Pricing Strategies for Challenging Economic Times

Posted by: Today's Tip Contributor on March 15

During challenging economic times, companies often struggle with pricing strategy. While pricing may seem simple, the strategy behind it can be very involved. Here are a few tips to consider in your pricing decisions:

• Pricing is a market consideration, not a cost consideration. While the two are certainly related, pricing needs to be based on what the market will bear for the goods or services at hand—regardless of cost. Then costs need to be reviewed to ensure that target pricing results in profitability.

• Understand your customers’ primary goals. Be clear on what the customer wants first, then set pricing and bundling decisions. For example, a customer may prefer to pay full price for a specialty coffee and get a significant discount on a muffin, instead of getting a small discount on both items.

• Consider bundling products or services together. Always bundle a low- and high-valued product together. This will create higher sales and greater profitability. Avoid bundling two high-value products together.

• Understand your value proposition. Have a clear understanding of if and how your product or service is differentiated from the competition. Be sure that the differentiation is clearly communicated to customers. Without differentiation, you will have no pricing power in the market.

• Build the customers’ perception of value. Constantly build on customer perception. The more subtle the differentiation of the product or service, the more often customers need to be reminded of the value of your product or service.

• Know where you are on the scale of "innovative-to-commoditized." Keep the pricing of your product or service ahead of the curve. If you are priced for an innovative service and your service is becoming commoditized, you will either need to shift pricing, service, or the customer’s perception to maintain revenues.

Gregg Landers
Director of Growth Management
San Diego

Reader Comments

Prof.P.Madhu Sudana Rao,Srikar dammu,Haramaya university,Ethiopia

March 18, 2010 02:32 AM

Now a day many commodities are entering into markets, which sometimes may be in over supply and under supply. While low supply followed constant or high demand may result in high prices, it is difficult to price over supply followed by constant or lower demand. Hence an entrepreneur has to think carefully and price in a most tactful way to earn good profits without spoiling his image. Following are some of the techniques.

• Don't Drop Prices Immediately; To become a high performance business, don't immediately pull the pricing level by dropping prices. Be sure to consider pulling various other levers that deliver value to your customers besides price. For example, evaluate and identify your best customers and serve them in ways that they value. Evaluate and pinpoint the differentiating value you deliver to them and the long-term worth of what you provide them. Focus on delivering a superior customer experience. This benefit has become as critical as a differentiator in the current communications and high-tech industries that delivering it may diminish the customer's desire and justification for pressuring you to lower prices. Remember that with your best customers you can often be more flexible in your pricing strategies. You possess stronger negotiation leverage because of the strength, trust and goodwill inherent in the relationship.
• Identify the Most Price-Sensitive Markets; Analyze and understand the different types of customer segments and geographic markets you serve. Understand where and how you want to make money in the business, and price accordingly. Ascertain which markets you serve require that you reduce prices to compete effectively, and which do not. Examine and understand in a more disciplined way than you ever have the structure and critical processes and applications of the business you are in, and figure out which segments of your target market are more and less sensitive to your pricing changes. Precise customer and market segmentation is paramount to pricing success. Across the board pricing cuts for the products makes no sense; some customer segments are more tolerant of higher prices than others. Focus on software product pricing rules, formulas, structures and processes. Gain more knowledge, understanding and insight about what you sell. Then price accordingly.
• Be Willing to Lose Sales to Maintain Pricing Control; Be willing to lose a bid on a contract because you are not willing to lower your price. In most businesses, is not so crucial that you absolutely must have it. Think about this scenario: you win a sale by lowering price, but by doing so; you hurt your business long-term. If a sale requires that you lower your price so much that it hurts your overall profits and revenues, maybe it's not worth it to you. Don't turn the pricing power over to your customers. These pricing issues should be viewed as great opportunities to re-examine what the structure of your software business is, what structure you want it to have in the future, and how and why you do and do not compete and differentiate.
Conclusion: Don't Destroy the Real and Perceived Value
There is a basic and crucial business axiom involving pricing, branding and value. The axiom is this: if a company drops its price in times of particular economic instability, that company exposes itself to the dire reality that when the market returns to a growth phase, it will be difficult to persuade customers that a price increase is justified. By reducing prices to sub-standard levels, companies cause a devaluation of their product and brand and lose pivotal leverage to reclaim value for its software. During these challenging economic times, cost containment and retention of best customers are paramount to success. Pricing wisely is one pivotal way to achieve these compatible goals and achieve high performance.

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