Pricing Strategy
Posted: January 29, 2008
Playing the Pricing Game by Chris McCrory, Lead Strategist
Setting a price, in and of itself, is pretty straightforward. It cost A, you want to make profit B, so you set price C. There. You’ve set a price.
Developing a pricing strategy, on the other hand, takes a bit more work. It is a step-wise process, that, when done properly, puts you in the best position to hit the right sales volume, revenue and profitability.
- Get a sense of the appropriate price range for your product (value, mid-price, premium).
- Establish a few price points within that range to test.
- Test your different price points against your competitors and with potential consumers.
- Set your price.
- Give it time, then repeat.
The most challenging part of this process involves the testing. Ideally, you’ll be able to predict how your competitors will react to your various prices—undercut you, go head-to-head, move prices up, do nothing. This would require you to know your competitors pretty well. You know, that whole keep your friends close and your enemies closer sort of thing.
Here, game theory comes into play a little bit. When you attempt to establish a price, your competitors are going to make one of 5 choices:
- Lower prices
- Raise prices
- Stay the same
- Pick numbers 1 or 2, then reverse course
- Pick number 3, then decide later
Most often, they will stay the same for a while to see what happens. Sometimes they’ll lower their prices, hoping to undercut you or seem more attractive than they were. Rarely, they will raise prices and introduce a new feature to make their product more premium.
Not only that, but they may do it preemptively (meaning before you really hit the market) or reactively, waiting until you hit the shelves to make a move.
Applying game theory accurately helps predict what each competitor is likely to do, given the situation. This will guide you on the optimal pricing strategy.
This comes with a major caveat, however. Because you do not have perfect information, the predictions are not absolute.
Several factors come into play when trying to understand what a competitor will do.
- Their standing in a particular market
- The timing of their last price move
- The amount and direction of the last price move
- The person making the pricing decisions (the local person, regional manager, someone from headquarters, etc.)
- Whether your product or price will elicit a fully rational response or one filled with emotion
- The size of the competitive space
- The distribution network
- Available retail space
- The costs involved in making and promoting price moves
If you are new to a market and have little or no access to reliable data, then your best option is to try different prices over various periods. For instance, use price X for two weeks, price Y for the next two weeks, and then price Z for the two weeks after that. Evaluate your sales and profit and decide on a price.
Alternatively, you can set your price high on your range from step 1 above and discount it to various prices below that, finding which price level works best.
With all of this said, your price still must create a profit, if not immediately then within a reasonable period of time. If the right price fails to generate sufficient revenue to exceed costs, then your volume is too low or your costs are out of line somewhere. Those require an entirely different discussion.
Most importantly, your pricing strategy must reflect your actual product quality, delivery and customer service. It also makes a statement about what you think of your customers and who you want them to be. Finally, it exudes the level of confidence you have in the product you are delivering.
While this approach to pricing takes time and effort, it will give you greater confidence that your price is targeted to your consumer and matched well to the product itself.
Let Chris know what you think. E-mail him at chris.mccrory@kennen-bmc.com.