How to Create a Comprehensive Pricing Strategy
December 5th, 2022 (Updated 03/09/2023) | 9 min. read
By Danilo Zatta
Pricing strategy defines the way businesses use price to position themselves in their competitive landscape. A good pricing strategy includes qualitative and quantitative evaluation of the varied factors that go into setting a price for your product or service. Without a comprehensive pricing strategy in place that properly positions your organization in the marketplace and communicates your company’s real value to potential customers, your business may never achieve its full potential for growth and profitability. In that light, join us in this article as we examine how to create a comprehensive pricing strategy.
As business partners, Pricefx and Horvath have been working together for a while now to help large-scale enterprise business organizations create winning pricing strategies that are facilitated by the best in pricing software technology. Developing the correct pricing strategy can be critical to your company in successfully achieving your desired business outcomes.
In this article, we will look at why a functioning pricing strategy is critical to your business and the disastrous consequences if you don’t have one, and the top 3 ways to set up a comprehensive pricing strategy.
Why Have a Comprehensive Pricing Strategy & What Can Happen if You Don’t?
To achieve your organization’s primary goals and desired business objectives, having a comprehensive pricing strategy is key. It is perhaps easier to examine and get a clearer picture of why you require a comprehensive pricing strategy by looking closely at the dire misalignments and unfortunate outcomes that can potentially happen if your business does not have a definitive pricing strategy in place,
Companies without a pricing strategy would usually define prices based on historical activities. Your company’s customers, countries, and products would vary without any rationale, they would not be aligned and would most often be without any clear market positioning. How would your business be able to answer questions like;
- How can I assess if my business is the clear market leader?
- Is my business the price leader in the marketplace?
- What does my business want to achieve and what are our ambitions?
Without a comprehensive pricing strategy, answers to all these questions would be unknown.
Profitability & Market Intelligence Can Never Be Maximized Without a Pricing Strategy
With no pricing strategy in place, making the most of your customers’ ‘willingness to pay’ is to pay would not be realized fully and your sales teams would often revert to being focused on volume rather than selling on price or margin optimization. Consequently, achieving strategic corporate goals will not be possible and profitability cannot be maximized.
What Happens with a Comprehensive Pricing Strategy in Place
Once your company boasts a comprehensive pricing strategy, your organization will be provided with clear guidance on how to determine, set and change prices. Prices between customers, countries and products would be aligned and regularly updated. There would be also clear positioning for every market segment reflected through pricing.
The flow-on effect will be having a clear ambition to what your business is looking to achieve. A pricing approach to which product segments to apply and concentrate would have been taken and your sales team would now have clear guidance on their price ‘selling corridors’ and know exactly when to focus on volume and when to focus on price or profitability.
In other words, your organization’s profitability goals can be achieved and maximized, and you will have a clearer overall clear picture of the direction that your business is heading in.
You will be able to ask yourself, is it the sales volume you are looking for, or are you looking for profitability or an overall balance between the two reflected in your pricing strategy?
The Role of Pricing Models in Pricing Strategy & Creating Business Opportunities
In today’s modern business environment, having an innovative pricing model defined in your pricing strategy is becoming today’s new source of competitive advantage.
Learn More About Pricing Models in Danilo’s book ‘The Pricing Model Revolution: How Pricing Will Change the Way We Sell and Buy On and Offline,’ available here.
Innovative pricing models help companies gain access to customers and segments that they would not have been able to serve previously simply because the pricing model was the hurdle. And with a new pricing model in place, large-scale business organizations can create a source of competitive advantage by being able to open-up access to new segments and to new customers, capturing a market share that has never previously been open to them before.
The Top 3 Ways to Create a Comprehensive Pricing Strategy
Before we dive deeper into the Top 3 ways to create a comprehensive pricing strategy, it is wise to acknowledge that there is no perfect pricing strategy for any business, and with that, recognize that your pricing strategy may change over time.
Changes in the marketplace require continual calibration and adaptability. While one pricing strategy may be just what you need for your product during its introductory phase, that strategy may become ineffective later. Many successful companies are flexible and adjust their strategies over time in their pursuit of maintaining profitability and a competitive advantage.
