Pricing Strategies - Examples and how to implement

Of the many areas of business management, pricing is one that the Genus team gets asked about more than most. Whatever product or service you are selling, how do you know if your pricing is too high, too low, or just right?

Pricing strategy can make or break a business, and we believe it is one of the most important components of a successful business model.

Pricing reviews are often neglected

Most businesses spend less than 6 hours a YEAR looking at their pricing.

This may be a shocking fact, but it is true. Pricing strategy is one of the most important, yet often most neglected areas of business planning.

Pricing should be reviewed regularly, at least every quarter, through a rigid process of review, research, and testing.

Getting your pricing right can be one of the biggest drivers of profit.

But what is the “right pricing”?

What is Competitive Strategy for pricing?

To determine the right pricing strategy for your business, you should first consider which competitive strategy applies to your business. There are three core competitive strategies:

• Cost leadership: Cost leaders offer the best value for money and their long term appeal is built around cost-effectiveness.
• Difference leadership: Differentiators are companies that offer products or services that are relatively unique.
• Focus strategy: Companies with a focus strategy will focus their energy on a small subset of a market in a very direct way. For example, Rolls Royce focus only on a minority of high wealth individuals.

Before determining your pricing strategy, you must know what your competitive strategy is!

There are pros and cons of each of these.

What is a Cost Strategy for pricing?

Examples

Lidl, Aldi, Walmart, Ryanair, Acer

When is this strategy good?

• You have a low cost base. This could be a result of your location and low salaries.
• You deploy technology to keep costs down.
• You are good at buying.
• Lots of people are selling the same products

But be careful of…

• The sustainability for small businesses.
• Your costs going up.
• Competitors that are cheaper.
• Any disruption or change in your business model.

What is a Differentiation Strategy for pricing?

Examples: Apple, Tesla, Virgin, Nike, Starbucks

When is this strategy good?

• You have a creative product team.
• You have a good sales team that can effectively communicate benefits.
• Innovation is part of your brand and reputation.
• There aren’t too many competitors.

But be careful of…

• Customers changing their minds on what they want.
• Your differentiating factors being copied easily.
• Customers becoming unwilling to pay extra.

What is a Focus Strategy for pricing?

Examples: Harley Davidson, Netjets, Rolls Royce

When is this strategy good?

• Your company has deep knowledge or experience in the target niche.
• You have detailed understanding of the competitors in your target marketplace.
• The niche is large and/or is growing.

But be careful of…

• A market that is too small.
• The niche declining.
• Falling behind customer needs and trends.
• Competitors who might focus on you.

Revenue Modelling for Businesses

Another key factor for any pricing strategy is revenue modelling. A particularly useful revenue model was created by Ron Mayer, who is a professor of strategic leadership.

Ron Mayer’s model consists of five parts of equal importance and is designed to challenge a business’s standard approaches to making money, helping them drive innovation.

• Who pays?
• What is paid?
• For what is paid?
• How are you paid?
• How much is paid?

Examples of Revenue Models

Multiple Revenue Models

Multiple revenue models reduce risk by spreading revenue. It allows you to develop products which complement each other. It also makes it easier to innovate, and leaves you open to larger opportunities. Ultimately, multiple revenue streams make it easier to grow your business.

Apple is an excellent example of a multiple revenue model, with iPhone, iPad, Mac, Macbook, Apple Watch and many more products or accessories bringing in revenue. This greatly reduces the risk if they only sold computers.

Recurring Revenue Models

Recurring revenue models also make it easier to grow your business but offer additional benefits. These include longer customer relationships, which enables you to grow revenue streams by offering new products to existing customers. It also provides greater resilience to tough times and offers a better overall customer experience.

Many companies are now moving to recurring revenue models, including membership organisations, SaaS products (such as Lucidity!), physical product subscriptions, and service plans (such as insurance and utilities.)

Cost-based Pricing Strategy

Arguably the simplest cost-based pricing strategy is Cost+.

COST + MARGIN = PRICE

Competitor Based Pricing Strategy

Put simply, the competitor-based pricing strategy is built around looking to your competitors and replicating their pricing to ensure you are competitively priced.

Value Based Pricing Strategy

Value based pricing is all about deploying excellent customer knowledge into your pricing. It is built around understanding which factors influence price perceptions.

Some factors will raise the value of your product or service in your customer’s eyes. For a cyber security firm, for example, these positive factors may be quality, visibility, peace of mind, certainty, and good communication. Other factors may reduce this value, such as uncertainty, variable/changing costs, credibility, or perceived risk associated with purchasing.

Spending time on your pricing is always time well spent. When developing a pricing strategy, you must consider your wider business strategy. How are you going to compete? Are you going to be cost competitive, focused on a particular niche, or a differentiator?

Make sure you always consider all the options that your customers have, and make sure you understand your own value amongst these options.