Meissner Research Group

There are three basic pricing strategies: skimming, neutral, and penetration. These pricing strategies represent the three ways in which a pricing manager or executive could look at pricing. Knowing these strategies and teaching them to your sales staff, and letting them know which one they should be using, allows for a unity within the company and a defined, company-wide pricing policy.

1. Skimming Strategy

   Skimming is the process of setting high prices based on value. Instead of basing your prices on your competition, a skimming price comes from within the company and the (financial) value your product represents to your customer. This strategy can be employed in emerging markets, where certain customers will always want the newest, most advanced product available. It also works well in a mature market, where customers have already realized the value of your product and are willing to pay for what they see as a worthwhile investment. Surprisingly, skimming also works in declining markets, as your diehard customers are willing to pay big bucks for what they see as an older but superior product with a dwindling supply.

2. Neutral Strategy

   In a neutral strategy, the prices are set by the general market, with your prices just at your competitors’ prices. The major benefit of a neutral pricing strategy is that it works in all four periods in the lifecycle. The major drawback is that your company is not maximizing its profits by basing price only on the market. Since the strategy is based on the market and not on your product, your company, or the value of either, you’re also not going to gain market share. Essentially, neutral pricing is the safe way to the play the pricing game.

3. Penetration Strategy

   A penetration strategy is the price war; this strategy goes for the deepest price cuts, driving at every moment to have your price be the lowest on the market. Penetration strategies only work in one of the four lifecycle periods: growth. During growth, your sales are continuing to expand, as your customers want the newest product but still a product that has already tested by others in the emerging period. This is when your average customer buys a product and when the sales numbers will be the biggest. A penetration strategy works here, and only here, because you’re attracting customers to a new but proven product with cheap productions. You’re developing relationships with new customers willing to try the new product but who will only come for a lower price.

   Penetration strategies fail in the other lifecycle periods by leaving possible profits in the hands of the customers. In an emerging market, your product is brand new and customers who want it first should (and will) pay for that right. In a mature market, a price war will simply start the process of endless and useless competition, destroying your profit margin. In a declining market, only those who still must have your product will purchase it, and just like in an emerging period, they should (and will) pay for that right.

Knowing which pricing strategy works best for your company is an essential tool for any pricing manager and can only be found by recognizing the lifecycle of your products. If your entire sales force is on the same page in recognizing product lifecycles and utilizing pricing strategies, your company will likely see greater returns.

In a price war, where competitors with similar products, designs, and incentives compete for customers by having the lowest price, the only person that wins is the customer. Always.

When allowing your sales staff to use price as their main tool to meet quotas for the month, week, or even year, you, as the executive, are actually making it harder for them to achieve the company’s goals. When competing on price alone, your customers will quickly realize that all they have to do is signify that some other company’s pricing is just a little bit better, and your prices will fall.

Don’t think this affects your bottom line? Not only will your profit shrink, there’s a good chance that if your sales team doesn’t have a bottom price range, the customers will manage to convince them that the only way to get the sale (which salesmen see as their one, main priority) is to dip below cost. Customer loyalty and all those other things the customer will promise your salespeople once that below cost sale happens will disappear the moment your competitor decides it is going to keep the war going.

So, playing the price war is a lose-lose situation for you, your brand, and your sales team, because your sales numbers may go up but your revenues will go down. You might even have happy customers – happy customers that will happily jump ship to your competitor with a lower price. Essentially, price wars are a no win situation, especially if you want to be at the top of your field.

Customers, especially in this recession era, have become very savvy at the pricing game. To them, only one thing matters in a market where everything else is equal: price. By choosing not to play their game, by pricing your products on value, your company can still win. While your competitors are eating away at their profits, focus your company on figuring out how to make your products different and worthwhile and showcase that value to the customers.

By pricing on your products’ value, your customers will realize the differences between you and your competitors. If you succeed in showing your customers a reason to pay just a little bit more, you can also create customer loyalty with a superior product. So instead of allowing your salespeople to empty warehouses below price, tell the rest of your company to create products and promotions that customers can actually see tangible value in. And avoid that price war altogether.

To understand how to best set prices, manager first must understand that all products go through four distinct periods in their life cycles: emerging, growth, mature, and decline.

