By M. Dana Baldwin, Senior Consultant
Pricing can be very tricky in times like the ones we are going through currently. Too high a price and you can lose considerable volume, customer loyalty and market share. Too low a price could lead to diminished profits, commoditization of the brand or product/service and lower long term prospects. The key is to strategically determine the pricing band, which is best for your product/service in light of current conditions.
To do this, you need to determine where your products and services are positioned in your market places. Each one of your offerings needs to be analyzed in terms of where it is located on a spectrum from pure specialty to pure commodity.
We define a pure specialty product as one, which is priced to take advantage of the uniqueness of the product or service. Key characteristics of a specialty product or service include:
- Unique “product” or “packaging” – “packaging” equals services wrapped around the product/service offered
- Market perceives clear superiority of the product or service provided
- Sales result from having the right product at the right price
- Strong margins/profits on each individual sale
- Value-based pricing – taking advantage of what the market and competition will allow to maximize profitability
- Exceed customer requirements – providing the extra services which add perceived value
- High level of customer support – to keep the perception of value valid
By comparison, a commodity product or service has very different characteristics. They include:
- Little differentiation between products/services offered by all competitors
- Substitutability – One company’s offering is little different from another
- Sales result from low price
- Weak margins/profits due to tight margins
- Competitive pricing in order to gain market share
- Meet customer requirements – no added services can be afforded
- Order taking – because there is no budget for added services
Almost all products and services have some of each characteristic – commodity and specialty. The challenge is to determine the behavior of the specific product or service in each market in which it competes. You need to determine where each offering is located on the spectrum between pure commodity and pure specialty. You also need to determine what the overall characteristics of each market segment are, to see where you are competing. For example, are you providing a specialty product in a mostly commodity market? Entirely feasible to do, but you must know this or your pricing could be hurting your profitability by being too low.
An example of this is windshield washer fluid (appropriate for this time of year). This is basically a commodity market, with the majority of sales of the blue fluid centered in a narrow band within a few cents of each other. There is a specialty part of this market, however. Some people buy the green version, which contains more alcohol and more soap, allowing better functioning at lower temperatures and with the ability to clean the windshield better. The price of the green fluid is considerably higher, due to the higher performance and specifications. This green fluid is a specialty item in a mostly commodity market. If the vendors of the green fluid were to price their product at or near the price of the blue fluid, they would be leaving money on the table.
By properly understanding the positioning of their product, the makers of the green windshield washer fluid can keep their profitability higher and keep their perceived value high to command the higher price.
Some additional thoughts:
Pricing policy is one of the most strategic issues that a company can deal with-both for the short term and the long term. It is tied to market strategy (expand, maintain etc.) e.g., do we need to buy our way into a market? Do we need to do some pre-emptive price-cutting to make a market a competitor is eyeing less attractive?
In custom manufacturing, cost-plus std. margins can be the kiss of death. You either over-price and lose the business or leave money on the table and get the business.
Competitive intelligence needs to feed into pricing as well.
You may want to take a look at Tom Ambler’s 2-part article “Mining Your Unexploited Value”. It offers a process to address the pricing issue.
M. Dana Baldwin is a Senior Consultant with Center for Simplified Strategic Planning, Inc. and can be reached at firstname.lastname@example.org.
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