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Name: The Strategy and Tactics of Pricing
Rating: 4.2 (42 reviews)
Author: Thomas Nagle, John Hogan & Joseph Zale

Thomas Nagle, John Hogan & Joseph Zale

A Guide to Growing More Profitably

4.2 (42 Bewertungen)

18 Min.

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The Strategy and Tactics of Pricing
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What’s in it for me? Learn how to price your products in order to maximize profits.

Have you ever looked at a price tag on a product and wondered whether it was just chosen completely at random? Well, prices result – or at least should result –from thorough studies, which rely on both consumers’ psychology and financial analysis, and which are conducted by specialists in pricing.

While this might sound like a lot of work, it’s most certainly worth it. Why? Because pricing could be the main driver of success (or failure) when launching a new product. And that’s exactly what these blinks are all about: insightful and comprehensive guidance on the art of setting the right price for maximum profits.

In these blinks, you’ll discover

how Apple managed to overprice their iPhones and still make a fortune;
why you shouldn’t price your products according to what consumers want to pay; and
why understanding the value of your products is crucial.

The art of pricing is an essential element in today’s economy.

You might not have noticed, but pricing has become quite a hot topic over the last few years. Why? Well, as a result of the information revolution, we consumers have become more aware of and more sensitive to pricing.

These days, information on the products or services any company has to offer is at our fingertips. By now, many of us are seasoned online shoppers and are quite accustomed to the process of comparing product after product until we find the one we think is best for our budget.

In light of this, many companies have placed pricing at the heart of their commercial strategy. Take the Apple iPhone, for instance. This revolutionary smartphone was considered overpriced when it was first released.

However, knowing that early adopters and tech-obsessed customers wouldn’t mind paying a high price for such a unique product, Apple wasn’t deterred. They kept their high pricing and, in doing so, created a reference point for the market sector and for their entire product range. Later on, when Apple slightly decreased the price of the iPhone, customers viewed this as a brilliant bargain, and sales soared once again.

Retail giant Walmart also owes much of its success to clever pricing. Items that everybody needs, such as toilet paper or disposable diapers, are massively discounted, ensuring that Walmart is the first place customers will head to buy them.

Because competitors can’t afford to lose their profits on essential products like these, Walmart avoids a price war. And because so many customers are buying their everyday items across a vast network of Walmart stores, the discounts aren’t likely to jeopardize their profits. Other items are then priced higher, which allows Walmart to recoup their losses.

Apple and Walmart teach us an important lesson about strategic pricing. It’s not about tweaking prices to perfection, nor is it about selling as much as possible; rather, great pricing strategies are focused on increasing profitability in innovative ways.

Unfortunately, many companies fail to grasp this and make plenty of pricing blunders. In the next blinks, find out which pricing mistakes you should avoid.

Strategic pricing isn’t simple, but it is effective.

Many companies that use pricing strategies might think they’ve picked the right approach and have got everything under control. Unfortunately, this is rarely the case; pricing is far more complex than simple strategies seem to indicate.

Take the cost-plus method, for instance. While it’s the most common pricing strategy among companies, it’s also the hardest to get right. This method involves calculating the costs of production and adding a markup to this cost to determine a retail price.

Value, proactivity and profits are at the core of a successful pricing policy.

Now that we’ve identified the methods we don’t want to mess with, let’s look at pricing strategies that really work. There are three dimensions to successful strategic pricing: value-based pricing, proactive pricing and profit-based pricing.

Value-based pricing requires that your prices change only when the value of your product as perceived by your customers changes. So, once the iPhone 7 is launched, for instance, other smartphones won’t be able to compete in terms of performance or features. Their value will shrink in the eyes of the customer, and their prices must be discounted accordingly.

To price your product effectively, get to know what it offers to customers.

What makes a customer willing to pay for your product? Well, it’s usually as simple as whether they think it's any good or not! In developing your pricing strategy, your first task is to work out how the features of your product create value for your customers.

But before getting into that, let’s take a moment to define value. All too often, value is described as the satisfaction a customer receives through purchasing a product or service. This definition describes the use value of a product or service, but it doesn’t tell the whole story.

Segment your pricing to ensure your customers all feel they’re getting great value.

By pricing your products according to their economic value and differentiating them, you’ll have completed the first step of the strategic pricing process. The next move is to define an appropriate range of prices.

All markets are made up of segments, where consumers are willing to pay varying amounts. Without creating prices tailored to each of these segments, your company will lose money.

Give your customers the information they’re looking for.

How much effort do you put into researching products you want to buy? Sometimes customers simply have better things to do than read through a long list of specs. So, why not make it easier for them? The third step in the pricing process is all about how you can help clients understand why your product is a cut above the competition.

To do this, you’ll first need to assess your customer’s relative cost of search. This is the effort they have to put in to find out about the pros and cons of your product. If your product is toilet paper, this cost is almost nothing, whereas a new car might take hours of online research.

Keep in mind that pricing strategies have a powerful psychological impact.

Did you know that two customers who pay the same price for the same thing can have completely different perceptions of its value? Let’s illustrate with an example.

Say there are two gas stations. The first station charges $1 per gallon, plus a $0.20 fee for credit card payments. The second station charges $1.20 per gallon and offers a $0.20 discount per gallon for cash payments. Customers paying cash will pay the same price at both stations – but a customer at the second station will feel like they’re winning because of the discount. This psychological dimension of purchasing is not to be underestimated.

Price sustainably to give your company legs.

As you get closer to pricing your offer, you’ll need a set of rules to guide you; in other words, you’ll need a pricing policy, the fourth step in this process. Businesses are faced with uncertainty every day. Pricing policies are particularly useful when companies are facing changing situations that are likely to create a need for price adjustments.

Say a company faced with a sudden surge in the price of raw materials is forced to increase their prices. Clients aren’t convinced and refuse to pay more than usual. What would you do? You can’t risk alienating your clients, and your supplier simply won’t budge.

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Worum geht es in The Strategy and Tactics of Pricing?

The Strategy and Tactics of Pricing (2010) reveals the fundamental importance of how you price your products. By exposing common misconceptions, explaining the three dimensions of effective pricing and the five steps you can take to achieve it, these blinks are an essential guide to maximizing your profits through clever pricing.

Wer The Strategy and Tactics of Pricing lesen sollte

Business students hoping to understand the underlying principles of pricing
Entrepreneurs planning to launch a new product and struggling to find the right price
Any shopper curious about how price tags are set

Über den Autor

Thomas Nagle, John Hogan and Joseph Zale are industry leaders in strategic pricing, having made significant contributions to the theory and practice of pricing, as well as the development of software to aid businesses around the world. Hogan and Zale are partners at Monitor Deloitte, a leading strategy consulting practice based in Cambridge, Massachusetts.

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