Emerging products have just been released to the public; perhaps they’re even in trial form and only available to select customers. During the next period of growth, the products have entered in the market at full-force and with each passing period, sales continue to grow at a steady rate. This is different from emerging in that your product is now part of the everyday, standard business – not necessarily the newest product on the market anymore. Once your product enters the mature phase of its life cycle, the sales growth has evened out. A large portion of your customers already own your product and only come to you for problems or repairs. And finally, your product will enter into decline – it becomes obsolete (hopefully because your company has already put its replacement into the market) and its sales dwindle to a few stragglers who are behind the times or devoted fans of your product that simply don’t want an upgrade.

Each of these periods of the life cycle change how your product is viewed in the marketplace. Unfortunately, most sales teams are not equipped and don’t even realize when each of these periods happen and the effect they have on your product and pricing. As an executive, it is your duty to recognize the shift in life cycles and to guide your sales staff in pricing accordingly.

Most executives unfortunately don’t like to think of their products having any sort of cycle to them; they prefer to think of their products as entering the market and remaining in the same growth phase forever. This simply is not the case. While it is true that you continually want your profits to grow, a single product cannot manage growth indefinitely. It is up to the executives to watch for signs that a product is entering a maturity phase, or even its decline phase, and react. New products should enter the market, starting new emerging and growth phases for your company. Without adherence to this law of entropy in business, your company will suffer.

A good example of this is the yearly nature of car manufacturers, or the ever-changing nature of Apple’s iPods. The moment one version of the iPod becomes obsolete, or even before (allowing Apple to control when a product enters its own decline phase), a new version appears on the market. Use your knowledge of product life cycles to shepherd your business into continual growth phases.

Depending on which politicians and pundits you listen to, they will tell you that at the beginning of this new decade, the economic recovery has not only started; it has happened. Whether or not you believe them doesn’t matter. At the beginning of this new year, you and your company are going to face an upturn as the market slowly pulls itself from the recession.

Now that your company has survived the recession, your pricing will have to reflect the new market. As an executive, you must become your company’s watchdog, keeping an eye on the market, your product, and your company, all to discover exactly where your price point should be. Here are several ideas to keep you and your company in the black in the coming upturn.

1. Don’t Jump the Gun

   This isn’t the free-for-all market economy anymore. After the recession, customers are still weary of big, corporate business and are just as likely to walk over to your competitor as they were before (and during) the recession. If you lowered your price point in a price war to survive the recession, you’re still stuck with that price point. Price points rarely rise after they’ve been lowered for any amount of time, even if the market (or inflation) shows they should be raised. The one thing customers hate even more than faulty products are rising prices, and if you think you can return to pre-recession pricing, your customers will disappear more quickly then they did during the recession. You will need to be careful and if you feel there is resistance to accept a price increase, you might consider introducing an improved version of your product and phasing out the old one.

2. The Market Still Fluctuates

   The thing about our current market era is that everything changes and will be likely to continue to change until further notice. Every day is a new battle. The coming months, overall, will be marked by a slow rise of growth. But the stability in that growth hasn’t happened yet. We no longer live in a period of continual growth, and your pricing should reflect that. Just because your profits are up last quarter thanks to a boost in holiday sales, doesn’t mean that your market is back to what it used to be (or even close to what is used to be). Any particular market could still come crashing down. Be wary that data about consumer demand, such as elasticity, might be outdated faster than you would wish, and customer preferences can quickly shift. As such, it is important that you run constant price trials to be ahead in these time of change.

   Resting on your laurels will only lead to frustration and money loss. As the executive, it is your job to watch the market and predict when the rises and the falls will happen. And then price accordingly.

3. The New Pricing

   Throw away old ideas about price wars and simply having the lowest price. Customers, themselves having survived a recession just like your company, are smarter and far more savvy than they used to be. Instead of creating a price war that is bad for everyone but the customer, take your services and your products and find new ways to market and price them.

   The first step is to keep your existing customers. In a scramble for new customers that may have more extra capital then they did six months ago, don’t forget about the people who got you through the recession. Look for reasons why they stayed with your company and reward them with services and products that reflect those reasons. If you’re an internet and telephone company and your customers chose you over a competitor because you promised them a free phone line for signing up, then give them that free line for another year if they decide to stay. Keeping these core customers should be priority one.

