Why a clear method for determining optimal pricing matters to a mid-marketer

Setting a price for a product or service is one of the most critical business decisions a mid-marketer will make. But, many mid-size businesses feel that they don’t have control over the pricing- Either their competition sets it for them, or they must rely on their “gut-feeling.” The two-step process outlined in this perspective report is designed to help you first to assess your competitive strategy and then to reflect that in your pricing structure.

Step One: What’s your business strategy?

To reflect on Porter’s classic generic strategy model, three generic strategies exist in business:

• Having the lowest price
• Having a product or service that nobody else sells
• Having products that specialized customers want

But, how do these well-known business strategies pertain to the mid-market pricing question?

With the lowest price strategy, you win when you can provide your product or service lower than your competitors… or in other words, you can charge a lower price and still make a profit. In this case, since your goal is to price under the competition you have to know what their price is and, more importantly, what their costs are. For some companies with public products and visible competition, this information is out there, but this can be a tall order to obtain for a mid-marketer. So, think about whether you’re in the lowest price strategy and keep that in mind as you read on.

When you have a product or service that is so unlike your competitors (and, therefore, superior for target customers) you can charge a premium price…but how much? Product or service superiority is often short lived so companies either need to keep that innovation slope going or recognize the competition as it catches up and shift strategies. Price and value are always table stakes between buyer and seller, but when the seller has the high ground of unique value, price pressure loosens.

In the third strategy, you win when you have products or services that are specialized or unique to certain customers such that competition is eliminated or at least minimized.

The point of thinking of these models is that you answer some questions about your business that lead directly to your place in the market…and price.

Step Two: Characterizing how pricing is set

Once you’ve settled on your competitive strategy, it’s important to characterize how markets and prices behave in the customer world.

There are three basic ways to look at how prices are set:
Profit Driven Pricing
Profit driven pricing exists when the price is set by the producer by specifying a certain amount (margin) above the known cost of the product or service. You know what your cost profile is and you know how much profit you need to make (or would like to make) so this number should simply compute out.

Market Driven Pricing
Market driven pricing is when price is determined by what the customer base is willing to spend. This must be known; however, it is often difficult to obtain. With this model, a company can set prices based on what they think the value is to the customer, but the buyer has some control over the number and that it is always “up for discussion”.

Competition Driven Pricing
Competition driven pricing exists when price is set by what competitors charge for similar offering. A competitive set can establish a range that is very firm and cannot be exceeded despite significant differentiation. For example, newspapers have a standard price range that even the most significant gimmicks cannot transgress. That said, competition and differentiation in that market exists and customers make their choices based on price and value…but there really isn’t a customer looking to buy a $5 daily. On the other hand, there are products and services that are so unique, new, market dependant, and/or with few competitors that there is no competitive driven pricing. Professional sports tickets are an example where this range continues to grow—who really knows how much a ticket is worth?

Price Triangulation – putting it all together

Once you’ve thought about the business strategy and pricing models we’ve mentioned above in the background, you can then put them into a framework and get some pricing answers (or at least direction.) The Actions section of this MidMarketer Perspective goes through an exercise for triangulating around a pricing zone where the forces of markets and competition interact. You can also download the “Pricing Triangulation Template” in the MidMarketer.com Tools Section as a starter.