The importance of pricing

Choosing an approach

Pricing is the single lever available to marketers that yields the best short-term results. In spite of this, it is often overlooked. The price itself is considered to be something imposed by forces that cannot be controlled, with limited leeway and minimal impact. But as much as external factors – like competitors’ prices and cost of goods sold – have to be considered, every company has the possibility to influence the final price, and doing so is in all their interests.

Six out of seven companies see price as production costs + desired mark-up, often mediated by average market prices, while leaders in all industries look primarily at the value to consumers. They apply value-based pricing when managing prices – and this may translate into having higher-than-average prices.

Effect of just a small price increase

Academics and empirical data prove that increasing prices by even a small percentage can impact  operating profit by a much larger amount: usually up to tenfold. A better result than what can be achieved by most other often-used strategies, like cutting costs.

Value-based pricing

There are many techniques to increase/adjust prices. One is looking at current customers through the lens of value – hence the name ‘value-based pricing’. This could involve optimising the discount structure, segmenting customers based on psychographic features other than volume, or using psychological techniques. Considering the value to consumer is also necessary when launching innovative products, where the tendency is to undercut competition, hoping to quickly gain market share. New launches too often result in money being left on the table without capitalising on the R&D expenses incurred, leaving the innovative player worse off than before. Something that would not happen if value to consumer was properly taken into account.

Analysis is key

Theoretical bases and techniques must be complemented with pricing analyses. These guide decision-makers with priority setting. A common method is to cluster products according to their contribution to sales or total margins in the so-called ABC analysis. A-products contribute to 80% of sales or margins, B-products contribute 15% and C-products 5%. The resulting insights are used for strategies such as ‘long-tail pricing’, that is increasing the price of C-products with very low margins. Another strategy is ‘key account pricing management’, where the company implements upselling initiatives on A-products for the biggest accounts.

Pricing is the strategic element which has the fastest impact on the bottom line. It can be the central tool to drive sales, market perceptions and profits for any company, no matter how competitive the industry.