   For new customers, add tangible value to your offerings. Instead of raising the price on your old products and services, add new services, upgraded products, or something else that the customer can actually see as being beneficial to them. Once a customer sees the benefit in your offerings, they will be more than happy to pay a higher price. Just remember to offer these new deals to your old customers, as well.

Essentially, creating a healthy profit from the upturn is as much a challenge as surviving the recession. As the executive, you must take responsibility for your prices and be aware of everything that happens in your market. The market is in flux, and while your prices can’t be constantly changing to reflect that, your pricing strategy must. Be prepared to implement a new strategy the moment the previous one no longer works. By doing so, you’ll create a precedent that will help your company take advantage of the upturn and generate more profits. The market fluctuations might even offer a rare chance for well-prepared pricing managers to get a greater market share without compromising profitability.

Pricing strategies to thrive in the continuing market downtown.

In the current recession, top executives are called upon to make tough decisions to find a quick turnaround for sliding profit margins and reduced sales. And while sale prices, gimmick promotions, and free giveaways might stir up business in the short term, they may also cause long term damage to your company’s image and brand. Executives need to remember that pricing on value, instead of on costs, competition, or even those frugal recession era customers, can reap the largest benefits for their companies.

1. Don’t Slash Prices for a Quick Buck.

Since customers during the recession are looking for the cheapest prices, even going so far as to haggle when they wouldn’t have dared before, businesses are quick to drop prices in hopes of retaining these customers and perhaps even creating new ones. And while the price cutting might lead to short-term increased revenue, it can also create a bidding war that will devastate your future pricing. The prices will drop so far, so fast, that even if you got the sale, you’ll be so far beneath your profit margin that it you’re essentially paying for part of the product yourself.

2. Don’t Ruin Your Brand Name.

Any marketing specialist will tell you that branding is essential to a business’s long-term success. You’ve worked for years to develop your company’s brand, to instill confidence in your products, and to create lifelong customers. If customers suddenly see you dropping prices, they will start to doubt the value of your products, even if nothing has changed. In the eyes of a customer, if your product becomes cheap, so does your brand. To keep your prices where they should, remember that what is unique about your company. Give the customers detailed descriptions of the value of your products, and they’ll remember why they started buying from you in the first place.

3. Luxury Items and Services Are Just That – A Luxury.

Just because the economy is tanking and the recession is continuing doesn’t mean that your high end items should suddenly be sold at Wal-Mart. If you’re going to reduce prices on some items, thereby reducing their inherent value in the customers’ eyes, then reduce the prices of your lower quality products. The customers who want cheap prices will find cheaper alternatives no matter what you do, but your loyal customers, who expect a high level of service and value from your products, will continue to pay for the service and value. Luxury items and top-of-the-line products should retain their top-of-the-line pricing.

4. Fix Pricing the Hard Way.

Pricing products often falls to people who are not in charge of the entire company. They watch the markets and the product flow, and they alter prices according to the old standards of supply and demand. In a normal or booming economy, this is an effective decision. In a recession, this no longer works. As an executive, seeing how each piece of the pricing puzzle fits together, finding where to squeeze that last profit dollar out, is not only your responsibility, it should be a priority. Look at pricing as a whole package deal, taking into account everything from the gas for delivery to the price of raw materials. Improve employee relations by setting new sales standards for your staff, instead of relying on figures from when customers were more apt to buy. Figure out where money is being lost by trimming production costs, cutting back on any expansion project, and slash nonessential perks. Take control of your pricing policy, and don’t let the nagging customers who claim they’re going to go to your competitor force you into bad pricing decisions.

5. If They’re Going to Go, Let Them.

If customers say they’re going to take their business elsewhere when you can’t produce lower prices, let them. Instead, create loyalty programs for the customers who do stay with you and attract new customers with deals designed for recession era economics, like bundling new services into old programs while keeping the same price. Keeping the loyal customers and attracting new customers is far more important than placating the fickle ones, who are just as likely to jump ship as they are to stay. Also, entering into a bidding war with other companies is useless: the customer will go with what they perceive to be the lowest cost, costing your business money in the end whether they went with you or your competitor.

In a recession, your profit margins and overall revenues are not going to be as good as last year. But by taking control of your pricing policy and not cutting prices just to survive today, you help to create a recession-proof product by continuing to build your customer base. If you can keep your customers happy and retain the level of value and service your customers expect, you and your company will continue to thrive long after the recession has ended.