Pricing Solutions - Global Pricing Strategy Consultants - Global Pricing Research

Paul Hunt Apr 19, 2012 – 9:00 AM ET | Last Updated: Apr 19, 2012 11:23 AM ET

Cost based pricing is relatively simple; you figure out your cost of goods, set a desired margin for each unit, add that margin onto your costs and you have your price.  Cost based pricing doesn’t require the detailed level of analysis and value measurement necessary to employ a value-based pricing strategy.  Because it’s simple, many companies fall into a trap of cost-based pricing.  But as far as smart pricing goes, cost-based pricing strategies are anything but.  So if it’s simple, why does it suck?  Here are three reasons why:

Reason 1:  Cost based pricing limits your ability to price to different segments of the market.  Think about these two examples; the last sporting event you went to and your SEO strategy.   In the case of the sporting event, ticket prices vary based on the view you get of the game.  The cost to install a seat, serve a customer and the game itself don’t change whether you are at game level or up in the nosebleeds, but you certainly pay more to sit up close because it is perceived to be a better, more valuable seat.   In the case of SEO, it doesn’t cost Google more to place your key words near the top of the list, but you pay more for a higher position if you value higher visibility of your key words.  Both of these examples have something in common; pricing is about capturing as much of the demand curve as possible.   In each example the customer base can be segmented by its willingness to pay.  There are multiple offers, each at different prices based on what people are willing to pay, not based on the cost of the offer.  By setting a variety of prices based on how different customer segments value your offer you capture a greater portion of the market, maximizing revenue at each point on the demand curve.

Reason 2:  Customers don’t care about your costs, they care about the product attributes they value. In the Smartphone market, do customers really think about what it costs the manufacturer to produce a phone? Do customers consider what the wireless carrier is paying to carry Blackberry, iPhone or various Android phones?  The answer is typically no.  Customers focus on the product attributes that they value; data capabilities, network coverage, apps, screen size, touch screen vs. keyboard, etc.  Customers will be willing to pay more for a phone that has the features that best meet their needs regardless of the manufacturing costs.  If a customer’s willingness to pay is not based on the cost of goods, your price shouldn’t be either.

Reason 3:  Unrealized revenue and profit can be substantial.  A tire manufacturer developed a more durable, longer lasting tire.  If a cost-based pricing strategy had been implemented the manufacturer would have set prices about 10% higher than competitive products reflecting the higher cost of materials required for added durability.  This would have resulted in the manufacturer missing out on millions in profit, because the price would have been 10% higher but durability was 100% better than competitive tires.   The manufacturer would have missed out on capturing the true value of the tire.  To capture that premium the tire manufacturer developed an innovative pricing strategy.  Historically, customers expected tires to be priced based on size; tires that are the same size should be about the same price.  A 10% price premium would not have been received well by customers without realizing the benefits of the added durability. To avoid losing out on sales and profit, the manufacturer avoided a cost-based strategy and used a pay-per-landing model. This created a situation where the new tire could not simply be compared to competitive products based on size and price and customers felt they were getting better value paying per landing.  The customers realized the benefit of the additional landings they could get out of each set of tires.  The manufacturer achieved close to a 100% premium over competitive tires resulting in significantly higher profits than a cost-based strategy would have generated.

The impact of a smart pricing strategy will show up on your bottom line.  Spend the time to price based on value and avoid the easy trap of cost-based pricing.  It will pay off in the long run.

Paul Hunt is the president of Pricing Solutions, an international pricing strategy consultancy dedicated to helping clients achieve World Class Pricing competency. Written in partnership with Madeline Stein, Senior Consultant of Pricing Solutions.

Financial Post April 19th, 2012

Paul Hunt Mar 22, 2012 – 9:00 AM ET | Last Updated: Mar 21, 2012 11:11 PM ET

Marketing professionals work hard to bring innovative new products to market, but often the customers’ procurement department figures out ways to commoditize the product thus negating the pricing power that you expect to get out of an innovation.

The result is poor profit margins and less investment in innovation — not an acceptable formula for long term success.

This trend is prompting some marketers to find ways to make sure they capture a price that rewards the value they have created.

Here are a few examples.

1. Pay per Use

Pay per use is common for services and subscription based products.  In recent years, it has been introduced as a new pricing model for hard goods.

