Pricing Done Right: The Pricing Framework Proven Successful by the World's Most Profitable Companies (Bloomberg Financial)

by Tim J. Smith

differentiation implies doing something different, which may mean that for some critical decisions, executives must choose to eschew industry-accepted best practices in order to develop the firm’s own set of strategic resources or capabilities.

This leads to important strategic considerations for executives: How is the firm better than its competition for its market today? What investments will it take to be better in the future? And how will these positive competitive differentiators be exploited in the firm’s target market? These questions are strategic precisely because they lead to strategic investment decisions,

There are four pricing decisions that senior executives face in the strategic pricing area.

These four pricing strategy issues are: Price positioning Price segmentation

Competitive price reaction strategy Pricing capability

Each of these strategic pricing decisions is directly dependent on and influences the...

Price positioning

Price segmentation

Competitive price reaction strategy

pricing capabilities

These four pricing strategy issues engage executives in high-impact/low-frequency decisions.

They become most important when the firm’s business strategy is changing or when the current strategy is under duress.

In the price neutral position, the firm’s pricing closely matches the price of its competitors after adjusting for the differential benefits:

What differentiates a price neutral position from other positioning is that the prices the firm seeks to extract from the market reflect the value it delivers to customers relative to their alternative choices.

In general, firms should consider the price neutral position as the default strategy.

the price neutral position is generally the most profitable.

from a competitive perspective, the price neutral position is least likely to instigate a costly price war.

In the price skimming position, most customers in the market perceive the firm’s prices to be too high relative to the competition after adjusting for the differential benefits the offering delivers.

Because few customers will take offers that are skim priced, firms that practice price skimming generally suffer from few sales and low profits, which is generally not a sound strategy. I say “generally” because there are times when price skimming makes sense as part of an overall business strategy.

The clear instances where price skimming is strategically defensible, at least for a short term, relate to market exploration and market segmentation.

In entering a new geographical market, the firm may find that its prices are higher than its competitors for a relatively similar product. This is commonly called a “testing the market” pricing strategy, wherein prices are initially held high in a new ge...

In a well proven and documented time-segmentation strategy with new products, a firm may initially market a product with a high price to extract profits from those who value the offering the most and are willing to pay to get the offering

This strategy was famously executed by Apple with the launch of the first iPhone in 2007, where the launch price of $599 was dropped to $399 within a month despite high demand

These kinds of time-segmentation pricing strategies are often perceived as a form of price skimming.

A less discussed approach to time-segmenting the market can also occur during the end of a product category life cycle.

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In a price penetration position, most customers in the market will perceive the firm’s prices to be low relative to the competition and the differential benefits the offering delivers.

By forgoing margins, penetration pricing is generally suboptimal from a profit perspective compared to price neutral positioning despite the higher sales volumes, and therefore penetration pricing cannot generally be defended from a strategic viewpoint.

Though it may be obvious that firms should price to optimize profits at all times, there are times when a firm will rationally forgo profits in the short term to invest in a future competitive advantage.

Since price penetration relies on using low prices to drive volume, executives should first determine whether the market is sufficiently price sensitive. That is, will customers change their buying habits due to price alone?

Outside of generally failing to produce a future strategic advantage, penetration pricing also encourages price wars.

Price segmentation refers to charging different customers different prices for similar or highly related offerings.

Because different customers

derive differing benefits from the firm’s offerings, they will have a differ...

Price segmentation is the means by which a firm’s attempt to price offerings at the level of the individual customer, ...

From the firm’s per...

it can expect to be more profitable with sound price segme...

From the customers’ pe...

price segmentation enables the firm to both serve more customers and create greater overall societal value and therefore leaves them be...

These c...

have been theoretical...

Yet price segmentation is...

To keep high-paying customers paying

higher prices, firms must define some form of segmentation hedge that separates higher paying customers from lower paying customers and is societally acceptable.

The two major types of price segm...

(1) the firm’s choice of price structure and (2) the firm’s management of ta...

Price stru...

refer to the way in which a firm calculates its target tr...