Product pricing is an element of marketing strategy that can have a profound impact on growth and profitability. Yet despite the importance of pricing, we often see many common mistakes. Here are three questions to help you identify opportunities to improve pricing, grow margins, and maintain a competitive position.
Do you set prices from the inside-out or the outside-in?
One critical step in the pricing process is understanding your value proposition as it relates to other competitors. The good news is that there is usually plenty of external information that you can find to serve as a basis for preliminary pricing decisions. Most companies do a good job gathering this information in the early stages of a product lifecycle. However, over time companies often get lulled into setting prices on a cost-plus basis rather than reassessing value through the eyes of its customers. This lack of discipline ordinarily grows right at exactly the wrong time — when the market has matured and become even more competitive. In these environments, pricing on a cost-plus basis can open the door for competitors who have a better handle on value perceptions in the market.
Do you charge the same price in every market segment?
Companies often initially launch products in one specific target market and then expand into adjacent markets as product lines mature and growth rates level off. Companies charge the same prices in these adjacent markets out of fear that charging lower prices might result in profitability erosion in existing segments. However, customers in different segments commonly place different values on various features. If you offer similar — but not identical — products in these adjacent markets, you can often drive rapid growth while still preserving price integrity in higher-priced markets.
Do you maintain price integrity?
Wanting to win is human nature, but allowing that drive to undermine pricing integrity is a losing proposition. The relationship between a company and its customers is like any other relationship in life in that behaviors create both boundaries and expectations. If you have a consistent approach to pricing and do not waver from it, then you have price integrity. Your customers learn not to ask for discounts.
On the other hand, once you offer discounts, customers will come to expect them. Over time this will have the effect of eroding overall profitability. If you experience significant pressure to discount from standard prices, it may be a sign that there is a problem with your value proposition. Rather than discounting, you might want to reevaluate whether your salespeople clearly communicate your value proposition, whether customer needs have changed, or whether a competitor has disrupted the market with a new, better value proposition. Answering these questions can shift your focus from discounting to other strategies that preserve (or grow) existing margins.
Pricing will always be part art and part science. However, answering these questions can help ensure that your offerings are relevant to the markets you serve and priced in a manner that drives both growth and profitability.
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