• A manufacturer of aircraft components developed a tire that would last longer than anything else on the market.  Despite being a premium product, customers had a difficult time accepting the premium price.  The manufacturer regrouped and set the pricing strategy based on the key benefit:  increased number of landings.  Instead of buying a set of tires, customers would pay for each landing they achieved with the new tires.  The lower per-use price appealed to customers and generated higher revenues than the manufacturer forecasted with its original pricing strategy.

• In healthcare, large capital investments for equipment are necessary but difficult with tight budgets.  A medical device manufacturer developed a new delivery system for anesthesia and introduced a pay-per-procedure model.  Hospitals would essentially “rent” the equipment and pay for each time the device was used.  The pricing model was a huge shift in thinking for the healthcare industry but made it easier to adopt this device because they didn’t have to budget for a large capital expenditure.

Pay Per Use is an effective strategy when the customer doesn’t want to make a large capital investment and the manufacturer can generate recurring revenue from frequent product use.

2. Pricing based on Cost-Benefit Analysis

Cost-Benefit analysis is a regular exercise for procurement departments evaluating between product offers.  It can also be an effective exercise for a Pricing Manager to do when setting prices.

• A medical equipment manufacturer developed a new line of hospital beds.  Based on specifications, these beds did not appear to be different than existing beds but they were twice the price.  The manufacturer knew its new line of beds had advantages over the competition so it invested in a cost-benefit analysis.  With the results, the manufacturer was able to show that its beds reduced workplace injuries, therefore reducing time off and worker compensation costs.  The savings made up for the premium price of the bed and sales took off.

Proving to your customers the long term savings that can be achieved with an investment up front can drive success.

3.  Pay What You Want

This strategy has gotten a lot of press, but the results have been fairly dismal…..except in a few very unique situations.   Instead of the marketing team selling the value of the product and setting the price, the customer determines the value and pays accordingly.

• The band Radiohead released its last album as a digital download and listed the price as “up to you”.  The strategy generated publicity and interest in the album.  However, Rolling Stone reported that while the album was popular, most fans decided Free was the best price for the digital download.
• Even organizations and individuals that are reliant on Pay What you Want have made some modifications to try and increase what they receive.  Two examples:
  • I was at a “Busker” fest (e.g. street performers) recently.  It was very interesting watching them implement their pricing strategies…..after they finished their act they pointed out what made them unique and the value that they brought “where else can you get to see world class entertainment like this and not have to pay a substantial price.  I am only asking you for a minimum donation of $5!  I used to give $1 and feel good about it…..not any longer!  In speaking to a few of the buskers they have found that the donation size has gone up….more than enough to offset any loss in the number of donations!
  • The same is true for not-for-profit organizations.  Rather than leave it to people to determine what size of donation to make, most of them are suggesting amounts.  When is the last time your alma mater asked you to “contribute whatever you feel like contributing”?  Now, almost all of them have a suggested donation size (e.g. $100).

“Pay What You Want” is necessary in some situations (e.g. not-for-profit, busking, etc.) but even they are setting reference prices to push their constituents to “dig a little deeper”.  And when it comes to consumer goods, “Pay What You Want” will bring out the spendthrift in all of us.

Be sure you are not letting yourself be commoditized. Remember, when it comes to pricing it is just as important to have the right pricing model as it is to have the right price.

Paul Hunt is the president of Pricing Solutions, an international pricing strategy consultancy dedicated to helping clients achieve World Class Pricing competency. Written in partnership with Madeline Stein, Senior Consultant of Pricing Solutions.

Financial Post March 21, 2012 – Pricing Solutions

Pricing Solutions is proud to sponsor the Pricing Management course under professor Vinay Kanetkar at Guelph University.In the past several years we have awarded a $500 prize to the best term paper .

Congratulations to our 2011 winners! Click on the links to check them out.


Winter 2011 winner: Stephanie Coutinho did a paper on organic food prices in Canada and touches upon brand preference and how it affects consumer perceptions of value pertaining to organic foods, specifically what attributes of a product consumer’s value most, and the increased amount they would be willing to pay for organic verses conventional food products.


Fall 2011 winner: Emily McLean & Alexey Novikov put forth an investigation of retailers and final consumers’ price sensitivity in the mobile industry and furthermore what alternative distribution models are available to manufactures to re-capture profit.


