Pricing Strategies

Adapted from Marc Cosentino’s Case In Point, 8^th edition (p. 42-44):

For pricing questions, the process is relatively simple: understand the company, research the product, and determine a pricing strategy.

The Company

• How big is the company? Is it a market leader?
• What other products does it produce?
• Who are its customers?
• What is their objective: profits, market share, brand positioning?
• Is the company free to price its product as it wishes or is it reacting to the market and its competitors?

The Product

• What are the advantages and disadvantages of the product?
• Is it patented? If so, for how long? Can it be easily reproduced?
• How does this product compare to competitors’ offerings?
• Where is the product in its growth cycle?
• How sensitive is the product to changes in technology?
• How price-elastic are its customers? Is there a supply and demand issue?

Choose a pricing strategy: 

Competitive Analysis

• Are there similar products on the market?
• Are there readily available substitutions or alternatives?
• How are other products in the market priced?
• How will the competition respond? (See Coca-Cola)

Price in relation to these various benchmarks while taking into account costs and margins.

Cost-based Pricing

Simply take all costs (future costs as well) into account and add a margin. As simple as this is, it’s also incredibly dangerous. If a competitor engages in a price war, the profit margin may not survive successive price cuts. A perfectly good product could incur losses or face being dropped simply because it was incorrectly priced.

Price-based Costing

The central question is, what are people willing to pay? If the market price is less than the costs required to make the product, it may not be a worth pursuing. However, customers may be willing to pay far more than the cost-based price. What is the product worth to the buyer? Compare it to other purchases in their lives. Use their priorities and disposable income to determine a suitable price.

There are interesting variations to the pricing question that involve customer segmentation or partition pricing. The latter variation refers to charging separately for parts or services such as delivery, shipping, installation, and warranties versus bundling everything into one flat rate. Here, competitive analysis is important. Do competitors bundle or charge separately? Do they offer and advertise free shipping? What are industry norms?

For a practice case, refer to the Everlasting Light Bulb case. A report on Coach and Michael Kors also explores the importance of pricing strategies in the luxury industry.