Nearly All Successful Pricing Strategies Embody Three Key Principles.
The objective of Strategic Pricing is sustainable profitability. Which essentially converts into thoughtfully designing the price-value proposition and believing that this will play out in long term. Cutting down prices to drive short term demand (and in turn sales) may drive the topline (in short term) but may severly affect the long term profitability potential of a company's product or service line.
Although there are numerous pricing strategies that can be deployed to achieve profitable results, nearly all successful pricing strategies embody three principles.
They are value-based, proactive, and profit-driven.
Let us elaborate on these principles below.
a) Value-based means that the differences in the pricing across customers or applications (use cases) reflect differences in the value to the customers. For instance, during recessions usually the overall market demand is low. Should the firm lower the prices in response to lowered demand? If you go by the simple demand-curve method, the answer may be 'yes'. But, there is another perspective to be put forth here.
If the customers receive less value from your product or service because of the recession, then the prices should reflect that. It may make sense to lower the prices to reflect price-point value to customers during this period. BUT. In case where there are fewer customers in the market for your product, it does not necessarily imply that those who remain value your product or service less than when they were more numerous. Unless a close competitor has cut its price giving the remaining customers a better alternative, there may be no value-based reason for you to do so.
Thus, it is critical to assess whether your product/service is valued less or the number of customers itself has decreased leading to lower demand but not the value.
b) Proactive means that the companies anticipate a disruptive future events and develope strategies in advance to deal with them. For example, if a company anticipates that a recession or a new competitive entry will cause customers to command lower prices, the company may proactively develope a lower-priced service option or loyalty program, enabling it to define the terms and trade-offs of the expected interaction, rather than getting forced to react to the terms & trade-offs defined by the customer or the competitor. One should proactively keep an eye on Porter's forces and take actions in anticipations.
c) Profit-Driven means a company works from first-principles basis. It evaluates its price management by what it earns relative to alternative investments rather than by its market share and growth relative to its competitors. Apple is a prime example of this scenario. Even though numerous competitors have released knock-offs of apple products and smartphones based on android platforms have overtaken Apple in terms of unit sales by a wide margin, Apple has not been seen worried because it approaches its pricing from first-principles basis. With the price tags of 5 to 10 times higher than that of the cheaper smarphones in the market, Apple maintained the crown of the most valuable company in the world for a long time.
Thus, it is a good thing to absorb the fact that the strategic pricing driven by value-based, proactive and profit-driven approach leads to long-term sustainable profitability.
A large part of this write-up is taken from The Strategy and Tactics Of Pricing by Thomas T. Nagle and Georg Muller.
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