For more information you can contact vkanetkar@pricingsolutions.com

Paul Hunt Feb 23, 2012 – 10:00 AM ET | Last Updated: Feb 22, 2012 4:47 PM ET

Pricing low to gain volume is the oldest move in the pricing playbook; the laws of economics say that as you lower price, volume will go up. Therefore many companies that want to dominate a market, or are in a rush to grow in a new market, will use low prices to achieve their goals (e.g. Walmart, Dell, Private Label).

But where do you cross the line? When the price is so low that it communicates a lack of quality? It is certainly a tricky balancing act and it depends upon a lot of factors.

For example: the e-book market. As noted by Melissa Foster, an award winning author, “There seem to be two different schools of thought when it comes to e-book readers: there are those who will only buy 99-cent books, and those who refuse to buy 99-cent books, with the latter group fearing that the cheaply priced book must be of poor quality.” Furthermore “bringing books down to 99 cents throws them into the ‘impulse buy’ category, allowing their work to get into hands of far more readers.” Foster also adds that she ran an experiment where she priced her e-book for 99 cents and sold 60,000 one month and then raised the price to $2.99 and sales dropped to 20,000 the next month.  The same amount of money, but a lot fewer units!

The .99 e-book price point is what I call “No-brainer pricing”. The price is so low that buying the product or service is a no brainer for many people; they can buy the product almost risk free since the loss would be minimal if they are not satisfied. I see this strategy being increasingly deployed in the digital age because of low costs of distribution. Selling an electronic book is vastly less expensive than selling a hardcover book.

However, even companies that are not selling digital products will sometimes deploy this strategy. For example, a Denver-based newspaper wanted to dramatically increase circulation and drive a competitor out of the market back in the 90s. To do so, it lowered subscription rates to one cent per day. This caused the subscriptions to quadruple. In this case the strategy seemed to work. However, it’s important to be careful; it can also damage a brand and ultimately may not be sustainable. Eventually, the paper had to raise rates and the result was that subscriptions dropped off dramatically. Whereas, In the e-book market the 99-cent price point can continue on forever as long as there are writers who are willing to sell their content for that price.

Another interesting phenomenon around the topic of selling ‘cheap’ is the emergence of Dollar Stores. The growth of Dollar Stores demonstrates that there are lots of products which consumers are more than happy to pay ‘cheap’ prices for. While Hallmark and Carton were insisting on selling cards for price points between $3-$4, the Dollar stores priced them at 99 cents. You can guess what happened; sales rocketed. Clearly, consumers have decided that a 99-cent greeting card can be just as clever and appreciated by the recipient as a more expensive card.

However, let’s be honest; for some products the price can really be too cheap. When you buy your OTC medications, do you look for the cheapest product? Not if you care about your health. Most consumers tend to gravitate toward higher priced health products. This is based on the belief that higher prices mean better quality and therefore better health treatment (e.g. quicker relief from back pain). Offering a pain relief product that is excellent at a price well below the competition has a low chance of succeeding. This is simply because consumers don’t believe that something cheap can be as effective as the pricier products.

In other words, from a consumer’s perspective the answer to whether you can price too cheaply is: “it depends”.

Paul Hunt is the president of Pricing Solutions, an international pricing strategy consultancy dedicated to helping clients achieve World Class Pricing competency. Paul publishes a weekly pricing column in the FP Executive. He also writes for the Pricing Solutions Club.

Financial Post February 22, 2012

Pricing low to gain volume is the oldest move in the pricing playbook; the laws of economics say that as you lower price, volume will go up. Therefore many companies that want to dominate a market, or are in a rush to grow in a new market, will use low prices to achieve their goals (e.g. Walmart, Dell, Private Label).

But where do you cross the line? When the price is so low that it communicates a lack of quality? It is certainly a tricky balancing act and it depends upon a lot of factors.

For example: the e-book market. As noted by Melissa Foster, an award winning author, “There seem to be two different schools of thought when it comes to ebook readers: there are those who will only buy 99 cent books, and those who refuse to buy 99 cent books, with the latter group fearing that the cheaply priced book must be of poor quality”. Furthermore “bringing books down to 99 cents throws them into the ‘impulse buy’ category, allowing their work to get into hands of far more readers.” Foster also adds that she ran an experiment where she priced her e-book for 99 cents and sold 60,000 one month and then raised the price to $2.99 and sales dropped to 20,000 the next month.  The same amount of money, but a lot fewer units!

