There is a fundamental difference between setting up price levels to generate a demand and strategically pricing for sustainable profitability.
During our economics 101 lessons we are taught about demand curves and are asked to solve equations during exams to score the right set of marks as per the rules and boundary conditions of the curve. As per this basic economics, the price one can charge is usually limited by the demand curve.
Pricing, given the assumptions of economics, is simply about optimising the price levels given that demand. However, the real world does not work this way. In the real world the demand for most products or services is not given. It is created, sometimes thoughtfully and sometimes haphazardly, by decisions that sellers make about what to offer their customers, how to communicate their offers, how to price differently across customers or applications and how to manage customer expectations and incentives.
Making these decisions thoughtfully and implementing them effectively to generate sustainable long term profitability is called "strategic pricing". Achieving exceptional profitability entails making well thought through decisions about much more than price levels.
It requires attention to critical areas below:
a) It requires ensuring that products and services include just those features that customers are willing to pay for, without those that unnecessarily drive up the cost by more than they add to value.
b) It requires translating the differential benefits your company offers into customer perceptions of a 'fair price premium' for those benefits.
c) It requires creativity in how you collect revenues so that customers who get more value from your differentiation pay more for it.
d) It requires varying price to use fixed costs optimally and to discourage customer behaviours that drive excessive service cost.
e) It also requires building capabilities to mitigate the behaviour of aggressive competitors.
Thus, as a business organisation, you can choose to play only on price-demand curve by limiting yourself to the boundaries of the demand curve, or you can choose to make concious efforts towards strategically pricing your offerings and achieve long-term sustainable profitability.
We'll be touching up on more strategic pricing related area in upcoming articles.
A large part of this piece is takes from the book "The Strategy and Tactics Of Pricing" by Thomas T Nagle & Georg Muller.
See You In The Next Article.