| |
PRODUCT
PRICING STRATEGIES
Developing a pricing strategy perplexes many CEOs, marketing
and sales executives, and brand managers. It's not surprising really:
real businesses don't always follow the pricing strategy models
that business schools and books on pricing strategy present. But
there are a few basic guidelines that can help take some of the
mystery out of the process of establishing a successful pricing
strategy.
We consider
that there are four basic components to a successful pricing strategy:
- Costs. Focus
on your current and future, not historical, costs to determine
the cost basis for your pricing strategy .
- Price Sensitivity.
The price sensitivities of buyers shift based on a number of factors
and your pricing strategy must shift with them.
- Competition.
Pay attention to them, but don't copy them . . . when it comes
to pricing strategy they may have no idea what they're doing.
- Product Lifecycle.
How you price, and what value you provide for that price, will
change as you move through the product lifecycle.
Pricing
Before You Build
Establishing a pricing strategy is an activity that should be completed
before you start product development. The only way to accurately
determine how much money you can afford to spend on development,
support, promotion and the other costs associated with a product
is to analyze how much of that product you will sell, and at what
price. That's the heart of a successful pricing strategy.
Use
the Right Costs
A successful pricing strategy is your means of making a profit today,
not of recovering costs spent a year ago. Don't use the cost of
developing your current product as the basis for its price. Instead,
use the current costs of developing your new products as the basis
of the price of your current product.
Raise
Price to Exploit a Reticence to Switch
Once the customer is yours, the situation switches in your favor.
One of the resistance factors your salesforce encounters on a new
sale is reticence to switch. An existing customer is still unwilling
to learn something new, only now they're afraid to switch FROM you,
not TO you. They would much prefer to add the functionality of your
product enhancements instead of learning how to use something new.
For you, price sensitivity is much lower as comfort and ease factors
increase. So you might raise your update pricing accordingly.
Study
the Competition
Study the competition, but don't react and don't copy them, since
they're likely making mistakes anyway. Let them guide you in terms
of where you set your boundaries, and in terms of counter offensives
you can launch to deal with obvious bonehead pricing on their part.
And remember this as well: any move you make can be countered by
them just as easily. Don't get caught in a no-win price war--which
may hurt your product, their product and devalue your marketplace.
Align
with the Product Life Cycle
How high or low you set your price is also going to be driven by
where your product is in its life cycle. In general, the farther
along you go toward the Decline phase the lower your price should
be, since your market will be (a) saturated with product and (b)
have increased price sensitivity as their knowledge of the products
increases. One technique to consider is unbundling support, training
and services from the product itself, which will allow you to lower
price without discounting.
Strategic pricing
is the effective, proactive use of product pricing to drive sales
and profits, and to help establish the parameters for product development.
Used wisely it is a clearly powerful tool for successful marketing
strategies.
That's what we think. Click
here to tell us what you think.
Want to receive these articles by email on the second and fourth
Tuesday of every month? Give us your information here:
|
