This continues a series of posts around the importance of pricing to the bottom line. Unfortunately, many firms approach pricing in a reactionary and ill informed manner. Inevitably, pricing is far more complex than many organizations realize or resource for. Pricing should be an ongoing process that is recognized for its profit potential, both short and long-term.
Since many organizations need help with pricing, I decided to write about different types of product pricing strategies, moving along a continuum from the simple to the more complex. Our last blog covered Customer Based Pricing. This, and the next post will provide examples of different Customer Based Pricing strategies.
With Customer Based Pricing, the seller makes decisions based on the estimated value of the product or service from the customer’s perspective. Companies must therefore fully understand the customer, their motivations, and what they value. I’ve included the following as executions of Customer Based Pricing for that reason … I primarily see them as having a buying decision predicated on some form of customer driven value.
Differential Pricing Strategy
Differential pricing strives to identify customers with different valuations for your product or service. It is a strategy whereby certain customers pay less for the same product than other customers. Perhaps you have segmented your customer base demographically, and determined your product or service can sustain a particular price based on certain income and age ranges. However, your research has also indicated there are fringe customers that have interest in your product, but need to be incentivized. An example of differential pricing in this instance might be a discount offered to seniors and/ or students. Your knowledge of the customer has guided you to maximize volume and price, and in this instance, the pricing is transparent to everyone.
Incidentally, while these two groups may share a similar need to be incentivized, it may not be at the same discount level. Moreover, you may want to execute this price discount differently between each of these two groups, taking into consideration things like media habits (newspaper versus smartphone web browsing), differences in when or how the product is used and other factors that might better align your offer with the target groups consumption.
Volume Based Pricing Strategy
I would classify Volume Based Pricing as a customer based pricing activity as well. Here we establish the base price the customer is willing to pay, and then build a price/ volume scale whereby the price decreases as the buyer commits to incremental volume. If this discount scale is used on a short-term basis, it adds time and consumption (or resale) to the pricing equation. It will indicate how the buyer views the value of your product when additional costs such as inventory carrying charges or additional warehousing fees are added to his cost of procurement. From the seller’s perspective, using this sort of discount on a short-term basis may address certain operational issues such as excessive inventory or plant downtime. Volume based pricing is also an effective tool to use when negotiating annual contracts, as it may provide an incentive for the buyer to eliminate or limit the competitor’s product.
Pricing is made more complex by the numerous strategies available. Differential Pricing and Volume Based Pricing are just two of several Customer Based Pricing options that are available to you , and we’ll cover more of them in my next post.
As you review each type of product pricing strategy, think about your situation … how is pricing viewed within your industry by your customers and by your competitors? What are your pricing objectives? In addition to profitability, are there objectives around positioning, purchase cycle, brand penetration, etc? What pricing option or combinations might best deliver against your objectives?
As always, your comments are welcome. If you are interested in discussing how pricing can impact your organization, please contact Boardroom Metrics, 1.905.709.4031