Pricing is not a strategy.
A strategy is the big picture of how you compete in the market. Your strategy should be based on how your product or service is different from your competition. That could be features, that could be location, that could be marketing, that could be breadth or focus of offering, but it shouldn’t be pricing.
The only way that pricing can be your strategy is if you are always known for the lowest price. That’s Wal-Mart. If you take this as your strategy, then your business must be continually focused on lowering and controlling costs, just like Wal-Mart. You are attracting the price buyers, the customers who are not loyal, but are looking for the lowest price. Once a competitor figures out how to produce a similar product for less, they will charge lower prices and you will struggle. If another company figures out how to sell products for less than Wal-Mart, Wal-Mart will be in trouble. Wal-Mart has a laser focus on keeping costs down to make sure that doesn’t happen. If you make low price your strategy, you have to be like Wal-Mart, laser focused on low costs.
You may be thinking about a different price strategy. “My product is as good as a Lexus, but less expensive. I’m going to make that my strategy.” Don’t do it. You may be able to have that product positioning for a short period of time, but it’s not sustainable. The market will morph and your position may or may not exist in a few years. You have competitors on both side of you, above and below, either of which may be able to steal your position, because it’s just price. A better strategy would be to position yourself relative to a Toyota, differentiate yourself, then price to the market.
This is not to say that you can’t have a pricing strategy. Actually, you MUST have a pricing strategy. Your pricing strategy is different from your corporate strategy. Your pricing strategy is a big picture view of how you set your prices. There are three pricing strategies: penetration, skimming, and neutral.
Neutral pricing is setting a price that is similar to your competition, taking into account any difference in value offered. Penetration pricing is charging much lower prices in an effort to grow the market or steal market share. Skimming is charging higher prices, usually in an effort to segment the market. In a future post we will discuss when each of these strategies is most appropriate.
Action: Write down your corporate strategy. What is your sustainable competitive advantage? Did you mention the word price? If so, try to rewrite them without using price.