Deciding on a pricing strategy can be a daunting task. Whether you're aiming to grow, skim, or follow, your choice can significantly impact your business's success. Let's delve into these three strategies and their potential implications for your enterprise.
Pricing is a critical choice
The hardest part of startups is making choices
- A choice is a decision between alternatives, whereby deciding to do one thing you are also deciding not to do another
- Set goals and make sure the pricing goals align with the larger business strategy
- Understand how you create value for different market segments
- Figure out your value metric and find a pricing metric that tracks value
Additional Resources from Steven Forth
You Can’t Price Software Without Focus
- The Secret to Boosting Your Software Pricing Power
- B2B Pricing Black Magic: Appealing to Economic and Emotional Needs
- How to Disrupt Your Market with an Innovative Pricing Model
- A disruptive pricing model can be one of the most effective tools you use to differentiate yourself
What Are The 3 Pricing Strategies?
Grow: Setting a low price, leaving most of the value in the hands of your customers
- Skim: Initially setting a relatively high price to reinforce your value and capture the profit you need to invest in more innovation
- Follow: Setting price based on your largest competitor or a dominant input so that you track changing market conditions
The Evolution of Your Pricing Strategy
Companies buy for different reasons at each phase and pricing strategy needs to reflect this
- Early adopters buy because the solution gives them a competitive advantage
- In the Bowling Alley, people are buying because their peers are buying
- When (if) you enter a tornado market you are in a land grab
- A grow strategy makes sense once the market is in Main Street
Market Following Strategy
Used to mean finding a dominant competitor and setting prices at a premium or discount to their price
- Recently, more sophisticated Market Following Pricing strategies have started to appear
- Price based on utilization ratios
- When utilization ratios are low, you would price based on how much you decrease input or process costs.
- But when utilization rates are high, you increase the capacity of existing facilities to avoid or defer capital investments
Pricing Strategy Checklist
Align pricing goals with the overall strategy
- Have a focused target segment and are setting a pricing strategy specifically for that segment
- Understand the pricing metrics used by the alternatives
- Choose a pricing metric that tracks value for the segment I am targeting
- Know what your brand represents
- A Grow, Skim, or Market Following strategy is an integral part of the strategy
Pricing Strategies for Startups
For start-ups, adopt a grow pricing strategy when market share (first mover advantage) is the most important thing about your market.
- Adopt a skim or premium strategy when you have a compelling value differentiation and have identified a well-defined and relatively small market entry segment (e.g. no dominant incumbent).
- adopt a market following strategy when there is a dominant incumbent
Constraints on Pricing Strategy
Price makes a statement about your brand
- Only adopt a Market Following strategy if there is so much volatility in the market that any other strategy would rapidly leave you with pricing that did not make sense
- You can only have one pricing strategy per segment
- Pricing strategy cascades into your marketing communication strategy and sales execution
