Effective pricing strategy is comprehensive, holistic, and contextual
Developing a successful pricing strategy is complex and needs to be approached holistically. All elements of the pricing and marketing mix need to work together. Our process is rigorous and driven by a deep understanding of all pricing levers:
In a typical consulting assignment, we cover each element of the above 8-step strategy development process. Below is a short exposition of each:
1. Market, Competitive & Strategic Context
We start with immersing ourselves into your business, and gaining a clear understanding of your markets, competitor landscape, customers, and positioning and corporate strategy. The goal is not only to understand the market and your business, but also to identify value-capture opportunities that can be monetized via contextual pricing strategies.
Contextual pricing strategies reflect that buyers are influenced more by comparison points and contextual messages than by actual price levels – as Arthur Miller famously said in his 1968 play The Price, “Without a story I cannot give you a price. The price of used furniture is a point of view.”
Contextual pricing is our guiding principle, or lens, through which we view and develop all price strategies. For a more in-depth discussion on this topic, see our book: Contextual Pricing (McGraw-Hill 2012).
2. Segmentation & Price/Value Drivers
Price Segmentation divides the market or your customer base into segments that have different price sensitivities. To identify these segments we ask the following questions:
We call the latter Price/Value Drivers. There can be many potential Price/Value drivers, but we usually find that 2-3 key drivers make a difference in actual purchase behavior.
Developing a robust price segmentation requires in-depth qualitative work (interviews, focus groups, etc.) and rigorous analysis of purchasing and/or usage data. Some of the qualitative factors we analyze are:
3. Price Structure
Price Structure is how to charge for a product or service (as opposed to how much, which is Price Level). This is the most important and far-reaching pricing decision that needs to be made, as it needs to be segment–specific and cannot easily be changed without upsetting the market. Price structure addresses the following questions:
In addition to these fundamental price structure decisions, there are various tactical structure options such as Conditions, Hooks, Add-ins, etc.
4. Price Level
Price Level is how much to charge for a product or service, and is an outcome of the steps outlined above. Good price level setting distinguishes between segments and is based on the effective use of a “price engine” (discussed later under Services/Tools). Some of the questions to ask are:
5. Discounting & Promotions
The purpose of promotions, discounting, rebates, etc. is to adjust for temporary differences in price sensitivities and to drive specific short-term behaviors, not to replace segment-differentiated price structures and levels. This is a mistake we have observed many times, and it’s reflected in what many sales managers have told us: “Our price list is meaningless. We discount as much as we need to not lose a customer.” If this sounds familiar, it’s time for an overhaul of your pricing strategy, not more discounts!
6. Post-Purchase Economics
Post-Purchase Economics refers to pricing-related programs after the sale has been made, such as satisfaction guarantees, customer loyalty programs, etc. It also includes the pricing impact of a client’s ability to “charge back” the cost of a purchase to a third party after the purchase, such as law firms charging back legal research cost. We have found that this makes a significant difference in price sensitivity and purchasing behavior.
7. Life-cycle Strategies & Tactics
Here we develop specific strategies and tactics that leverage the understanding of how customers evolve over time when buying a new product or service, or migrate to a new product or service delivery method, e.g., online platform. There are three areas we We divide these strategies into the following three segments:
The framework for these strategies is that customers usually go through three phases of adoption (see below illustration):
8. Tools & Implementation
In this phase, we create tools for use by management and/or the sales team. These software tools include:
For a more in-depth description of these tools, go to: Resources: Pricing Tools.
We also often assist management with implementation and improving Pricing Capabilities, which refers to the organizational structure, processes, and management actions required to manage pricing on a day-to-day basis, as well as how to communicate and enforce the price with customers (and the sales force). Some of the threshold questions to ask are:
Pricing capabilities are important – without action, any strategy is just theory!