So what shape do pricing strategies typically take? Typically, three types of pricing strategies are found. These are:
1. Cost-based strategies
Pricing a brand based on achieving a given margin over and above costs of manufacturing, marketing and distribution. Often associated with sales- or production-led organisations; tends to encourage a mechanistic approach to cost control and pricing. Examples:
Cost-Plus: Price = full cost + mark-up (as a % of full cost)
Mark-Up: Price = direct cost + mark-up (as a % of direct cost). This technique is preferred to
Cost-Plus for products with a relevant percentage of direct costs on total costs.
Break-Even Analysis: Price = variable costs + fixed costs/quantity. This formula does not depend on any cost controlling technique (Full Cost or Direct Cost); it provides a useful decisional support for different marketing strategies, taking into account return on investments.
2. Competition-based strategies
Pricing based on the competitive strategy and on “attack/defence moves” of competitors against a given brand. Often associatedwith “competitive intelligence-led”
organizations; characterised by an “against-someone” positioning.
Pure Parity: Price = Price of a chosen competitor. Typical strategy of “price takers” who
set price equal to one of the “price makers” and align constantly to it. This can also be
a strategy for specific channels, e.g.: vending impulse.
Dynamic Parity: Given a chosen competitor, the gap with its price is kept constant in time, in order not to change competitive positioning in the consumer perception. This is most common amongst category leaders and the #2 brand, and is usually expressed as an index, i.e.: #2 brand will aim for 90% of the category leader’s price.
Discount Pricing: Price is always below the average of competitors, allowing a precise positioning of low perceived price and low perceived benefits.
Premium Pricing: Price is always above the average of competitors, allowing a precise positioning of high perceived price and high perceived benefits.
3. Value-based strategies
Pricing based on value of a brand as perceived by the consumer. Value perceived by consumer may have little to do with the cost of manufacturing, marketing or distribution. Often associated with marketing-led organisations, tends to focus organisations on maximising
the value creation process. Some common techniques are:
Elasticity Analysis: The price decision results from the calculation of the sensitivity of volumes to price changes. By simulating different price scenarios it is possible to set the optimal price to the one maximizing expected revenues and profits.
Buy-Response Analysis: The price decision results from market research estimating the
consumer’s intention to buy at different price levels. The outcome is a quantification of perceived value.
Conjoint Analysis: The consumer quantifies the economic value of the perceived utility for each product attribute, making it possible to determine the ideal pricing of each product configuration.
Segmentation pricing, niche pricing, EDLP or Hi-Lo pricing, and other approaches are ultimately variations of these three fundamental strategies
This toolkit of price tactics is the marketers’ / retailers’ arsenal for strategizing in the pricing game. Managing price strategy consists of viewing pricing through a variety of perspectives.
By looking at the varied elements of marketing, profit, value, pricing objectives and how these interact with the impact on profitability and the competitive dynamics of the market, arriving at a definitive pricing strategy can be a rewarding activity. This includes looking at key elements of the marketing mix. These are:
Those that exert a downward pressure on prices:
• Macro-economic pressure
• Sensitivity to price and gaps to key competitors
• Whether the product is a luxury, necessity or substitute
• Pricing, promotions, media, innovation of the competition in the market
• New entrants
• Role of category and brand
• Competition between retailers
• Private Label strategy
• Balance of power; trade margin negotiations
Those that exert an upward pressure on prices:
Your own business objectives
• Profit, turnover, volume, share
• Investment in innovation, media, promotions, packaging
Cost of goods
• Increasing supplier and distribution costs
• Volume-dependent costs