Is Pricing Your Friend or Foe (Part 2)?
In the last blog entry, we examined the roles of commodity vs. differentiated products, elasticity of demand, and relative market share play in pricing strategy. Now I would like to look at three more areas – your sustainable price premium, the use of product configurations, and participating in relevant price bands.
Your Sustainable Price Premium
Your ability to use pricing to your advantage is tied to what people are ultimately going to pay for your products. If you are highly differentiated, have a premium brand, deliver a great product, customer experience, etc., you should be able to charge a price premium for your products. The opposite is true as well. Technology examples of premium priced products include HP printers, Apple PCs, and Intel chips. Now let’s look the opposite situation. You can’t charge a price premium. In fact, you may even have to discount your products relative to average market prices. Can Kia charge as much a Toyota? Can Budweiser charge as much as Heineken? Can Lexmark charge more than HP? Even in the best situations, charging more than 10-20% higher than your nearest competitors (as a share leader and/or premium brand) is extremely difficult. There are notable exceptions. If you are a market niche player or luxury product with extreme product differentiation, and control distribution you may be able to sustain more substantial price premiums. Examples include Bose, Louie Vuitton, and exotic cars like Maserati and Ferrari.
The Use of Product Configurations
As a supplier of a product or service, your goal is to get the highest price per unit the customer is willing to pay. In technology marketing, products with attractive low base prices and options (multiple configurations) that contain additional features and accessories bundled together are typically used. The option prices are set up so that the sum of the parts of the bundle are less expensive to buy than buying them individually or are otherwise unobtainable features (if you don’t buy it in a bundle you can’t upgrade your product later for that feature).
See these two examples:
HP’s M4345 Multi-Function Product Pricing
It is an art to decide what features should be included in the base product vs. the options. Customer-centered marketing insights will lead you to the right answer. But the net goal is to have attractive, entry-level price points on the base products then build such an attractive portfolio of options that people, based on their needs, will more than likely purchase a more expensive option. In addition to this product/pricing approach, there need to be compelling up-sell and sell across marketing communication, tools, and promotions to wring out these higher average selling prices.
Participating in Relevant Price Bands
Based on the above, you should be able to triangulate on your pricing, relative to industry averages and nearest competitors. It is helpful to calculate average selling prices or revenue per unit and compare your performance to that of the competition. Many third party companies track this data (like IDC or GfK for printers and PCs). Equally important is the concept of price bands.
As a company, you ideally want to sell products at all relevant market price bands (or customer- appreciated price points) – whether they are higher or lower. Why? As mentioned earlier, participating in more price bands opens up broader market access. Over time as a product category matures, lower price bands grow faster than higher price bands and there is a mix shift to lower price bands. This follows the trend of classic technology productlife cycles. This becomes important when you are managing your market share. For example, let’s say 50% of your market is priced over $300 per unit and 50% if your market is below $300 per unit. You don’t currently play in the less than $300 market because it is less profitable, cheapens your brand, etc. Let’s say you have 50% market share in that >$300 market. That would give you 25% market share in the total market (50% x 50%). Let’s assume you are gaining one share point of market share every year in the >$300 market and the <$300 market is growing 2X faster than the >$300 market. In this scenario, even if you gain market share in your traditional segments of the market, you are losing market share in the overall market. That may or may not be OK, depending on your business strategy. If you are the market share leader for the price bands you participate in as well as the overall market, chances are you will want to hold on to your share and keep prices as high as possible. But as new price (probably lower) price bands emerge, you will need to decide how to respond to them. There are ways to respond (but that will be another blog entry).
Equally important to this conversation is to develop the appropriate tracking mechanisms to measure and respond to your industry’s unique pricing dynamics. Appropriate measures can include revenue share, unit share, price premiums vs. average selling prices, market leadership indicators, brand metrics, and coverage of market price points and bands. Looking at these factors and carefully considering your pricing approach will yield better decisions and help you make marketing a more strategic, value-added function.
Often times, companies will make broad statements – that they would like to grow revenues, profits, and market share – all at the same time. Unless you are starting from nothing, this is almost impossible. At best, only two out of the three variables in play can be optimized. You need to make sure you wisely chose the best ones for your business.
So is pricing your friend or foe? It is you friend if it helps you grow revenues, has neutral or positive effect on market share, and helps you manage your overall profitability to goals. It is your foe if pricing decisions drag down your revenues, gross margins, profits, and market prices. While there are no easy answers to pricing decisions, a framework like this will greatly increase your odds that you are making excellent pricing decisions.
