How Retailers Can Gain Pricing Power Through Product & Service Differentiation

More on pricing strategy and value-added services: If you have no differentiation from the market, you are a commodity. When you’re a commodity, you have no pricing power. So unless you happen to have a sustainable, defensible cost advantage (hello, Southwest Airlines), you’re going to be in big trouble.

So what about competitive pricing? How do you differentiate? Why should people buy from you? If you have a unique product, you can differentiate off that. Tiffany, RedEnvelope, and Apple (despite the presence of resellers) provide highly differentiated products and they can charge a premium.

If you resell someone else’s products, things that people can also buy from other distributors, you need to differentiate on the service and experience aspects of the buying process. This may mean value-added services such as faster shipping, free returns, compelling mobile app, well-targeted promotions, or even breadth of offerings that a single producer can’t match. Amazon is both the granddaddy and trailblazer for online distributors.  And Zappo's is an excellent example of providing exceptional customer experiences.

If you can do both, of course, that’s even better. Apple puts a lot of work into making its products great, but also making the entire customer experience good. (While it provides a superlative brick-and-mortar retail experience, its online experience is good but not stunning). Amazon not only resells other people’s products, it has launched its own Kindle, which provides greater lock-in, and the opportunity to further improve the customer experience.

Knowing which kind of strategy you’re pursuing helps you figure out how to price.

If you have no product differentiation, your product prices have to at least be competitive, especially if you are selling primarily or entirely online. You are a distributor -- and your value is distribution, not production. However, you can still increase profits through effective up-selling, cross-selling, and premium shipping. You can also increase customer loyalty by offering discounted shipping or other benefits to people who pay some kind of subscription fee. This is what Amazon does online and Costco does in the real world. The fee is useful to people who shop there enough, and paying the fee encourages shopping.

If you have product differentiation, you can price according to that perceived differential value. Don’t discount your product, except for end-of-life, end-of-season, and other reasons for your products to have less value. Focus your pricing on the customer and their behavior. For example, you may wish to offer “refer a friend” discounts, “buy one get 20% off another”, or simply give great customers credit to spend as they please.

These tactics reinforce the value of the product while still allowing you to do targeted discounting.  Avoid the painful death of a commodity. Make sure you’re differentiating along at least one axis. Otherwise, you end up with price as your only weapon, and that’s a losing battle.  

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Reuben Swartz, Guest Contributor

About Author

Reuben is a world-renowned expert on pricing, and combining pricing strategy, business processes, and technology to dramatically improve profits and boasts "the longest running blog on pricing and profitability". He has helped companies in North America, Europe and Asia and he teaches part of the Professional Pricing Society's Certified Pricing Professional program. You can follow him on Twitter or on Dollars and Sense: The Pricing Blog. Reuben's company, Mimiran, provides software to help business owners and sales teams create, share and close online proposals, while improving revenue and profit and helping companies focus on their customers.
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