Pricing Strategy | Avoiding Pricing Truisms
The first step towards developing a sound pricing strategy is to dispel the myth that pricing strategy revolves around truisms such as long tail price optimisation, value-based-pricing, loss-leader, skimming or penetration, edlp, hi-lo and the many other pricing truisms that litter the pricing literature.
These are essentially pricing approaches specific to a particular business and competitive environment; and reflecting the way customers behave and make choices at that time.
In and of themselves they are not pricing strategies.
Our approach is to avoid these truisms and to start with a blank sheet of paper. We then apply critical thinking, innovation, and analysis to maximise value capture for our client organisation.
The over-arching purpose is to build a pricing architecture that consistently delivers on the client’s business and financial objectives.
Pricing Strategy | Critical Thinking applied to Value Capture
Strategic critical thinking applied to a firm’s current and future revenue streams, and how pricing science can deliver competitive advantage is at the heart of pricing strategy.
Clearly the current (and future) product and services portfolio of all existing and potential competitors will be a key consideration, as well as the dynamic inter-play between customer preferences, willingness to pay, and market/segment viability.
1 Microeconomics and macroeconomics to guide profit maximisation and price optimisation;
2 Pricing theory to guide pricing architecture and business rules; and
3 Behavioural Economics and Human Psychology (esp. in risk, decision making, and purchase behaviour) to guide pricing architecture, portfolio configuration, and portfolio optimisation.
Exemplar pricing strategy is validated by qualitative and quantitative data and market insights sourced through robust business and pricing research.
Sub-optimal pricing strategy cobbles together a disparate set of ideas, activities, processes, and technologies. This inevitably creates confusion, misalignment, an unhealthy focus on competitors’ prices, and the pursuit of short-term sales targets.
In addition pricing degenerates into a disparate collection of excel spread sheets performing rudimentary analysis of profitability, price-waterfalls, and averages-based price realisation analysis..
Superior Pricing Strategy | Start Here
Pricing strategies are not formulated by marginal improvements in industry practices and/or adopting pricing truisms. They’re formulated by posing tough questions:
Does our revenue and profit model still make sense in a disrupted world?
Is our pricing architecture misaligned with our strategy and does it accelerate revenue production?
What elements of our product and service portfolio support a price premium? What elements have become generic and in which we are now mispriced?
What price-metrics (i.e. the way we charge) maximise our value capture? Are our current price-metrics misaligned with our customer’s needs and operations?
What drives variations in price elasticity and margins? How have they changed? How do we leverage these changes and variations to maximise profits and revenue?
What market share is defensible and sustainable? Why? What’s the NPV of an extra point of market share? Is our pricing aligned with maximum attainable market share?
What price segments are identifiable, reachable, and viable? What drives price elasticity and willingness-to-pay within these segments?
How do we optimise our price architecture and price levels? How do we maximise expected returns on bids and RFP’s?
Pricing Strategy | The Need for a Rethink.
In a sea of disruption, blurring of industry boundaries, and uncharted customer power legacy pricing approaches and strategies will fail to deliver target revenues and margins.
In this disrupted environment, the difference between successful and not-so-successful firms will increasingly depend on the quality of the critical thinking applied to price optimisation and realisation.
To explore how our Pricing Strategy methodologies can contribute to your sustained price realisation please contact us.