The Price Conundrum – should pricing be a variable to drive your marketing strategy?

Arguably, no component of the marketing mix (generally believed to be the 4 P’s) generates as much discussion, analysis, and at times even angst, as Price.

It is a function of perceived value for sure – but everyone’s perception, including different purchaser groups, seems to be different!

Generally, as a marketer, I would prefer not to tinker with the price once it has been set. However, in many cases, it is not that simple.

For new launch planning – price is an unknown variable, the more innovative the new offering the more difficult the pricing strategy for the product. However, the fact remains that it is a crucial part of how to successfully launch a new product in the market.

For mature products, (typically the BCG grid cash cow), companies try to keep high-profit margins, – which though helped by rational promotional spending – still depends largely on a high price. What if then, there is a new entrant with similar features but reduced price? Do you drop your price? Or take a hit on volumes?

I have 3 learnings on pricing which can help take this discussion further.

1. Price can be a differentiator: the important factor is where it fits into the overall strategy. Also, it is not the only parameter that drives marketing, some examples:

a. Higher Price can help occupy a unique position

(i) Luxury Fashion brands – Rolex, Gucci have successfully used a higher price along with sensorial and other brand associations to occupy a distinct competitive position.

(ii) Apple is an example of a technology brand using premium pricing as one of the important tools for driving its strategy.

b. Lower Price can drive customer acquisition & loyalty in a specific customer segment

(i) Airlines: Ryan Air, Southwest Airlines – are examples of low-cost airlines on both sides of the Atlantic – but both had clear unique activities and a distinct value proposition for travelers to support a lower price.

(ii) Pharmaceuticals: Generic brands follow a clear low-cost strategy post patent in developed markets, similarly, branded generics pharmaceuticals in India, South East Asia, Africa have a clear median position between the innovator (or once innovator) and pure plain vanilla generics, based on price & quality.

In each of the examples above, price is a critical but not the only component of strategy. It is backed with a synergistic fit of activities reinforcing the overall ethos of the brand/company. However, when used to drive strategy in this way, price is largely in a clear, constant band of high/low/middle.

2. Pricing Is Complex: Be it setting the price for creating the marketing strategy for a new product launch or deciding to lower prevailing prices for being competitive in a particular context

a. Pricing is not easy to research.

(i) It requires a special research expertise: in my experience pricing researches are trickier than others. The questions asked, the way they are framed, understanding the unsaid – it requires much more finesse and expertise.

(ii) Customers at times do not reveal correct insights regarding price: often this is a parameter which the purchaser or user is not comfortable revealing

(iii) Customers at times do not know the price to be attributed to an offering: for totally new segments pricing is an essential part of the product launch strategy, however, customers often do not have a bench mark to compare, hence the pricing suggested goes to either high or low extremes.

b. Price Action (changing price) has other layers to it:

even when there is an urgent need to reduce the price (say) due to competition’s “price moves”, there are various factors to be considered. For example, prior to a price reduction decision, we realized through our surveys that it would impact a small (though important) percentage of customers.

The others would be largely unaffected because they valued relationships and our product features more than the cost difference to be paid.

3. Alternative Pricing Plans should be in place: pricing is one area where a certain flexibility is warranted (marketing workshops or simple brain storming sessions are needed periodically to be prepared for this)

a. Market Shifts may require price action: Customer preference shifting to newer trends may at some point require lowering of price or special price linked promotions for retention

b. Price cutting by new (or existing) competition: if a significant % of important customers are likely to shift, it helps to have an alternate pricing plan in place

So, while competing on price does not sound like a smart policy, and is fraught with dangers of slipping into destructive price wars, it may require deeper thought depending on the industry or life stage of specific brands.