Tactical pricing begins with understanding your business economics. In many B2B pricing situations, especially in services, customers are price inelastic, i.e. they are more sensitive to changes in value than changes in price. As a result, companies find they may be able to raise prices to increase profitability. Doing that, however, may result in losing some lower end customers.
One PS organization we’ve worked with found that raising prices increased project margins, but overall margins decreased because utilization fell. This dilemma illustrates the problem of one price fits all, aka “monopriceosis”. Instead, an appropriate pricing strategy here is to design the offering and price menu such that low priced customers get streamlined service offerings and those that want greater value pay a higher price. Of course, there are tricks to the trade. The offerings must be designed with sufficient value differences across options that persuade certain customers to choose the higher priced options. In addition we must erect “fences” to keep buyers separated. More on this below.
Note this is not the same as giving salespeople pricing flexibility to adjust price for individual customers. When you give sales price flexibility, they will use price (discounting) to close deals. As a result, all prices will migrate to the lowest level. The strategic pricing approach is to segment customers and craft a price menu that forces value-price tradeoffs, i.e. provides salespeople with governance that protects high price business. These rules strengthen sales ability to communicate more powerfully and negotiate more effectively.
Price Determines Market
Market strategy is the combination of target customer plus offering plus price that creates a win-win relationship between buyer and seller. As a strategist, your price determines the target market you are after. Using the hotel business as an example, you need to answer the question: Are we the Waldorf Astoria or the Hampton Inn? These are two of the ten brands that comprise Hilton Hotels.
The truth is that you actually want a pricing strategy that gets in the way of some sales. Continuing the example, The Waldorf price gets in the way of more sales than the Hampton Inn price, and that’s OK. Your strategic pricing decision is what sales do you want to get in the way of and which ones you don’t. Then communicate that strategy to the sales organization! You want sales chasing the right kinds of deals. Your strategic market segmentation provides vital direction to sales, resulting in higher sales effectiveness and lower sales costs.
Note that once you have made this “price positioning” decision, price competition immediately diminishes. Waldorf competes with the Four Seasons and Ritz Carlton. It competes as a luxury hotel, at a luxury price point. These hotels in no way compete with the Hampton Inn or Courtyard by Marriott. This latter group competes for the day to day business traveler, at a day to day business price point. Each of the ten brands in the Hilton portfolio competes at a different price point.
Now let’s say you have decided you are the Hampton Inn, competing with Courtyard across the street. Tactical pricing begins with understanding your business economics. You only have so many rooms, and at full capacity customer service suffers. The Courtyard across the street has the same problem. So your goal is to hit a target range of occupancy where your contribution to overhead is high and customers are well served.
On the revenue side, you need to understand the demand for your hotel rooms. Is it visitors to the IBM facility across the street, visitors to the convention center down the block or visitors to the Six Flags over the hill. The types of buyers determine your offering packages. Obviously, your value proposition for IBM, conventioneers and vacationers are going to be different, with pricing that is tailored to each. Segmentation and targeting are once again at the forefront, providing day to day guidance to marketing and sales.
Your price strategy informs your sales people about the kinds of buyers they need to be chasing. Your pricing tactics have created prices that are tailored to the needs of these buyers. Both are built on the foundation of good segmentation and targeting. Good strategic and tactical pricing reduces the level of price competition. Sound pricing, therefore, becomes an aid to sales rather than an impediment, resulting in shorter sales cycles, happier customers and more money for commissions.
Free Business Impact Valuator
Description / More Information
Using our Business Impact Valuator you can estimate the impact of better pricing on your firm. Choose an area of interest, answer a few questions, and receive a complimentary report on that topic.