Kazira

Here is a quick quiz - do you remember your 4 marketing Ps? I bet you do. Did you know that of those four Ps, pricing is the primary revenue generating element, with the rest largely anchored as cost centers? Even though pricing brings money in, the typical marketing department spends the least amount of effort on this very important activity. There is too much fun to be had designing the product, promoting it, and placing it; who would want to get into the boring world of pricing. Let’s just look at our competitor’s prices and use that as a basis for setting a price.

I hate to be the bearer of bad news but that approach will not get you too far in your endeavors. Pricing is often done in haste, utilizing what I call incomplete information. A thorough approach to pricing requires you to leverage micro economics, managerial accounting, supply chain analysis, and human psychology, along with the typical marketing knowledge areas. Only pricing strategy and decisions based on this set of complete information can be called sound. Anything short of this rigor and discipline will result in one of the two scenarios –

1. A product that is priced too high, which further results in -
   • Products never fully developing their target market segment
   • Company leaving opportunity for competition to read the pricing signal, loud and clear, and move into sharing the economic rents you had planned on generating
2. A product that is priced too low, which further results in -
   • Company giving away millions of $s by not effectively tapping into all of the consumer surplus
   • Company depriving itself of precious profits needed to finance its future growth and product lines

What throws the biggest of all wrenches in this process is that the impact of the pricing strategy and decision, good or bad, is not fully understood until it is too late. In case of a bad pricing decision, the outcome is often detrimental to the future of the business/company as valuable time, effort, money, and opportunity would have been lost.

Here is a great analogy (at least in my mind) that I was able to come up with. Pricing is like cooking – the quality of your cooking, and hence its value, improves as you spend more time in the kitchen. You may start off by following the recipe book but eventually you know the right mix of ingredients that must go into the dish in order to make it delicious. You deviate from the recipe and create your own version, with a bit of red wine, a dash of lemon, some garam masala, etc. You become more of an artist, than a machine that just follows steps and orders. That is the precise reason why experts say that pricing is an art, not a science.

Here is another important point that you should get out of your head – that there is some sort of tight-knit relationship between pricing and cost. Just forget it. Now if you are in the commodity business, yes, I agree. In such a case, you are a “price taker”, not a “price setter”. You go to the spot market, check the price(s), and that is what the customer will pay for your product. Your product can be sourced from multiple other suppliers/channels and your product has no meaningful differentiation from the competitors. Your price is going to be pretty close to what the marginal cost of producing the next widget (i.e. product) is and that is all what you can get away with.

But, if you are in the business of selling differentiated products, products that provide a relatively measurable and distinguishable advantage over their comparables, products that are fairly targeted and customized to specific market segments, you ought to ignore the product manufacturing costs in the beginning. Try to understand the additional/incremental value your product provides to the consumer. Put yourself in the consumer’s shoes and ask “how much is this product worth to me?” “How does this product improve my productivity, my image, my agility, my comfort, etc. above and beyond my current capabilities/worth?” Once you understand the consumer value of your product, then you are in a position to put a price to it. You should still do the cost-plus computation and also look at other product substitute value and prices, to validate and rationalize your product pricing.

My bottom-line recommendation is that you take a multi-pronged approach, work of a complete set of information, and then converge on a price that the market can bear. Be clear on what your product launch strategy is – are you trying to maximize profit margins, grab the leader position in your market, or striving for something in between? Accordingly, your pricing strategy must change and so should your resulting product price. As always, be sure to take a minute and share your feedback or experience.

Reference: Marketing High Technology by William Davidow.