Pricing is a key marketing issue these days, especially with Chinese companies taking the competition to even small and medium sector brands. Of course, there are brands that have nailed the pricing game to take on the big names. Nirma, Chik, Parachute and Emami, to name a few.
Pricing is often understudied but overused. It is assumed that a pricing problem means a problem with the price. That is wrong.
We have seen in our consulting practice that a price change is often the wrong response to price resistance. The pricing problem can be caused by any of the several aspects of marketing. Then why spend more time on just one P of the classic 4Ps of marketing?
Problems with other aspects of marketing are not noticed until you understand how they affect the customers' willingness to pay the price.
At our firm, for instance, we often see clients who have great products but still face price resistance. There is no obvious problem with the product, advertising and recall or with distributor margins, yet sales and profits are inadequate. So, it is assumed that the price must be wrong. But, by studying what is behind a customer's reaction to price, you can understand what needs to be fixed.
Make the value count
First, the product may be great but over-engineered. One of our clients made a product that had eight-year life cycle but we learned that most purchasers used it as a part in products with a lifespan of three to four years. No customer complained about the product's quality, they complained about the price.
Second, communication of a product's value may be inadequate or ineffective. Marketing communication usually focuses on features and benefits, and assumes that customers can convert the information to value but often this is not enough. Even sophisticated purchasers can’t quantify the value of the benefits they seek.
Pharmaceuticals and medical device companies, for instance, usually must quantify the value of complications avoided with products or buyers will undervalue the benefits.
Similarly, advertisers often cannot quantify the value of the media they purchase, so they tend to undervalue publications or broadcast stations that offer superior value.
Third, customers who know the value of a product often do not think they must pay for it. They have been educated to push for a deal by a sales force that negotiates prices to maximise volume rather than profitability. Customers do not complain about this since they benefit from the situation.
Price it in first
The key to correcting the pricing problem is not a change in the price. Putting in place policies that create an expectation of price integrity and to pay the sales force to sell value rather than volume helps.
Part of the reason that pricing is misused and poorly understood is the common practice of making it the last marketing decision.
We tend to design products, communication plans and distributing plan before we deciding on the price. We then use pricing tactically to capture whatever value we can get.
Strategy, however, requires that we put pricing at the beginning of the process. For example, a multipart marketing strategy usually is required in value-based pricing.
Airlines' complicated service packages with arcane restrictions, and their multiple channels of distribution must support pricing that reflects different values of the service to different segments. Without such a strategy, airlines would capture a much smaller portion of the value they have the potential to create.
A lifestyle store proved this when it unwisely adopted "everyday low pricing". The strategy reduced profits because it undermined the company's ability to segment customers for pricing. This problem was not with the structure of pricing but with the inability to create or demonstrate value.
Strategic pricing is more than capturing value, it is about orchestrating the marketing fraction to create value that can be captured profitably.
We recently recommended that a client design, position and distribute its new product for only a segment of the larger market. The client found this recommendation counter-intuitive since at current prices the product could be more profitably positioned for the larger market. However, going head-to-head with the established competitors would have forced the company to cut prices to defend share, undermining the value of the marketing and the entry strategy.
By focusing on a segment that could benefit disproportionately from the company's technology, the chance for competitive reaction was minimised. As a result, more value could be captured in the price.
An SME brand like Chik shampoo succeeded not because it was one of the cheapest shampoos. Several shampoos were available at the same or lower price. It succeeded because the company was able to communicate the value proposition. The same company, however, failed with their Nyle brand moisturisers and high-end shampoos. The reason? Failure to find the value equation and communicating the price rationale.Profitable pricing follows good marketing but good marketing begins with determining the efforts necessary to support good pricing.