Relationship Between Effective Pricing and Effective Marketing

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The competitive question to pricing is not:

- What level of price will enable us to achieve our sales and market share objectives?

The competitive question relevant to pricing is:

- What level of market share can we most profitably achieve and how can we most profitably achieve it?

Planning for effective pricing

Effective pricing is profit-driven pricing. Profit-driven pricing integrates considerations of costs, customers, and competition to arrive at an optimal strategy that seeks to maximize long-term profitability. The process for developing an effective pricing strategy starts with an understanding of costs, customer price sensitivity and competition. A thorough knowledge of these concepts leads to the development of appropriate strategic objectives for all marketing decisions, including price. From the objectives, the firm sets more concrete and time specific strategic goals. Finally, tactics are the specific actions a firm takes to achieve its goals.

Don’t Get Constrained by Tactical Thinking

ASK STRATEGIC QUESTIONS!

Do Not Ask:

What price do we need to cover our costs and achieve our profit objectives?

Ask:

Given our cost structure, what volume changes would be necessary to make price changes profitable?

What costs can we afford to incur and still earn a profit?

Do Not Ask:

What prices are the customers willing to pay?

Ask:

What prices can we convince customers are justified by the value of our products (or service) to them?

How can we segment our customers to reflect differences in value, enabling us to gain or defend market share without undermining profits?

Do Not Ask:

What level of price will enable us to achieve our market share objectives?

Ask:

What level of market share can we most profitably achieve, and how can we most profitably achieve it?

Outline of the book:

Chapters 1-8 – Devoted to the building blocs of strategic pricing.

Chapter 9 – Explains how to analyze cost structures in order to understand the true profitability of a product or service.

Chapter 10 – Focuses on the types of financial analysis needed to make profit-driven pricing decisions.

Chapter 11 – Explains the process of price competition and how to manage it.

Chapters 12-13 – Deal with issues involved in implementing pricing decisions and address such issues as pricing through channels, pricing over the product life cycle, conducting pricing research and legal issues in pricing.

Week 1: Instructor Notes

Effective marketing is never limited to pricing alone. If long-term profitability is the goal, then the pricing decision provides the unifying focus and rationale for the entire firm’s other marketing decisions. Pricing strategy is about managing customer behavior rather than simply adapting to it. A company can experience price resistance from customers for many reasons. Price alone is seldom the only cause of a problem, but a symptom signaling a problem with other elements of the pricing strategy.

The Strategic Pricing Pyramid

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A comprehensive pricing strategy is comprised of multiple layers creating the foundation for price setting that maximizes profit over time. These layers combine to form the strategic pricing pyramid. Value creation forms the foundation of the pyramid. A clear understanding the products and services value creation for the customers is key to development of a price structure. Once the price structure is established then marketing can develop messaging and tools to communicate the value to the customers. The final step is to ensure the pricing processes are able to maintain the integrity in the face of aggressive customers and competitors.

Value Creation

Understanding how a product delivers value to customers creates a foundation for more profitable prices. Understanding how customer value varies across segments, companies can develop strategies to align price and value and thereby improve profits. The ultimate objective is to design your product or service for value in the first place. The pricing challenge is to understand what creates meaningful value for different customers in order to set prices that reflect the actual value received.

Price Structure

Once you understand how value is created for different customer segments, the next dilemma is to create a price structure aligned with the value received instead of the products delivered. There are two techniques to creating a price structure: price metrics and fences. Companies often augment their “per unit” pricing metric with a “delivery time” metric that forces customers that value quick delivery to pay for it. Fences are another way to create a price structure to align price with value and cost-to-serve. The airline industry uses fences such as pricing for 14 day advance for their pricing structure. By using policy fences, the airlines have created price structure that captures the value of travel flexibility from only those customers for whom it is important. Pricing strategy involves Price Structure and Pricing Process. Price Structure deals with segmentation fences that reflect the definition of different customer segments, each with different value drivers and different prices they are willing to pay. It also deals with the value metrics that frame prices in ways that properly reflect the value that customers are paying to receive.

Price and value communication

A complete pricing strategy requires justifying your prices based on the value created for different customers.