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The Black Art of Pricing

 

Disciplines > MarketingPricing > The Black Art of Pricing

Pricing to a purpose | Thinking like a customer | Thinking like a competitor | Knowing when to price high | Knowing when to cut prices | See also

 

Pricing is a tricky subject that can seem logical yet can be difficult to get right. Too high, and your sales may plummet. Too low and you may miss valuable profit. Prices also send messages, changing how you and your brand are perceived.

Pricing to a purpose

One of the first questions when setting price is not so much how many products you are going to sell, but what you want to achieve. Do you want to achieve market penetration, pushing into a market and displacing other providers? Do you want to just make a quick profit, skimming the market for maximum margin while you can? What signals do you want to send to customers or competitors? When you know what you want want, then you can set your prices to help with this.

Common purposes when pricing include one or more of:

  • Selling as many products as possible
  • Making as much profit per product as possible
  • Increasing your market share at the expense of competitors
  • Driving competitors out of the marketplace
  • Increasing the overall size of the market, encouraging new customers
  • Establishing or confirming a luxury brand
  • Getting rid of old stock, for example when you have a new product launch coming up soon

Thinking like a customer

When pricing, as with any marketing, it help a lot to understand something of how your customers think. Do you know how they buy? Is it habitual, impulsive or slow and thoughtful? Do they involve others in the purchase decision? Do they buy individual products or in bulk?

Other questions to understand include:

  • How sensitive to price are they? How would they buy if you reduced or increased the price by a little? A lot?
  • At what price would they think your product a bargain? Where would they think it a rip-off?
  • Do they recognize your brand? What do they think about it? How loyal are they?
  • Do they see your brand as high, medium or low quality? How does the price affect this view?
  • How do they view your competitors? What would lead them to buy competing products?

To get this level of information and particularly if you are not familiar with your customers, you can do pricing surveys, though beware that when customers say they will buy at a given price, this does not mean they really will buy, perhaps more that they would consider buying. The best way to understand customers is to look at real purchase data. If you can, do pricing experiments in contained markets. You can also do post-purchase (and post-non-purchase) interviews.

Thinking like a competitor

Remember always that your competitors will probably be watching your products and pricing (just as you should be watching theirs). If you price lower than their equivalent products, will they respond by cutting theirs too? Will they ignore your moves or will they react with a tiger response, attacking you on multiple fronts, from price to advertising to legal? When you are using competitive pricing, you need to understand not only how customers will respond, but also how competitors will react.

Critical questions about competitors include:

  • What products of theirs compete with your products?
  • How flexible are they on price? How far can they cut prices and still make a profit?
  • What is their standard discount structure? What does it take for them to cut prices?
  • How easily will they enter a price war? How fierce are they in competing?

Competitors may fear you, even if you fear them. They may also hardly think about you. We often imagine that competitor companies are hotbeds of innovation with infinite marketing budgets, all designed to ruin our day. Yet the truth may well be more mundane than we expect. Big companies mostly ignore small companies unless they are causing a particular problem. Small companies often think there is no way they can compete, especially on price, with larger companies. Yet it is in such misunderstanding that opportunities exist to outwit and out-price even bigger competitors.

Knowing when to price high

Setting the price is not all making it as cheap as possible. Certainly, most customers want the price to be as low as possible. Yet there are times when you can successfully set prices higher. In fact setting the price high can be a very successful strategy, particularly in two situations.

A high price sends a signal that your product is of a high quality. It says your products are exclusive, intended for people of taste who are powerful and rich enough to afford your price. In fact your products are so desirable the price is unimportant.

A high price may also be used when you have a captive market, who have little option but to buy from you. This is typical in a supplies and spares market, when they have bought the base product from you and now need to buy such as consumables, spare parts and maintenance from you. It is also typical in a monopoly, where you are the only supplier, or an oligopoly, where a group of suppliers all offer prices that are very similar.

Knowing when to cut prices

It is one thing to set a price, but what if sales are not reaching target? Do you cut prices to get the volume up? Do you allow individual sales people to offer discounts?

Knowing when to cut prices is often a balance between having the courage to keep the price high and pricing to sell. Cutting the price can seem like an easy solution, yet when you do this, you send a message about the product and about future price cuts. Cutting the price significantly may say you have over-priced and have been rather greedy in adding too much profit margin. It may say the product is not as high quality as the original price indicated. Frequent price cuts may also lead customers to wait for the sales rather than buying when they might normally buy. There is nothing quite as annoying as buying a product and then find the price has later been reduced.

See also

Premium Pricing, Price Skimming, The Price-Quality Graph and the Fair-Value Line

 

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