The .99 e-book price point is what I call “No brainer pricing”. The price is so low that buying the product or service is a no brainer for many people; they can buy the product almost risk free since the loss would be minimal if they are not satisfied. I see this strategy being increasingly deployed in the digital age because of low costs of distribution. Selling an electronic book is vastly less expensive than selling a hardcover book.

However, even companies that are not selling digital products will sometimes deploy this strategy. For example, a Denver based newspaper wanted to dramatically increase circulation and drive a competitor out of the market back in the 90’s. To do so it lowered subscription rates to 1 cent per day. This caused the subscriptions to quadruple! In this case the strategy seemed to work, but be careful; it can also damage a brand and ultimately may not be sustainable. Eventually, the paper had to raise rates and the result was that subscriptions dropped off dramatically. Whereas, In the e-book market the .99 price point can continue on forever as long as there are writers who are willing to sell their content for that price.

Another interesting phenomenon around the topic of selling ‘cheap’ is the emergence of Dollar Stores. The growth of Dollar Stores demonstrates that there are lots of products which consumers are more than happy to pay ‘cheap’ prices for. While Hallmark and Carton were insisting on selling cards for price points between $3-$4, the Dollar stores priced them at $.99. You can guess what happened; sales rocketed. Clearly, consumers have decided that a $.99 cent greeting card can be just as clever and appreciated by the recipient as a more expensive card!

However, let’s be honest; for some products the price can really be too cheap. When you buy your OTC medications do you look for the cheapest product? No way! When it comes to their health, most consumers tend to gravitate towards higher priced products. This is based on the belief that higher prices mean better quality and therefore better health treatment (e.g. quicker relief from back pain). Offering a pain relief product that is excellent at a price well below the competition has a low chance of succeeding. This is simply because consumers don’t believe that something cheap can be as effective as the pricier products.

In other words, from a consumer’s perspective the answer to whether you can price too cheaply is: “it depends”.

Paul Hunt Feb 9, 2012 – 8:00 AM ET | Last Updated: Feb 8, 2012 3:42 PM ET

Jin Lee/Bloomberg

When it comes to luxury brands, you expect to pay a high price!

In fact, some would say that the higher the price, the better the product and that is what makes it exclusive!

Tom Ford, the consummate commentator on fashion, clearly agrees: “The ‘democratization of luxury’ promoted by the large luxury brand conglomerates is without doubt the main force behind the vulgarization of most traditional luxury fashion brands,” he says.

Let’s face it; the only thing that stands between most consumers and the luxury brand is price. People want them but they just can’t afford them!

But, if a consumer is shopping for an exclusive brand (think Hermes, Louis Vuitton, Gucci), and likes the idea of buying smart, then many would conclude they can save some money by buying online from a country that sells it cheaper. However, the truth is that they probably won’t succeed; at least not online.

Why? First, the presence of truly international e-commerce sites are rare, particularly among fashion companies. Second, to protect prices in different markets, companies have made sure that the comparison of prices is not easy. Some of the “price fences” used to discriminate prices, include: language exclusivity; limited country selection within a site; cookies to automatically send you to your originally selected country of choice; different products names across geographies; and, variations in specifications.

These differences help protect brands from being gray marketed and from having their sales cannibalized from high priced markets in lower priced markets – sound strategies from a business perspective.

Although the Internet has facilitated the comparison of prices, it has not driven price harmonization. For example, when Chanel raised the retail price in Korea for some of its bags in July, sales should have dipped, according to the economic rules of supply and demand – but instead they increased.How consumers fight back will depend on the industry. In the electronics world, consumers tend to be quite powerful and apply pressure on technology companies through user groups leading to a change in the company’s behaviour. But in the world of fashion it’s a different story. There is virtually no resistance against online price differentials for fashion products.

In essence the luxury brands are pricing for value. In some markets the value is high and in others it is lower, hence the resulting price differentials.

Some price harmonization occurs among markets in close proximity to one another because there tends to frequent travel across borders and multilingualism is more common.

If you want a good deal on your next Gucci bag, surprisingly the good old USA is typically the best place to buy.

Those living outside the U.S. will have to plan that purchase for their next visit there. The reality is that as much as the web mimics a global environment, online retailing doesn’t follow when it comes to fashion.

