Pricing strategy is an integral part of the market-positioning decision, and its ultimate goal is to drive profitability. As an entrepreneur in digital space, I feel pricing is the most ambiguous aspect of value creation. The inherent success of the business is dependent not only on its own pricing decisions but also on how customers and competitors respond to these decisions. Many entrepreneurs commit blunders of offering same price to all the customers, which is sometimes influenced by the market forces. This would cause overpricing low-value customers and under-pricing high-value customers. And there are entrepreneurs who make drastic unexplained changes to the prices to meet short-term sales objectives that often results in adverse impact on perceived value and lower profits in future.
There is also a very common myth that only market share is the driving force to profitability. But in reality market share and profitability could be correlated to an extent but higher market share doesn’t necessarily result in higher profitability. What really matters is how effectively you are leveraging your business’s competitive advantage to achieve higher margins by either a price premium or lower cost of production.
Same-price strategy for all customers would overprice low-value customers and underprice high-value customers
What a business need is to invest in strategic pricing strategy that involves communicating the clear value to customers and proactively managing the pricing changes (aligned with established policies) based on competitors’ reaction to company’s pricing decision. Entrepreneurs should focus on redesigning the pricing structure that allows customers to decide on how to engage with the businesses.
I have personally come across few situations in which I had to decide whether to invest in boosting growth in high volume low-margin segment or low volume high-margin base. I take decisions based on how successful we would (and were in past) be in raising the customers’ willingness to pay price that reflects true product features value.
This brings me to the importance of value optimized pricing which sets the product prices based on perceived value to the customer instead of cost plus and competitor-based pricing tactics. Most of Apple customers buy latest version of iPhone just because it elevates the self-esteem of the buyer, and hence help in elevating the perceived benefits of ownership, and this aspect of Apple products also strengthened their resale value. But if you compare Apple phone with the latest version of Samsung phone on the aspects of tech specifications, aesthetics, and durability, you wouldn’t find significant differences that command $150-$250 more in perceived value. Smart pricing managers at Apple don’t have to make a list of EVERY SINGLE product feature and associate $$ value to them by evaluating customers’ willingness to pay. They would rather focus on feature differences and evaluate their value to the customers.
So the entrepreneurs need to focus on what fundamental value (in terms of functional, emotional and social impact) is addressed by their products/services before determining the right pricing structure.