Pricing is one of the 4 Ps of marketing and the most basic tactic, having been around for hundreds if not thousands of years. It is the most direct way of communicating value to customers and has the most direct impact on bottom-line performance.
At the same time, price as a marketing instrument is difficult to leverage effectively because it involves integrating decision-making vertically and horizontally within the organization. Apart from the bottom line, it can also impact brand perception: Too low a price may cause the brand to be perceived as a commodity, whereas too high a price runs risk of being priced out of the market.
Pricing has multiple levels of implementation. At the highest level is strategic pricing, which takes into account long-term profit objectives of the organization at brand or franchise level. The next layer is tactical pricing, which optimizes price to take into account short-term market dynamics, including demand shifts and competitive effects. The lowest layer is execution level, where SKU-level dynamics and inventory and supply management come into play.
If too much focus is placed on strategic pricing, short-term opportunities occurring due to competitive actions may be missed or aggressive campaigns may go unchallenged, leading to expensive market share loss, which may not easily be regained. On the other hand, a myopic focus on tactical pricing will miss the big picture, causing long-term loss of profitability.
Pricing optimization is the process by which revenue is optimized by maximizing buyers for minimum reduction in price, or maximizing price for a minimal loss of buyers. This is a tricky tradeoff, as under-pricing directly impacts the bottom line and over-pricing indirectly impacts market share.
Pricing relies on tried and tested concepts from economics, like demand-supply equilibrium and utility functions.
Pricing has greater leverage for products or brands with higher price elasticity, since small changes in pricing can result in substantial changes in revenue (Price elasticity is the percentage change in demand/revenues for a percentage change in price).
The effectiveness of pricing as marketing lever is also affected by competitive pricing activities, especially for brands and products with high cross-elasticities. Cross-elasticity is the percentage change in the demand for a product for a percentage change in the price of a competing product.
Pricing effectiveness is also affected by other marketing tactics, like promotions and advertising. If there are substantial changes over time in these tactics, the true impact of pricing strategies may be confounded with the results of those tactics. Pricing can then be correctly measured by controlling for these different drivers of demand, which is typically done through a market-response or marketing-mix model.
Tactical price optimization can be carried out with output from simple regression models that ignores the simultaneous competitive reaction for pricing changes, because in the short term the impact of these changes may be very subtle. But in models that simulate scenarios of strategic, longer-term price changes, not including the simultaneous relationship between brand and competitive pricing will lead to potentially spurious results, because the sales change from brand-level pricing change may partially be offset by competitive reactionary pricing.
Pricing has several business objectives, which can become the primary pricing strategy or may form a portfolio of pricing strategies that can be alternated to meet different market conditions:
- Profit maximization: This is pricing for maximum profit and can be pursued if the product is sufficiently differentiated in the market.
- Target ROI- or ROA-based pricing: Here price is simply Cost of Goods Sold + [target return times total investment or total assets].
- Market-share growth: For well-capitalized firms, a short-term offensive strategy may involve lowering price to almost break-even levels to increase market share. In addition to greater market share, which can be later leveraged to increase prices, this strategy also helps in increasing margins by lowering costs from the economies of scale achieved through higher volume.
The above matrix, which is an adaptation from the well-known BCG Matrix, shows pricing and market-share for four hypothetical brands:
- Brand A has a low price and low market share; it is a small player that will eventually either buckle under the pressure of the large volume players or get acquired.
- Brand B is the high-end market leader that enjoys a price premium—an enviable position to be in. This is not usually a sustainable position unless the player has a considerable competitive advantage that acts as a barrier to entry for other players.
- Brand C is the niche market player that enjoys a price premium, usually for the high-end segment of the market—a profitable but risky strategy due to a lack of diversification.
- Brand D is the high-volume price discount player (Wal-Mart, for example); it maintains its market position by keeping very low margins and making profits on volume.
This is just one of the ways in which pricing strategies can be related to sales growth. These broader strategies are further segmented into more sophisticated techniques like Hi-Lo retail pricing (alternatively pricing some items high in some weeks and low in other weeks to give an overall impression of being a low-price retailer).
Every Day Low Price (EDLP) is another popular strategy (a strategy of consistently offering a low price, but not the lowest). Other broader strategies are "skim pricing" (high price margins in an innovative or low-competition market) and "penetration pricing" (low price margins for the purpose of building initial market share).
FAQs
These are adopted over the medium to long term to achieve marketing objectives They have a significant impact on marketing strategy. Pricing tactics. These are adopted in the short run to suit particular situations Tactics have only limited impact beyond short-term sales of the product itself.