Paul Hunt is the president of Pricing Solutions, an international pricing strategy consultancy dedicated to helping clients achieve World Class Pricing competency. Paul publishes a weekly pricing column in the FP Executive. He also writes for the Pricing Solutions Club.

Financial Post February 8, 2012

Pricing Solutions Jan 10, 2012 – 12:44 PM ET

My barber recently left the salon he had worked at for the past 25 years and relocated.  I visited him earlier this week at his new location and he shared his journey and why he chose this particular spot.

I thought there were some interesting lessons to take from his experience and that I’d share them with you.

He checked out three different salons.

The first place he investigated was a good location but according to Antonio “ was not well maintained…. there were chairs with rips in them….my customers would not be happy in that place”.  I happened to walk by that place today and would agree with Antonio. Even if the price was cheaper, I would not like going to that place at all; it was rundown.

Then he described the next stop on his search, “…..a great location, but they charge $40 bucks for a haircut….I told them that my customers wouldn’t go for that……they’ll pay $4-5 more, but not $40 for a haircut.  The owners said to me that was their price and they were sticking to it…..they wear bow ties…..i bet that’s to justify $40 bucks!” We had a good laugh and as a customer I agreed that $40 was a lot more than I was willing to pay.

That lead Antonio to his final destination located closeby in a Fairmont hotel. ”Good location and the price is $4 more than what I was charging before…. $4-5 to my customers…..they don’t mind”.  And in my case he is right. I’ve been seeing Antonio for 12 years, I enjoy seeing him; it’s like a little break from the hubbub. We talk about restaurants and travel and our families, at Christmas he sneaks me a glass of wine. You get the idea, it’s personal.

Antonio’s story included wisdom as well as an example of a typical behavior that leads to missed opportunities when it comes to pricing.  I have summarized it into 3 lessons:

1. Antonio instinctively knew what wouldn’t work for his customers.  The first salon was in poor repair and “was not right for his customers” even if the price was cheaper.  He also knew that the high end location that charged 60% more was too much for his customers even though it was a fantastic location.

• Lesson:  A good value proposition consists of many components and price is only one of them.

2. The salon that charged $40 for a haircut stuck to its pricing strategy; they knew their value proposition and did not deviate.

• Lesson: Segmentation is the name of the game. You need to know who your core customers are and stick with them. If they are Wall Street bankers then go ahead and charge $40, put on a bow tie and feel good about it.

3. He knew he could charge his customers $4-5 more and they “would not mind”.  Based on this insight Antonio missed a golden opportunity. He should have adjusted prices at the old salon 12 months earlier.

• Lesson: We are usually too risk averse when it comes to pricing, thus forgoing significant opportunities.

Financial Post, January 10 2012

I was presenting at a conference recently and mentioned the Professional Pricing Society. A gentleman in the audience scoffed and could not believe there was such a thing!

Well, believe it or not, there actually is a Professional Pricing Society and it has been in existence for quite some time.

The PPS is in essence the global meeting place for all things related to pricing. It holds conferences in North America and Europe, conducts webinars, publishes a journal and a newsletter and has even developed a certification program through accredited courses; CPP (Certified Pricing Professional).

Just a couple of weeks ago I was at their fall conference in Las Vegas. There were more than 600 participants from a diverse range of industries and locations. The corporate names that attend are a who’s who of leading companies in their respective industries. What is surprising is that the participants are predominantly executives from the pricing profession whereas 20 years ago it was very rare for a company to have anyone with the pricing manager title.

So why has this new profession developed? I believe there are two core reasons:

• First, it is driven by the disproportionate impact pricing has on profitability; a 1% improvement in pricing leads to a 12.5% improvement for the bottom-line profitability of the average Fortune 500 business. A seminal article in the Harvard Business Review written in 1992 by a couple of authors from McKinsey related stories of tremendous improvements in profitability through successful pricing improvement. The article also shared tools and processes for driving pricing improvement. Once companies understood that they could systematically drive price performance the early adopters were hooked and jumped all over the opportunity. As the saying goes; “success begets success”.

• The other major development that has skyrocketed the growth of pricing as a discipline is technology. A company’s ability to track and organize their sales data has enabled them to systematically analyze and gain much better control over their “rogue” deals. It also allows a better understanding of the relationship between volume and price.

