All retailers set pricing strategies, but while some get tied up in complexity and buzzwords, the most successful retailers keep it simple. First, they decide where they will compete and how they will win -- and then build tactics around those decisions. Successful companies ignore the noise around them until after they have made those basic choices, and only then do they layer in the tactics to augment their margins -- within the parameters of their strategies.
I recently consulted the world’s favorite information source, Wikipedia, and I found 23 different pricing models listed along with 9 laws of price sensitivity and consumer psychology. With that much complexity, it is no wonder so many companies are intimidated and just total their costs and add a margin.
The truth is, instead of simplifying down to a cost-plus approach, retailers should tune out the choices among all those models and laws until after they have made the two basic decisions about where to compete and how to win.
Identifying the business strategy is the first step in setting pricing strategy. The company’s leaders must answer the same questions – “Where will we compete and how will we win?”
That means first identifying which market segments to serve, and determining how to gain advantages versus their competitors (win more customers). It then means allocating resources to those segments and those capabilities. Simple statements like, “we will grow organically with existing customers and add new products,” are not strategies. At best they are objectives, and at worst they are platitudes.
Real business strategies should specifically identify which customer segments and needs the company will target, what product benefits and feature sets have the greatest chance to attract a winning share of customers, and which processes and capabilities will enable the company to deliver those features to those customers. Once those fundamental questions have been answered, it will be much less complicated to set the pricing strategies consistent with the overall business strategies.
What kind of pricing strategy is appropriate?
1. An every-day low price strategy might be appropriate, if:
* The Company believes they have a sustainable cost advantage,
* The Company believes they are targeting the most price-sensitive customers.
* The company's products are more commodity-like and it is very difficult to differentiate prices between customers,
That said, cost advantages are very difficult to achieve and even more difficult to sustain, so this type of strategy should be viewed cautiously.
2. If the business has identified target segments that want premium, top-of-the-line service where their needs are anticipated, and the business is built around providing that service better than anyone else, the pricing strategy should be set to both communicate and capture premium prices. Note: This type of strategy relates to winning by anticipating needs and meeting them without exception, but it does not necessarily require selling luxury goods.
3. If the retailer has decided to compete in the segment that wants and can afford mid-tier products, but they also believe the customers value and will pay for premium service, the appropriate strategy is to provide and charge for that service.
4. Another variation is a retailer who believes the key to winning customers is to become more ingrained with their customers, building a one-stop shop is the appropriate strategy.
The more the customer buys and builds the retailer into their shopping habits, the less likely the customer is to look elsewhere for their products. In such a case the retailer is likely investing in more products and services to meet more customer needs. If so, the retailer’s price architecture needs to offer customers incentives to add volume.
After the strategies are in place, only then is it appropriate to think about tactics that can enhance margins without deviating from the basic pricing strategy.
Things like odd-number pricing, loss leaders, and even dynamic pricing are more tactical enhancements to the underlying strategy, not strategies themselves.
Another final point is: Costs should not drive prices regardless of the pricing strategy selected. You should not ignore costs, and they are important in determining whether and how much money you make given the prices you can charge. Sometimes cost changes can help explain price increases to customers, but, ultimately, customers are concerned about how your product or service benefits them, and that is a measure of value, not cost.
Bottom Line For Your Bottom Line:
Avoid the noise, the buzzwords, and the complexity. Recognize that business strategy and pricing strategy are fundamentally about making choices regarding where you compete and how you win.
If you ensure your business strategies and pricing strategies are aligned, the rest becomes execution.