Traditionally, pricing exercises are done with a revenue or sales margin target in mind. Marketers fail to realize that value based price setting can also serve as a useful way to segment the market and fence competition off. I’ll try to address both these very briefly in this post.
As a pricing strategist you need to create a pricing structure that lets you target every segment of the market you choose to compete in. Your price determines the target market you are after. This is closely tied to the product/brand, which should give you the option of having variants that can be placed in these different market segments. Look at Toyota for example. Toyota has strategically expanded its brand portfolio, which today consists of three brands: Toyota, Lexus, and Scion, each with its own distinct purpose, target audience and a price tag.
Is price getting the way of sales a bad thing? Not as bad as most people think it is. Going back to the Toyota example – the Lexus is not for the price sensitive buyers. It’s a luxury car and is priced as a premium offering. And then you have a car like the Corolla. This is a car that attracts buyers who seek value for their money, the price sensitive buyers. The pricing for each of these cars should be designed in such a way that price does get in the way of the price buyers looking at valuable products. Use this structure as a barrier to keep these potentially unprofitable customers off your profit cows. You wouldn’t want your Lexus salesman using discounting as a tool to get a price buyer to pay for a $40,000 Lexus. You have the Camry starting at $20,000 for these buyers.
The truth is that you actually want a pricing strategy that gets in the way of some sales. The price of the Lexus gets in the way of a sale more than the price of a Camry, and that’s OK. This is one way of telling which deal your salesman should chase.
This is also a simple way to ward off unwanted competition from lower priced competitors whose products aren’t really in the same league as yours are. The Honda City would never compete against a Lexus. The Lexus clearly competes in the luxury segment, at a luxury price point.
The pricing strategy guides the sales force about the types of customers they should going after. The prices must be tailored to communicate the value of the product. Although this example looks very simplified, I think it still drives home an important point. Strategic pricing is a tool that can be used to go after the right consumer, reduce sales cycles, keep customers happy; and is not a hurdle to close profitable deals.
For more such articles on strategic pricing, check out the Leverage Point blog: http://blog.leveragepoint.com/leveragepoint_perspective/2010/09/how-does-pricing-support-the-sales-function.html
Ashwin Somakumar 