Pricing is the single greatest lever you have to improve profitability, and your profits will increase further when you price strategically. Strategic pricing is about proactively creating the conditions under which better and more-profitable pricing outcomes are the natural result. So, what exactly is Strategic Pricing?
Some define Strategic Pricing as value creation. Some define it as being competitively aware. Others will use it to describe establishing a company’s price levels and bands. There are therefore a number of definitions and slight differences in opinion but generally strategic pricing incorporates best practices in pricing and ensures that your pricing strategies, analytics and pricing processes complement your business strategy.
Strategic pricing sets a product's price based on the product's value to the customer, or on competitive strategy, rather than on the cost of production. This approach recognises that people often make purchasing decisions based more on psychology than on logic, and that what is most valuable to the customer may not be what's most expensive to produce. By creating strategic pricing policies, analytics, and processes, you can directly capture customer value and turn that value into shareholder value.
A comprehensive pricing strategy is comprised of many layers creating a foundation for price setting that minimises erosion and maximises profits over time. These layers combine to form a strategic pricing pyramid. Value creation forms the foundation of the pyramid. A deep understanding of how products and services create value for customers is the key input to the development of a price structure that determines how your offerings should be priced.
What customers are willing to pay for a product may be vastly more, or less, than a company would charge if it simply priced based on cost. Discovering what consumers value about your product can allow a company to increase its price – or, alternatively, might even suggest that a new product has no chance of being profitable.
Traditional pricing is set either based on the cost of production or on the price that competitors are
charging. Sometimes this is a reasonable approach but when multiple competitors produce the same product at the same price, the only way to compete is to offer a discount. Pricing a company's product strategically is therefore key to avoiding price wars.
One reason companies find pricing challenging is because they lack a systematic process to translate such diverse inputs as customer value, costs, broad strategic objectives and competitor prices into the right price.