Pricing: the Forgotten Part of Business Strategy 

gigcmo
09/03/2021

In the past, when people talked about the marketing mix, they used to refer to the four ‘Ps’; product, place, promotion and price. Today there are eight principles. Amongst these, however, pricing is often not given its due, despite being one of the most strategic parts of a business plan.

Some organisations are very good at pricing and understanding its power. Others leave money on the table or, even worse, leave room for a competitor to establish pricing leadership.

Pricing depends on a variety of factors, but it hinges on two questions:

  1. What is the price elasticity of demand?
  2. What is your pricing objective?


What is the price elasticity of demand?

This is used to determine how a change in price affects customer demand. When a product is still purchased despite a price increase, that product is considered inelastic. For example, water is considered a necessity, so price changes do not dramatically affect demand. Alcohol products usually face an inelastic demand curve, as is a product like live sporting events.  There are a few alternatives. If the demand for a product changes dramatically due to a change in the price, that product is considered to have elastic demand. Heinz soup, a KitKat chocolate bar and other grocery products have rather elastic demand curves.

It is up to a CEO and his/her leadership team to understand the product, market, and price elasticity and sensitivity. You may be in a market where there’s very little elasticity - a luxury car is fairly price inelastic, for example. However, airlines may typically take a different view. A long time ago, they figured out the benefit of yield pricing management, asking themselves how they could charge customers to make sure they used the flight’s capacity because if they didn’t use it, it was lost forever.

What is your pricing objective?

Cost plays a huge part in your long-term goals for a company, the reputation you plan to build and what your business strategy and model is for growth and profit. In short, ask yourself: what are you trying to accomplish? 

There’s a vast range of pricing models that businesses can be based upon. Some adopt a cost-cutting strategy to improve margins; some will favour a premium price strategy. There’s often a preference for a ‘freemium’ model in digital service industries. A basic product level is available free of charge, and you pay for additional functions or multiple users. You will have seen this, for example, on platforms like Zoom and Hootsuite. 

Supermarkets have been well known for using the loss leader principle to attract people into the store. Meanwhile, penetration pricing has been used aggressively by companies wishing to increase their market share, and predatory pricing (which is illegal in some countries) has sometimes been used to drive others out of business essentially. We will all have also seen basic psychological pricing at work - where products are priced at £99 instead of £100 because it has greater appeal to the human mind.

Understanding price sensitivity in your market

It would help if you also considered market sensitivity. This is something that we have seen companies find particularly challenging when they venture into new territories. Fractional CMO Ulka Athalye discussed this in regard to businesses seeking to enter India and Indian companies seeking to venture overseas. She said: 

“Many people think a pricing strategy that works in one market will work in another, but it may be that you need to reconsider. India, for example, is a price-sensitive market where low costs are seen as a positive. However, depending on what you’re selling, other markets may not be the same. For example, some luxury brands have found that being ostensibly mid-priced in the UK market made them appear undesirable or not luxurious enough after they entered the Chinese market.”

Giving pricing the attention it deserves

These strategies, alongside a catalogue of other things, come into pricing models and processes for how pricing is reviewed over time. However, we often find that organisations do not give the same due diligence and time to pricing strategy as they would to other marketing and business development areas. 

However, not giving it its due is to miss a key component in your organisation's success. Today, top schools like Harvard have entire courses dedicated to pricing strategy alone. Getting pricing right is key for profitability and your relationships with your customers, and neither is it static. Just because inflation goes up each year doesn’t always mean prices should, for example. 

Price is arguably one of the single most significant determinants in an organisation’s success; you can get everything else right, but if your pricing is off, you will miss out on customers or profit that’s well within your grasp.

For these reasons, pricing should be at the forefront of a CEO’s mind both at the outset and as part of regular and strategic review processes.
 
Pricing is a crucial part of the marketing strategy. If you would like to discuss the right solutions for you, contact our marketing experts at any time. 

Click here to learn about Top 10 Pricing Strategies to Boost Sales

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