which features you need to remove to be able to provide a lower-priced option that can be attractive to a smaller subset of potential customers with limited needs and budgets, with the hopes of a future upsell to the mainstream product or service.
- Understand which features should be added, at a higher price for those customers who want more functionality and exclusivity.
This starts to hint at segmentation strategies to ensure successful pricing.
Some of the areas where pricing strategy can yield profitable outcomes
Various opportunities exist to use pricing strategy to boost profitability. These can be accessed by a better grasp of the following issues. Each will be discussed in greater detail further on:
- Are our growth objectives based on profitability or market share? Where does smarter pricing and segmentation play a role in this?
- Are we too focused on the price elasticity of demand, and getting to a “correct price” while not capitalising on other opportunities that may be “lower-hanging fruit” that are easier to benefit from?
- Are we pricing appropriately to retain our clients? What could we be doing differently?
- How are we pricing across our product / service portfolio? Why have we made the choices we have made? Does our portfolio pricing strategy give us an advantage in attracting and retaining business?
- How well are we integrating pricing strategy with communications strategy? What should we be doing differently?
- Do we use benefit segmentation to full effect to make our pricing strategy more successful? How does one do this in practice?
- Have we fully appreciated how a few changes to our discounting policies and strategies could markedly boost profitability? Are we successfully integrating discounting policies within our pricing strategy?
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.