Pricing is a strategy. In a story published in the summer 2012 MIT Sloan Review magazine titled “Is It Time to Rethink Your Pricing Strategy?” Warren Buffett is quoted as having said:
“…if you have to have a prayer session before raising the price by 10%, then you’ve got a terrible business.”
But how many entrepreneurs still sweat bullets when they struggle with pricing products? One reason why many business leaders can’t succeed at the “pricing is a strategy” task amounts to “peer pressure”. They are thinking more about what competitors are charging and what they presume to be market tolerance for cost. They end up allowing their “peers” (competitors) to set the rules. At the same time they lose sight of the most important factors they should be using as a basis of pricing – the costs they have to pay to continue building their product; the sales volume needed to replenish financial resources; and, finally, the quantified value they intend to deliver to customers purchasing their product.
The last factor, the quantified value they intend to deliver, is the most important. Not only does knowing how much money customers will save by buying your product help determine your products “job to be done” (to use the late Clayton Christensen’s notion), it also frees you from “competition to be the best” (concept created by Dr. Michael Porter in his theory of competition), the very expensive reality of failing to see how your own product is differentiated from the competition. From the vantage point of considering the value proposition your product represents for your target market, Warren Buffett’s “terrible business” should make a lot of sense.
The usefulness of the “pricing is a strategy” effort needs to be validated via conversations with companies picked from the target market. If a lot of these conversations end up summarized as “they didn’t see the value for our price” a conclusion should be made the product has either not been thought through correctly (in other words market participants can’t see a reason to purchase at your planned price), or marketing communications fails to communicate the real benefit your product delivers. A decision to try a lower price is not a right one. Right decisions are either to go back to the drawing board to rethink the product, or to change marketing communications.
Once “pricing is a strategy” has been done correctly, the product is transformed into the business equivalent of a very fast car driven by a highly competent driver. Without this exercise pricing is simply the very fast car. Unfortunately very fast cars without drivers end up in fatal accidents.
If you would like to learn more about our take on Michael Porter’s “Competition to be the Best”:
What you should think about before you get engrossed in developing your pricing strategy: