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Pricing Review: Step 6 in developing a marketing strategy

The final stages of the Customer Review are really important and we have just two to go before we start stitching things together.  If you remember, the first stage in developing a marketing strategy is thinking – which I call the customer review – and then we move into delivery.  We are now up to step 6 – Pricing review.

  1. Customer insight ✓
  2. The marketplace ✓
  3. Critique the current strategy ✓
  4. Identify and critique your enemies ✓
  5. Critique your current/planned offer in detail: Product / Service / Channel ✓
  6. Pricing Review
  7. Futurology

(6) The Pricing Review

pricing

My comments here can only be generic, but I will try to use examples, and forgive my inherent focus on Financial Services, it is what I know best.  There are clear and significant differences between actuarial pricing strategies and pricing an add-on service that is for related goods say.  The principles, process and purpose remain valid cross industry I believe.

Purpose:

  • To bring together your current pricing strategies and establish your position or powerbase in your chosen markets
  • To place you in context of customer and market expectations and reality

Process:

  • You will need to review your Boston matrices to remind yourself of the market and product attractiveness scores
  • You will need your value engineering that we completed in the last step
  • You will then need a clear and concise view of competitors.  You can use the Good Better Best tool and apply that to price if you like.  I find that helpful if using comparative advertising.  On that topic I was at an interesting DMA seminar last week on the improved ability we have as marketers to complete comparative advertising.  An area of legal flux that offers greater opportunities for exploitation than it once did. But only IF your target customers respond to comparative advertising or if one of your enemies is targeting you.
  • Establish answers to the following for the following three timeframes: 1) Now, 2) Go to in 12 months, and 3) desired position in 1-3 years i.e. where do you want to be in the pack?  Use a simple checklist for each of your offers:-
  • Best Market price – designed to drive SoM and place you as ‘new’ or as pack leader or innovative or indeed acquisitive territory.  Hero prices may be a tactic you employ here and of course you can, if your customers think it reasonable, come and go in this quartile e.g. by use of Sale pricing strategies
  • Best to Middle market pricing – compromising the profit of each sale, potentially, for higher than average growth in SoM.  Like best market pricing it may not be sustainable long-term unless you have a cost advantage vs the market – see Value Engineering in step 5
  • Mid Market – where the noise is in the field, you may want to have several competitive offers available rather than be a pack leader with a hero product.  This position is the mainstream and is usually a hard-fought battleground where leaders of the pack will emerge and others will fall back. This mid market price position usually drives long-term sustainable profit, but constraining growth potentially.  You may go here for cash cows to test elasticity of pricing – use your Boston Matrix from earlier
  • Worst in Market Quartile – you may have cost issues or exposure issues that drive this strategy or it may be that you have few strong competitors and no enemies attacking you.  Equally a new product or innovation as well as being keenly priced could be placed here if it truly is unique.
  • I would resist establishing too hard and fast a set of rules for competitive position vs your enemies.  I worked on a brand once that had a stated price position of being ‘the cheapest’ vs a basket of enemies.  The result – we had to move price and therefore profitability irrespective of our cost and performance if one of the enemies moved – not a great strategy I would suggest.
    • But do think about building in new year/summer sales, seasonality lifts in demand, making a new market in a new time period as options to allow you a pricing advantage or to beat your enemies.  One tool I have used in the past is to look at where companies over indexed on one product line e.g. ISAa at a specific time and used a great price in a different product line whilst their attention was diverted.  Your business intelligence of the strategy and performance of your competitors is invaluable here.  I love the HSBC New year sales … very good controlled marketing.
  • In pricing terms the value engineering and financial assessment we did in the last step is crucial but overlaying it with that of your competition is equally important … Try and look at what shifts they make and what their overall matrix of price positions look like – are they the same as yours?
  • Be clear what you can afford to charge/pay and know what your price elasticity is in each of your target customer groups and/or products.  This is critical.
  • Don’t neglect the new customer/existing customer balance either – in elasticity terms most consumers now ‘get’ the idea of an introductory discount, but too high a level of price shock at renewal (especially if there is an annual renewal or maturity) will drive churn and push costs up even higher.  In Insurance this allows the Aggregators to win – especially where prices are easily compared.
  • Finally write down and communicate the lead times it takes to make changes in prices for each offer – this could drive your responsiveness to changes by your enemies and could, at worst, mean you compromise your desired price position.

This process step is short – you have done most of the work earlier, but wide-ranging and it’s absolutely vital that Finance are engaged throughout to help you model your outcomes.

You need strategies for new sales, renewals, add-ons, cross sales and up sell and down sell levels for your customers.  Plus you need to be clear in what part of your Boston matrix is your brand and price offer credible.

  • You may also wish to determine how much first line flexibility in prices you want to give your sales force.  I would contend that unless you have good CRM systems or segmentation this is challenging as you may be discounting to customers whose lifetime profit is low and ignoring those in the opposite position
  • Don’t ignore transfer pricing either – if your organisation cross charges for goods and services, make sure they do not constrain you

Pay-offs:

I appreciate the above process is quite qualitative, but that is only because as a step this is using the outputs from earlier stages and asking you to write down your strategy with pay-offs in the following areas:

  • You will know the price elasticity of your customers
  • You will have a price strategy / actual price that you can then research how best to present to customers
  • This will then inform how you discount your prices and where you do so e.g. front line responsibility
  • It will also, off the back of your value engineering, have identified internal areas to target i.e. low value high cost impacts on your price position
  • You will price according to market attractiveness and in the context of your enemies and your own offer strength

Pricing is a difficult and wide-ranging topic that covers not just core price but also discounts, offers and so on.  In this field more than any other identify your RACI early in the process to define who is doing what.  Your P&L owners will be the ultimate owners and they must have the final say.  This is unlikely to be marketing, so be relentless in trying to get a good deal you can communicate to customers, but acknowledge that in some cases your business costs and performance may constrain you .

I hope you enjoyed this post and found it a prompt for how you may look at pricing differently.

Futurology is the final step in the Customer Review … see you next week !

Paul

25 April 2013

Price Image : Copyright (C) F. J. Cahill & Son Ltd., 2013

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