What is the difference between tactical and strategic pricing? ›
At the highest level is strategic pricing, which takes into account long-term profit objectives of the organization at brand or franchise level. The next layer is tactical pricing, which optimizes price to take into account short-term market dynamics, including demand shifts and competitive effects.
What are the 3 basic pricing strategies? ›
The 3 Most Common Pricing Strategies
- Cost-based or cost-plus pricing.
- Market-based pricing.
- Value-based pricing.
A pricing strategy takes into account segments, ability to pay, market conditions, competitor actions, trade margins and input costs, amongst others. It is targeted at the defined customers and against competitors.
What is an example of strategy and tactics? ›
Tactics are the specific actions or steps you undertake to accomplish your strategy. For example, in a war, a nation's strategy might be to win the hearts and minds of the opponent's civilian population. To achieve this they could use tactics such as radio broadcasts or building hospitals.
What is the most important pricing strategy? ›
Value pricing
Value pricing is perhaps the most important pricing strategy of all. This takes into account how beneficial, high-quality, and important your customers believe your products or services to be.
Whats the difference between tactical and strategic? ›
While strategy is the action plan that takes you where you want to go, the tactics are the individual steps and actions that will get you there. In a business context, this means the specific actions teams take to implement the initiatives outlined in the strategy.
Which comes first strategic or tactical? ›
Tactical planning occurs after a business, team, or individual has created a strategic plan that outlines general goals and objectives. A tactical plan describes the steps and actions that must be taken to achieve the goals from the strategic plan.
What is the difference between strategic and tactical planning explain with an example? ›
Strategic plans influence the development of tactical plans. A tactical plan answers "how do we achieve our strategic plan?" It outlines actions to achieve short-term goals, generally within a year or less. They are much narrower in focus and can be broken down into the departmental or unit level.
What are the 4 pricing techniques? ›
What are the 4 major pricing strategies? Value-based, competition-based, cost-plus, and dynamic pricing are all models that are used frequently, depending on the industry and business model in question.
— but even when selling a product, determining the right price is challenging.
...
Strategies: 4 steps to determine what price is right
- Do your research. ...
- Test the market. ...
- Offer different price points. ...
- Explore different pricing models.
What Are The '4 Pricing Methods'? There are 4 Pricing Methods that can help you put a price on what you sell: replacement cost, market comparison, discounted cash flow/net present value, and value comparison.
How many basic pricing strategies are there? ›
There are three basic pricing strategies: skimming, neutral, and penetration. These pricing strategies represent the three ways in which a pricing manager or executive could look at pricing.
What is the importance of pricing strategy? ›
The importance of pricing
Pricing is important since it defines the value that your product are worth for you to make and for your customers to use. It is the tangible price point to let customers know whether it is worth their time and investment.
What is the first step in strategic pricing? ›
There are several common pricing strategies to choose from to price products and services, from value-based pricing to price skimming. The first step in choosing a pricing strategy is to examine the different types, review pricing strategy examples, and understand how they differ.
What is the importance of strategy and tactics? ›
Your strategy tells you what your long-term goals are. Without tactics, you don't really know how you're getting there. Your tactics are important as they give you a tangible route to take to achieve your goals.
What makes pricing successful? ›
The answer is that it must be right for the customer. The right price is based on the value the customer expects, and thus the "profit" they make from your product. But they have plenty of products and services to choose from and will choose what gives them most profit -- on their own terms.
What is the first best pricing rule? ›
In a first-best world, without the need to earn enough revenue to cover fixed costs, the optimal solution would be to set the price for each product equal to its marginal cost.
What is the best pricing factor? ›
Five factors to consider when pricing products or services
- Costs. First and foremost you need to be financially informed. ...
- Customers. Know what your customers want from your products and services. ...
- Positioning. Once you understand your customer, you need to look at your positioning. ...
- Competitors. ...
- Profit.
Elements of Tactical Planning
For example: further breaking down organization goals which are more than two or three years long, having a goal-oriented timeline with short term targets, like, target for next three months or six months.
Types of Tactical Aims and Actions
- PREVENTION: Tactics aimed to prevent imminent violations from happening, put obstacles to deter abuse or remove opportunities for abuse.
- INTEVENTION: ...
- RESTORATIVE: ...
- PROMOTION:
/ˈtæk·tɪ·kəl/ relating to tactics; done in order to get a particular result: He made a tactical error in agreeing to the debates. Tactical military operations or weapons are used to achieve specific goals.
