Published July 2002

Once you determine
a pricing strategy,
stick with it

Many marketers are in the dark when it comes to pricing. It’s more complex than its “marketing mix” cohorts (product, place and promotion), but not as confusing as most believe. My “focus” theme will hopefully shed some light.

This is the second article in a series of four that demonstrates (using the marketing mix) how “focus” can help deliver a better ROI. To view last month’s column (product focus), go to www.heraldbusinessjournal.com and click on the “Archives” button.

There are nearly as many pricing strategies as product categories. Variables include whether you sell B2B, B2C, products or services, the competitive landscape, life cycle, distribution, economy, consumer circumstance (demand variables) and price sensitivity.

The extent to which consumers are price sensitive toward a particular product is referred to (by marketing nerds like me) as “price elasticity of demand.” In English: A small change in price brings about a big change in sales — elastic; e.g. soda pop. A big price change brings about little change in sales — inelastic; e.g. insulin. No wonder everybody is confused.

Rather than define the deluge of options, I’ll walk through four steps you can take to determine the best strategy for your business situation.

• Define your pricing objective. The most common categories are: 1) increase sales to achieve production economies or brand loyalty; 2) increase profits to improve cash flow or acquisition appeal; and 3) increase competitive advantage to meet or prevent opposition.
• Determine your break-even point. This sets the price floor. In addition to accounting for fixed and variable costs, determine at what point you achieve variable cost economies.
• Understand customer perceptions. This sets the price ceiling. Ask your customers how they rate your “value to price ratio” (low, moderate or high). Then ask them why.
• Research your key competitors. This identifies the going rate. I’m not suggesting you “follow the leader,” but it’s important to study the competitions’ price positioning.

Armed with that intelligence you can develop a defensible pricing strategy. Make sure your price aligns to your other marketing-mix factors.

When you land on a strategy, stick to it — focus is essential. It’s harder for consumers to hit a moving target. Your pricing must reinforce your positioning.

Consumers didn’t expect fancy showrooms from Jack Robert’s. They expected the lowest price because of his “I won’t be undersold” slogan. We don’t expect bargain prices at Nordstrom — we expect great service. The reason these price strategies worked so well is because they were consistent and in-line with their respective positions.

Domino’s Pizza is the coupon king. While discounts can generate short-run spikes in sales, they usually do more harm in the long run. They condition consumers to wait for the next “special.” This is a hard cycle to break; it also eats profit and diminishes perceived value. Moral: Unless you’re selling a commodity, stay focused on a single price strategy.

Next month’s column tackles “place” — the function of distribution — and how “focus” can reduce costs and increase sales.

Andrew Ballard, President of Marketing Solutions Inc. in Edmonds, develops brand leadership strategies for businesses and teaches strategic marketing through Edmonds Community College. He can be reached at 425-672-7218 or by e-mail to andrew@mktg-solutions.net.

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