Types of Pricing Strategies to Address Supply and Demand

I decided to write on this topic because I kept meeting people who needed help with how to set prices, and as a way to engage readers, I promised to make this topic as exciting as possible. While I’m not sure I’ve succeeded in that, I have confirmed that this need is real, and that the whole area of pricing offers upside profit potential for many companies.

This post covers two key Market or Brand Based strategies. I created this segment to address situations where we might undertake a broader marketing strategy such as market build, or a specific brand level challenge like promotion pricing. Decisions made at the market or brand level should be driven more by knowledge and a clear understanding of the external environment.

Time Based Pricing

This strategy strives to maximize efficiencies and/ or profitability by setting price based on supply and demand at the time the product or service is purchased. Many utility companies use time of use pricing to help manage system demand. Here higher electricity rates are established during peak consumption periods, with lower rates applicable off – peak. Time based pricing is also well established within the tourist industry, where a price premium is charged during peak season, and lower rates offered during the off-season.

Dynamic or Flexible Pricing
This approach is similar to time based pricing, in that supply and demand are inherent in the price setting equation. Dynamic pricing can also take into consideration a range of other variables such as changing market characteristics and/ or large amounts of customer data.

One area where dynamic pricing is relevant is in pricing tickets for events. For example, the Washington Wizards modify ticket prices in real time using computer pricing software, with changes based on availability, league standings, roster, day of week, etc.

The airline industry is a well-known example of how pricing has evolved to use large amounts of customer data to customize pricing for identical or similar seats. While capacity and fill rates are important elements in the pricing equation, other factors such as past purchases, requested seats, and home base come into consideration.

Pros and Cons
Both of these pricing methodologies can increase profitability through better, more real-time management of supply and demand. Decision-making becomes more knowledge based as large amounts of data are used to support pricing changes, sometimes without human intervention.

On the downside, customers may be unclear as to what factors actually contributed to their price. They may view this as unfair, which may cause a backlash against the company or the brand. Similarly, these approaches can also be seen as discriminatory since different prices are charged to different individuals or groups for similar products or services.

From the company’s perspective, an investment in advanced software and personnel is required to optimize price adjustments over time. Since technology is being used to ‘mine’ personal data such as purchase history and demographics, some ethical issues may exist.

Summary
Time Based Pricing, and its more technology driven cousin Dynamic Pricing, are good examples of how pricing has evolved as a result of our capacity to gather and analyze large amounts of data. Thinking of pricing as a continuum with a simple cost based approach on one end, and a more complex dynamic pricing system on the other, where does your company sit? Are pricing reviews within your firm driven by the need to address increased costs, or is pricing seen as a strategic element of the marketing mix due to its ability to increase profit?

About John Slauenwhite

John Slauenwhite is a sales-oriented marketer who balances strategy and action. His background includes large corporate environments, senior roles in international trade development, and global leadership in the B2B arena across multiple channels, plants, and product lines.

Competition Based Pricing

 

The other day I heard someone refer to pricing as the bastard child of marketing. Why? Because pricing takes as much nurturing, if not more, than any other marketing tactic but generally doesn’t get the superstar recognition of an advertising campaign or new product launch.

This post is dedicated to Competition Based Pricing Strategies. In essence, we are now venturing into the marketplace and legitimizing our position versus other competitors.

 What is Competition Based Pricing?

In this methodology, competing products are used as a benchmark for how to set your prices, rather than using your internal costs, customer demand or brand development as key factors for price determination. This can be a simple and effective approach with the following options:

• Premium Pricing

  We feel able to charge some premium versus the competition because our product has attributes the purchaser values over the competition. These attributes may be real, as in the case of a concentrated soap that may deliver x% more volume of clean clothes, or perceived, as in the case of the luxury writing instrument. Presumably you have a sense of how much the attribute(s) are valued to enable you to set the premium. In the example below, the premium to the competition is $2/ unit, or 20%.

• Competitive or Parity Pricing

  In markets where there is little differentiation or a commodity orientation, competitors are often priced the same.

• Discounted Pricing

  Here we may adopt a price leadership strategy either because our product lacks certain attributes, or because we believe that the market is price sensitive. Simple analysis would allow us to determine payback for this strategy.

The above examples are meant to look at regular pricing versus the competition executed on a day-in-day-out basis. Another approach to competitor based pricing would be:

• High – Low Pricing

  This strategy positions the list price higher than the competition and discounts are later applied to tactically deliver a more competitive price point. Purchasers tend to peg the product value at the list price and ultimately feel they are receiving tremendous value by buying at the discounted price. North American car manufacturers often employ this approach, with discounts of $10,000 or more on some models.

While Cost Based Pricing is internally focused, Competition Based Pricing takes into consideration some important external influences. However, there are pros and cons for this approach.

Pros of Competition Based Pricing

1. On the positive side, this pricing strategy is relatively simple and easy to execute. This is particularly true in industries with few competitors, not many channels of distribution and/ or limited differentiation between products. Just follow the competition and tweak as necessary.
2. I also like the low risk element of this strategy since you’re not likely to lose volume and market share by following this approach.

Cons of Competition Based Pricing

There are also inherent weaknesses to this strategy…

1. Who says the competition knows what they are doing? In my experience, many marketing and sales people tend to view the competition as all-knowing, particularly in tough market conditions. I’m not saying we should underestimate the competition but perform some due diligence.For example, consult with your friends in accounting and make sure you understand your costs. Do the competitive price points you are seeing make sense relative to costs? Are competitive prices consistent across customers in a particular geography? You need to do reality checks since this approach is akin to delegating your pricing decisions to your competition.
2. If the competition is also using this approach, the entire industry may have stopped thinking. Once a ‘market order’ has been set, there could be a reluctance to change prices resulting in limited (price) competition. Complacency will yield inadequate understanding of true market demand and ultimately missed opportunities. For this very reason, I’ve learned to endure the pain of potentially trading away up to 5 per cent of the business each year while testing pricing limits. Of course, this kind of testing can also yield you an upside in revenue potential.

Summary

Competition Based Pricing is a viable option for many businesses, particularly those where there is limited differentiation between products. I believe this approach to be superior to Cost Based Pricing as it moves us from an internal focus to more of an external or market orientation.

Our pricing journey is becoming more interesting with the added complexity of external factors; we should recognize that this work is every bit as challenging as developing an advertising campaign or a new product. And in the same way, it requires focus and process to deliver upside potential.

About John Slauenwhite

John Slauenwhite is a sales-oriented marketer who balances strategy and action. His background includes large corporate environments, senior roles in international trade development, and global leadership in the B2B arena across multiple channels, plants, and product lines.