7: SETTING A PRICING STRATEGY

Pricing is the single most important lever that an organization has in its arsenal to influence growth, profitability and market positioning. 

Quite directly, a small price change can immediately add incremental $ to the bottom line or could also erode demand. 

Indirectly, pricing communicates to the market where your brand stands and reflects perceived value. 

If your pricing strategy is non-existent or not formulated correctly, it will be irrelevant if you have the best product.

We’re uncovering key elements of pricing in this article.

1. Timing of setting pricing

Pre-launch of a product/service:

At this stage, a product/service -> market fit is being assessed and a pricing framework is more or less used as testing for positioning.

Although not critical to achieve perfection at this stage, it is important to understand what your nearest competitors or growth companies were once charging in their pre-launch stage. 

Growth phase:

This is a stage that is characterised with high topline growth and differs between industry and sectors, but is generally one that is consistently tracking at a multiple to the industry/sector. 

Once an organization has 6 months - 1 year of transactional data, the effects of early pricing and its elasticity can be analyzed. 

Mature phase:

Once an organization’s revenue size is large enough and growth starts to either equal or lag the industry/sector, an organization has most likely entered a mature phase of its life cycle. 

Preservation of capital and profitability takes a higher priority than growth. Pricing changes need to be 

2. Type of pricing techniques

A pricing technique is a methodology to understand what prices can be set and the impact of deviating from those prices on demand and profitability. 

Cost plus pricing

An organization has many costs, those that are direct i.e. tied to the revenue that it collects and those that are indirect i.e. rent, utilities, depreciation, insurance, etc. 

This type of pricing technique begins with understanding these costs in detail and working out an acceptable margin to ascertain selling price. 

Value based pricing

Consuming a product or service solves a problem or unlocks more value for the buyer. Value based pricing focuses on perceived value for the buyer.

Competitive pricing

Through market and competitor research, it is highly recommended to keep a close eye on how your competitor is setting its prices. 

A price setter can simply match competitor pricing or go to great extents to win back market share or customers.

Demand and Market Conditions

Ridesharing apps, Airlines, E-commerce platforms rely on dynamic and surge pricing strategies (as much as this falls into competitive pricing too), but the essence of this strategy is that changes occur in real time. 

Seasonal pricing falls into this category too.

3. Types of pricing strategies

There is a difference between a technique and a strategy. A pricing technique is a methodology to arrive at various price points whereas a pricing strategy is the adoption of a framework for a limited period of time.

Segment based pricing

Most companies will develop a set of prices for their customers. e.g. startups vs growth vs enterprise that are tied to size and therefore usage consumptions.

Freemium and Premium Upsell

A common strategy adopted by consumer facing apps is providing certain features for free or for a period of time and charging premium features for a price. 

Expansion strategies 

Price skimming is a strategy of starting high for early adopters and lowering over time. A loss leader strategy on the other hand is intentionally incurring losses to attract buyers for a long period of time.

Segment based pricing

Most companies will develop a set of prices for their customers. e.g. startups vs growth vs enterprise that are tied to size and therefore usage consumptions.

3. Assessing effectiveness

There are a myriad of KPIs that will indicate the effectiveness of a pricing strategy. Simply tracking trends is not adequate. Setting clear goals before the strategy goes into effect is crucial for the success of this step. 

An unplanned declining average revenue per account/user and a related drop in profitability are signals that pricing is not effective OR discounts larger than planned thresholds are being offered to meet revenue targets. The aspect of protecting discounting is also related to investing in pricing infrastructure. 

4. Revisiting pricing

Time based

On a recurring basis, pricing should be evaluated on a bi-annual or annual basis, but monitored quarterly. 

External environment 

Inflation, tariff pressures, supply chain moves or macroeconomic slowdowns are valid reasons to bring about an ad-hoc change to prices. 

New features

Adding new features implies an increase in values and is a good reason for companies to raise prices as long as doing so clearly communicates value to customers.