What are the 3 strategic process? ›
The strategic-management process consists of three stages: strategy formulation, strategy implementation, and strategy evaluation.
What are the 3 types of strategy? ›
What Are the Three Types of Strategy- And How You Can Apply Them!
- Business strategy.
- Operational strategy.
- Transformational strategy.
While strategic decisions are visionary, tactical decisions are practical. While strategic decisions are slow and thoughtful, tactical decisions are quick and responsive. While strategic decisions engender long-term success, tactical decisions live and die in the moment.
What is the main difference between strategic marketing and tactical marketing explain briefly and give examples? ›
For a short summary: strategic marketing outlines what you are trying to achieve, while tactical marketing covers how you will try to achieve it. Both of these approaches are very different and can work solo. But, they won't deliver at full potential until they are combined into your digital strategy.
What is tactical and strategic information? ›
The terms strategic and tactical are typically used in a business environment to refer to the two main types of planning, thinking, or actions that takes place. Plainly stated, strategic refers to "what” and “why" the business chooses to do something and tactical refers to "how” they plan to accomplish it.
What is pricing method? ›
Pricing method is exercised to adjust the cost of the producer's offerings suitable to both the manufacturer and the customer. The pricing depends on the company's average prices, and the buyer's perceived value of an item, as compared to the perceived value of competitors product.
What are the two methods of pricing? ›
The pricing methods can be broadly divided into two groups—cost-oriented method and market-oriented method.
What are the 6 types of pricing? ›
To help you make the right choice, below I've listed six pricing strategies in marketing to consider for your small business.
- Price skimming. Best for: Businesses introducing brand new products or services. ...
- Penetration pricing. ...
- Competitive pricing. ...
- Charm pricing. ...
- Prestige pricing. ...
- Loss-leader pricing.
To determine the effectiveness of pricing, you need to measure your actual results for each variable that might be a factor in determining whether or not a customer buys. That means you should analyze results for: Each different customer segment. Each different size of customer.
What factors affect prices? ›
Four Major Market Factors That Affect Price
- Costs and Expenses.
- Supply and Demand.
- Consumer Perceptions.
- Competition.
What is a pricing structure? Your pricing structure defines your pricing setup for products or services, including your core price points plus discounts, offers, and strategy.
What are the 4 pricing strategies? ›
What are the 4 major pricing strategies? Value-based, competition-based, cost-plus, and dynamic pricing are all models that are used frequently, depending on the industry and business model in question.
What is a pricing strategy and why is it important? ›
A pricing strategy involves the processes and methodologies that can be used to set prices for products and services. It is there to help you determine how much to charge for your items.
What are sales strategies and tactics? ›
Sales tactics are actions you take to increase your chances of making an individual sale, while sales strategies are the long-term plans you put in place to reach your ultimate goals of increasing revenue and market share. Your business should have both sales tactics and sales strategies.
What are the importance of pricing tactics? ›
Pricing is important since it defines the value that your product are worth for you to make and for your customers to use. It is the tangible price point to let customers know whether it is worth their time and investment.
What are the methods of pricing? ›
12 types of pricing strategies
- Penetration pricing.
- Skimming pricing.
- High-low pricing.
- Premium pricing.
- Psychological pricing.
- Bundle pricing.
- Competitive pricing.
- Cost-plus pricing.
In this short guide we approach the three major and most common pricing strategies: Cost-Based Pricing. Value-Based Pricing. Competition-Based Pricing.
What are the 4 strategy? ›
The four phases of strategic management are formulation, implementation, evaluation and modification.
Within the domain of well-defined strategy, there are uniquely different strategy types, here are three: Business strategy. Operational strategy. Transformational strategy.
What is a price tactic example? ›
One of the most common pricing tactics that companies use is to price their products just a few pennies lower so that the first number of the price is lower. For example, if you were using charm pricing, you would sell your products for $19.99 instead of $20 because $19.99 seems like it is less.
Why pricing is the most important? ›
Why is pricing important? In markets with increasing volume and price pressure, the right pricing approach is essential to remain competitive. It brings you the value you deserve for your products and services offered and secures the profits you need to invest in change and growth.
What is the most important factor in pricing? ›
Three important factors are whether the buyers perceive the product offers value, how many buyers there are, and how sensitive they are to changes in price. In addition to gathering data on the size of markets, companies must try to determine how price sensitive customers are.
