Develop an effective pricing strategy

Businesses don't always have the right pricing strategy, notes a Wharton marketing professor. The research of Jagmohan S. Raju and Z. John Zhang shows that the pricing strategy has a significant impact on the profitability of an enterprise. They borrowed from a McKinsey study of more than 2,400 companies in the 1990s, which showed that different pricing strategies had a different impact on the bottom line: a 1% reduction in fixed costs resulted in a 2.3% improvement in profits; For every 1% increase in output, profit can increase by 3.3%; for every 1% decrease in variable costs, profit can increase by 7.8%; for every 1% increase in price, profit can increase by 11%.

"In recent years, entrepreneurs have noticed that there are many factors that can affect the success of enterprises." Professor Zhang said, "They pay attention to the organizational behavior of enterprises, streamlining institutions, benchmarking, corporate restructuring, etc., and enterprises spare no effort to reduce cost. But they didn't spend the same amount of time thinking about whether they had the best possible pricing strategy. I think McKinsey's research is still applicable today. With better pricing strategies, there is a greater increase in profits

Professor Zhang points out that in the past, many companies “set prices, execute them without hesitation, and hope for the best return. But this is not the best way to set prices. Companies take this approach because of the One is that pricing is a difficult thing. You have to know what you're doing and take responsibility for the decisions you make. Many managers want to have a say in the company's pricing strategy, but when something goes wrong, they don't want to Take responsibility.”

Raju stressed that pricing must be a strategic decision. Relying on intuition for pricing can affect the bottom line of a business. He said: “A misconception about pricing is that pricing should only be considered after all the other work to develop a new product is in place. But in fact, pricing should be the whole plan from the very beginning of the decision to bring a product to market. It’s an integral part of your business, not just for pricing.”

Correct pricing, the whole is greater than the sum of the parts

Businesses must work to identify target customers and understand how much they are willing to pay for a product or service; businesses must Recognize that pricing strategy is an important means of differentiating your product or service from other competitors, as price itself implies different quality and uniqueness; in addition, businesses should also consider direct-to-market distribution The interests of the merchants, because if they don’t get enough profit, the whole sales situation will be affected; the company also has to keep the pricing strategy as a long-term work, because this is to pave the way for more products to enter the market in the future .

Raizhu points out: "When you're making a pricing decision, your ultimate goal is to get ahead and outpace your competitors. You need to imagine a scenario like this: If I did that, how would the competitors react. But If your competitors are not as good as you want, then you have to start a backup plan. If you don't get ready sooner, you're going to lose the competition."

There are many ways to price. One of them is the simple and straightforward "cost-plus method", which first calculates the cost of a certain product, and then adds a reasonable profit margin on this basis. Another way is to do research to determine how much customers are willing to pay for your product (eg, customers are willing to pay $200 for a small bottle of perfume), and then set prices based on that. Another is to set the price according to the competitor's situation, adjust it on the basis of the other party's price, or increase or decrease it.

Professor Zhang said: "All of these methods work, but none of them are one-size-fits-all. When developing a pricing strategy, the overall effect of using these methods flexibly is far greater than the simple sum of the methods."

On In the 1990s, Ford Motor became a classic case of turning a flat profit into a bonanza by developing an appropriate pricing strategy.

For years, Ford, along with other automakers, has kept prices low on budget sedans like the Escorts. They thought the low price would attract younger buyers; and when things got older, those people would need a bigger car, and they would stay loyal to Ford and make a bigger deal with Ford. The problem is that while Ford sold a lot of economy cars, it made little or no profit at all. Ford relies on larger vehicles with higher profit margins, such as the Explorer or Crown Victoria, to make a profit. But because of the higher prices of larger cars, they are not selling as well as expected.

In 1995, Zhang said, Ford made an important decision to lower the price of its high-end models slightly so that it evoked consumer demand but not enough to unduly cut its profit margins.

This adjustment is one of the important reasons for Ford's profit of $7.2 billion in 1999, the highest annual profit for an auto company.

From 1995 to 1999, Ford's U.S. market share fell from 25.7 percent to 23.8 percent, according to BusinessWeek. But the decline in market share does not mean disaster. Although Ford has sold 420,000 fewer economy sedans because of its new pricing strategy, it has sold 60 more of its premium sedans. 10,000 vehicles. Professor Zhang believes: "Although Ford has made some losses in the low-end car market, it is still worth it."

Careful design and comprehensiveness are the safest solution.

Professor Zhang believes that pharmaceutical companies are facing challenges from generic drugs As you compete, you are also learning to develop flexible pricing strategies. They tend not to compete with other generic drugs on price, but to conquer the enemy by building a brand. For decades, pharmaceutical companies have spent a lot of money to build brand advantage, and they have done a lot.

Professor Zhang pointed out: "If you have been taking Bayer's aspirin for a long time, and it works as soon as you use it, then you will not switch to another brand, although the famous brand of aspirin Lin price is much higher than those generic aspirin. In fact, there is no significant difference between taking brand-name aspirin and taking regular aspirin. You can try to tell this fact to those who are already satisfied consumers, but good luck.”

Professor Zhang also cited another example of an effective pricing strategy, that of companies offering mobile phone services. Their pricing scheme is so complicated that few customers can figure out what's going on. "They do this for a number of reasons, and certainly not to the point where customers can't tell the difference between the price and the price."

Professor Zhang believes that if mobile phone companies don't think through their pricing strategies, their business may be Soon in danger of becoming a consumer commodity, just like the ordinary long-distance business, "a sophisticated, well-thought-out pricing strategy will help prevent the industry from falling into such a rut."

Raju and Professor Zhang has opened a new course for executives at Wharton called "Pricing Strategies: Assessing, Capturing and Retaining Value." They believe that in a deflationary environment, real consumer goods industries like oil or food will have a tough time, and those that are likely to be perceived by consumers as consumer goods will not fare much better.

Regardless of the economic environment, a company's pricing strategy must be well thought out at all times. "You must carefully analyze the environment in which the company operates, be sure of your judgment on price, and determine how much value your product or service can bring to customers." Professor Zhang pointed out, "Then you can formulate an appropriate pricing strategy to make It fits perfectly with the market environment and allows you to make as much profit as possible."