Strategic pricing sets a product's price based on the product's value in the eyes of your customers (or potential customers) rather than on the more usual cost of production plus a markup.
Pricing is actually pretty simple... customers will not pay literally a penny more than the true value of the product.
- Ron Johnson
Most people make their purchasing decisions based more on perception than logic and what seems most valuable to you (or what you find is the most expensive to produce) may not be the same thing that is most valuable to your customers.
They are really not concerned with your production costs or overheads, just what the product will do for them. According to a study by Harvard Business Review, the perceived cost has a bigger impact on consumption than actual cost.
Strategic Pricing With a Competitive Edge
Competing on prices doesn't necessarily mean going head to head on price, it just means having the edge on recognising what your customers' value and charging accordingly – in fact pricing your products strategically is often key to avoiding price wars.
Being aware of how your competitors' price is still important but you have to recognise that they do not always get their pricing right so to simply follow them may be a mistake.
What you need to do is discover through dialogue just what it is that your customers value the most; if they truly value your product you will be able to charge more than your competitors, which is good news for you – remember, for every 1% of price increase customers are willing to pay, you will receive 7-8% higher profits.
However, if people think your price is too high, there’s a chance they aren’t that interested in the quality to begin with.
There are still reasons to set prices below competitors however, even if you can't quite compete with the likes of Amazon and Walmart. Small businesses should take advantage of this pricing strategy in certain situations depending on market conditions, such as how crowded the market is and its level of quality.
If lower prices are rare in your market, that's an opportunity for you to step in with lower prices. It might be that you can offer next day delivery, unlike your competitors, which defines the value you provide.
Whatever prices you set, they should be based on your financial circumstances, combined with current market conditions. You should never risk going broke in an attempt to undercut competitors.
Two Examples of Strategic Pricing
Behavioural economist Dan Ariely recently gave a TED Talk presentation on strategic pricing, in which he compared the following choices in an ad in The Economist:
- An online subscription for $59
- A print subscription for $125
- Both for $125
Getting both the online and print subscriptions is clearly the best deal. Ariely used the ad for an experiment with his class and indeed found that most people wanted both for $125. After eliminating the unpopular middle option he found that the least popular option became the most popular.
What does this tell us? Well, the middle option was unpalatable as a choice but helped people decide what they most wanted, i.e. it made the last option look like the best deal. This is an example of how your potential customers might not always be logical but are influenced when options are presented to them in certain ways.
Another example is Apple, and how Steve Jobs developed it as a unique luxury brand compared to more office-oriented computer makers. The Apple brand has become synonymous with style and efficiency and well able to justify premium prices for its computers and software.
How to Implement Strategic Pricing
Consumers gravitate towards the products they identify with either because they are familiar with them or connect with the branding. Here are some tips on how to implement strategic pricing:
- Create a unique value statement that summarises the value you offer, crafted with your target audience in mind. It should explain why you are different from your competitors.
- Focus marketing efforts on target customers and don't waste time or resources on attracting random unqualified leads. Do you appeal to luxury consumers or is your product’s value more related to the utility it provides?
- Deliver what you promise. Any claim you make in advertising or branding must be backed up with evidence, or it can hurt your reputation. You must be able to live up to whatever value you claim that you can deliver in order to make you a better choice than competitors.
Will you implement strategic pricing?
It's all about realising the most appropriate prices for your products or services. Sometimes strategic pricing ends up being a reaction to what competitors do in the market, but you can keep your pricing under control the more you gain edges in performance over competitors.
Get the Price Right by Sahaj Kothari 2015
Pricing with Confidence: 10 ways to stop leaving money on the table by Reed K Holden and Mark Burton, 2014
Pricing for Profit: how to develop a powerful pricing strategy for your business by Peter Hill, 2013
What is Strategic Pricing? John Hogan and Thomas Nagle, 2005