Business | Features
For a winning pricing strategy
"Our prices are uncompetitive; hence we are not able to sell" is an oft repeated phrase in most sales meetings. Issue is that it does not take any marketing skills to sell a product at a "fire sale" price.
- Special to Gulf News
- Published: 23:41 February 5, 2008
"Our prices are uncompetitive; hence we are not able to sell" is an oft repeated phrase in most sales meetings. Issue is that it does not take any marketing skills to sell a product at a "fire sale" price.
What needs to be understood is that if the customers perceive the value, they will be willing to pay the price.
Unless an organisation is in a monopolistic situation, it will not be able to command a premium unless their product is differentiated from competition. Hence, having a well defined pricing strategy is critical to a company's success.
The most common method adopted for pricing is the "cost plus" methodology, where a profit percentage is added on to the costs to arrive at the pricing.
This may be necessary for commodity products, where the scope of differentiation is limited. A well-defined pricing strategy provides competitive advantage that improves profitability.
Various factors play a role - competitors, sales channels, customer segments, customer behaviour and price sensitivity.
A thorough understanding of competitive pricing is critical for any business. Business intelligence should track information on the pricing of competitor products on a continuous basis. Inputs from various sales channels are important.
These include the sales team, distributors, agents, etc. These are the people who are directly in touch with customers, and may provide invaluable insights on customer expectations.
Understanding your customer segment's requirements is also critical. Premium customers will be willing to pay the extra price for a better quality product/service compared to mass market customers.
Readymade garments in a boutique sell at a different price level, compared to smaller brands in a department store. This requires that a thorough customer segmentation exercise be undertaken.
Segmentation can be in terms of value, geography, products purchased, and other parameters. This will be coupled with the customer buying behaviour and price sensitivity. Customers purchasing high value fashion, jewellery and lifestyle items tend to be less price-sensitive.
Pricing is determined by what the "customer is willing to pay". Customers are willing to pay much more for snacks at a movie theatre or tennis stadium than at a local grocery store.
They are willing to pay more for branded jeans than unbranded ones from Carrefour, though the cost of manufacturing for both is nearly the same. It boils down to the "perceived value" of the brand, which enables it to differentiate itself from competition.
This does not dilute the role product development plays. Banks create services for its "high net worth customers" that are different from those for their mass customers. And these customers do not mind paying a premium since the perceived value is high.
Pricing is a science that ensures that your products sell and generate profitability. If the strategy is to gain market share at whatever cost, you may sell at a loss.
But how many companies have deep pockets to sustain continuous losses? Pricing is a double- edged sword. Low price may be perceived as low quality and could be rejected by the customers.
Developing a winning pricing strategy is more than just matching competitors' prices!
The authors are managing director and director respectively of Cedar Management Consulting International.
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