However, remember that having a well thought out pricing strategy from the get-go will be vital to ensuring your company will thrive.
Consider the top 3 ways to set up your comprehensive pricing strategy:
Define Your Guiding Principles & Desired Business Outcomes
Most importantly in setting up your pricing strategy for your business you require some decision-making regarding what you want to achieve in operational terms of market segments, market specific strategies and pricing rules. In other words, what will be your organization’s guiding pricing principles, your vision of where you perceive your company’s preferred position to be (market follower, discounter, premium price leader etc.)
What that means is honestly asking yourself the questions like:
- Are high prices acceptable?
- Do you accept low market share in exchange for high profits and profitability?
- Is your company’s self-image important?
- Are sales expected to follow your company’s market leader premium pricing position, for example?
Other things to consider when setting your pricing objectives are whether you want to maximize short- or long-term profits, achieve market stabilization, or increase sales volume or market share, etc. Other potential pricing strategy outcomes that may drive your guiding principles might include:
- An increase in profitability
- Improved cash flow
- Market penetration
- Increased market share
- Increased revenue per customer
- Price-beat your competitors
- Introducing new products to the marketplace
- Reaching a new client base
- Increase in customer conversions and much more
Remember, there are no right or wrong answers. Your business is unique, and your pricing strategy should reflect that.
Get the Technology to Do the Job
The second part of that equation is having the tools on hand to develop those kinds of market segment specific strategies. For example, does your business have different customers, (professional or consumer), or various products that require different positioning because they are in different product life cycles or are offered in different regions?
You require the technology to be able to work with that.
To have a successful pricing strategy, you will need to give your pricing team the right tools to do the work. Your pricing team should be skilled in the use of data analysis (e.g., sales and transaction, customer, and product data) to develop the right fact base for your strategy.
Finding patterns and objective insights to support decision-making is vital and supplying your team with quality pricing software is a critical part of the puzzle. This type of transparent technology reinforces consistency in your pricing and allows for your pricing logic to be clearly defendable and explainable by your sales team when they are communicating with prospects.
Depending on the way your company is organized, the responsibility for pricing can range from sales, marketing, product management or even your finance department. With the advent of pricing software technology, dedicated pricing teams are already part of many organizations. More of these dedicated pricing teams are continually being added to companies all around the world.
Get Granular with Your Pricing & Make the Most out of Every Segment
Finally, with the right technology driving your pricing strategy your business will be empowered to take different steps to more elaborate and defined pricing strategies.
For example, utilizing Next Gen AI-informed pricing software, you would be able to answer multiple simultaneous price optimization questions like which products and/or markets can be combined when developing a pricing strategy.
You could even put in place different strategies for assorted products in different countries and define specific strategies and make them relevant for the different segments in which you are playing.
For example, imagine your work in the pricing department of a shoe company, and your organization sells three types of shoes: summer shoes, waterproof winter shoes and non-slip clay-court tennis shoes.
You have determined your global pricing strategy to be the following:
- Increase Sales volume on your non-slip clay court tennis shoes to lower production costs (as these are your products with the least sales numbers)
- Have a standard 20% profit margin on your summer shoes
- Have a standard 30% profit margin on your winter shoes and;
- You want to simultaneously apply all these rules in every market you sell in except for Canada, the United Kingdom, and the United States where a standard 50% profit margin applies across your entire product range as demand is strongest in those 3 countries.
Using your AI-informed price optimization software, all 4 of the above business outcomes can be built into a single pricing rule for your pricing software to calculate your optimized prices worldwide automatically.
Need Help to Create your Comprehensive Pricing Strategy?
Now you know the steps towards creating a comprehensive pricing strategy for your business. However, if you do not have the internal resources to bring it to fruition you will want to learn more about how a pricing software partner can help you to achieve your business goals faster.
If you are a company looking for pricing software with a strong strategy partner partnership focus across a range of industries and specialty areas of expertise, then you will want to learn more about the Pricefx Advantage Partner Network and one of the specialty partners, Horvath.
On the other hand, if you are still unsure about working with partners to align your company’s pricing ducks in a row, check out the handy article below to learn more about the benefits that come by working together with a pricing software partner;