Newsletter, BEK Enterprises, Product Marketing Consulting Services

Pricing Strategies - Are You Setup for Success?

June 2004 - BEK Best Practices Newsletter

Pricing is risky. What price is too high? What price is too low? Will a certain price work three months from now? Are you sure? You have to get the price right—the first time! Pricing is one of the most important marketing decisions you will make. Your business model revolves around price, so finding the right price is essential.

What type of product or service are you selling?
Before we talk about pricing, you need to be clear on the type of product that you are selling:

A commoditized product has a lot of competition. You compete on price, and profit margins are razor thin. Price is sometimes the only thing that differentiates you from your competitors.
A proprietary product is new, unique, and has valuable benefits that are recognized by the market. The newness or innovation may be the product, the marketing, or both. The originality of the product allows you to charge a higher price than nearby competitors.

Regardless of the type of product you are selling, pricing always needs to accomplish a business objective such as

Acquiring a large number of new customers, so you can develop
life-long buyers
Attracting early adopters and becoming the household name in
your market
Eliminating competition and converting their customers into yours

Remember that not all business objectives include making the most money possible - it's one of many considerations.

Once you know your objective, you need to decide on a pricing strategy. This month we will talk about a few basic strategies that will help you meet your business objectives. You should not consider this list exhaustive but rather a good place to start.

Pricing Strategy: Market Penetration
One pricing model is to penetrate a market, and the goal is to sell as many items as possible. This is especially appropriate when you face intense competition, or when you suspect a new competitor may be entering the marketplace. Pricing to penetrate allows you to acquire market share, usually relatively quickly.

In this model, you need to set your prices low. But how low do you go? You want to a find price that balances the need to maximize profits while selling a large number of units. Some companies may even take a loss in order to penetrate a market. Why? In some cases, the lifetime value of the customer may be significantly greater than the original gain/loss on a sale.

Tip from the Masters: Penetration pricing only works when you keep the customers. It is important to have a strategy in place to turn first-time buyers into valuable life-long customers.

Here are a couple of quick tips for keeping your customers:

Product stickiness. The goal of product stickiness is to make it too expensive for your customer to switch to a competitor. The costlier it is to switch, the “stickier” your product. For example, if you buy a new razor, you have to buy blades from the same company because blades are not interchangeable between brands. Changing razors means throwing out everything and starting over. In technology, successful sticky products include IT infrastructure and applications that cannot be replaced without significant hassle. When you use market penetration pricing, you need to find ways to make your product or service sticky.
Great products and services: when your product and service are terrific, customers will continue to buy from you. Not only will your customers buy more from you, but they also will refer other customers to you!

Pricing Strategy: Top Pricing
The opposite strategy of penetration pricing is top pricing, where you deliberately set prices high in order to obtain large profit margins. Many companies use this strategy when they are launching a new product that is significantly different and better from the competition. You get to market first and set significant barriers to competition including patent protection.

You can set your prices higher because there aren't a lot of competitors, and it will take a long time for others to catch up. In this model, you will generally sacrifice market share in exchange for highly-targeted customers, consisting of early-adopters, thought leaders and visionaries, who may become your champions in the future.

Tip from the Masters: In many cases price is equated with value and quality. When you can show value, uniqueness, and quality with your product price, significant profits will follow.

Tip from the Masters: Top pricing is not always a good long-term pricing strategy. It comes at the cost of gaining enough customers to dominate the marketplace. It's important to be aware of market dynamics, so you can shift your pricing strategy at the appropriate time.

Pricing Strategies: Price to Kill and Price to Lose
Large companies will often price a product at a significant loss, just to drive smaller or more threatening companies out of the market.

What is "Price to Lose"? That's when we don't take a stand one way or another. We all want to make more money. But, in the process, we might skew penetration pricing too high. Alternately, we might keep the top price too low fearing that customers will be scared off. Decide what you want - more market share or increased profit margins -- then pick a strategy, and be sure to measure your results. If you are not happy with the results, or if corporate objectives change, you can change your pricing strategy to match.

Evaluating YOUR Pricing Strategy?
Here are a few questions you can answer in order to apply this information to your business.

What were your business goals when you chose your original pricing model?
What are the pros and cons of your pricing strategy?
Based on the current business climate and your goals should you change your pricing model?
Which model do you see yourself using in the next 3-6 months? Are you confident? If not, why?

Please share your pricing successes and failures with us.

Next month's topic: Are You Negotiating Away Margins by Chip Doyle of Sandler Sales Institute

For more information, contact BEK Enterprises at:

Web: www.bekteam.com
E-mail:

Phone: 720-304-3300

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