Furthermore, price elasticity was mostly a theoretical construct of economists that explained a lot but could not be applied in real life except in extreme cases such as commodities. Nowadays the research technique conjoint analysis enables many companies to accurately estimate the price elasticity for their products or services.

As a result of these factors, leading companies have invested heavily in Pricing Departments. One global Fortune 500 client of ours estimates that they have approximately 1,000 employees that are focused on pricing! What’s more, if you visit almost any Fortune 500 company you will undoubtedly find a pricing department led by a Pricing Director and a group of pricing analysts. As a matter of fact, one of the cutting edge trends right now is the elevation of Pricing to senior ranks. At the Las Vegas conference there were several Vice-Presidents of Pricing in attendance.

So what does all of this mean?

• If you have not established a pricing department then you are probably trailing your competition; not a good place to be.
• Companies see pricing as strategic and as such are elevating it to a senior role in the organization. If you do not have this vision, once again you are probably trailing your competition.
• There are associations and online clubs that are dedicated to pricing, if you have not heard of or joined one of them then guess what? You are probably trailing your competition.

In today’s hyper competitive environment you cannot afford to lag behind. I see a lot of companies that still haven’t gotten the complete picture when it comes to the development of this profession. So if you want to get started, you may want to consider attending the next pricing conference I am going to. It is next week in Barcelona! Nos vemos!

Just when things were looking bleak for Netflix they caught a break as Bank of America came along with their debit card pricing fee. Bank of America has taken such a beating for that decision that if there was such a thing as a Pricing Piñata it would have their logo emblazoned all over it. Here are the facts:

• The move is partly prompted by a new federal regulation, effective Oct. 1, that will limit the cut banks can take from merchants at the point of sale. Bank of America expects the new lower rate to reduce the revenue that those merchant fees provide to the bank; a generous $19 billion in 2009.
• The banking industry expected that this would cost about $6.6 billion in fees.
• Generally the banks are world class when it comes to implementing new fees. For example, did you know that back in 2009, 76% of checking accounts in the US were free. Currently that number is only 45% (Bankrate study). Furthermore, ATM fees are up an average of $0.07 from last year, and average overdraft fees went up $0.36 in the same time.

However these debit fees were perceived as a penalty, and were not taken kindly.

Let’s face it, customers do not like arbitrary policies driven by the internal needs of the company. Remember; it’s all about the value, and there was nothing in this pricing decision that spoke of improved value for the customer.

As for the other banks that were considering this fee? Well they did the smart thing and tested it to see how it was received. Chase, Wells Fargo and others were all running tests and had the benefit of assessing how the new fee was affecting their business. Consequently, they decided not to proceed with it.

This Bank of America Pricing fiasco has made a few things clear:

• People are still upset over the bank bailouts and feel that the banks owe them something in return; picking their wallets was not what they had in mind.
• The little guy is tired of taking it in the chin and now has a way to fight back. Social networks are being used as a powerful tool to change the game.
• The economy isn’t in stellar condition and this has made consumers particularly ornery to any fee that is seen as a penalty (or one that does not bring any value).

When you put these factors together it seems pretty obvious that implementing this fee would not be a good idea. The banks have confused passivity with loyalty and that is a dangerous mistake. It reminds me of a saying a very wise executive once said to me that I have never forgotten; “it’s the hogs that spend the most time at the trough that get slaughtered first”. Bank of America fell prey to it this time but I have a feeling they won’t be the last, stay tuned!

Paul Hunt is the president of Pricing Solutions, an international pricing strategy consultancy dedicated to helping clients achieve World Class Pricing competency. Paul publishes a monthly pricing column in the FP Executive. He also writes for the Pricing Solutions Club.

Financial Post November 29, 2011

Paul Hunt, Financial Post · Oct. 18, 2011 | Last Updated: Oct. 18, 2011 3:08 AM ET

Pricing strategy is a hot topic these days. Over the past 20 years, we have helped many companies develop, refine or transform their pricing strategy, but today we get requests for help more frequently than ever before. So why the surge of interest now?

There are several reasons.

Globalization: Companies are having difficulty managing price gaps between emerging and mature markets, so they need a pricing strategy to help them consciously make these tradeoffs.

Competitiveness: In today’s fast-paced environment, decisions must be made with unprecedented speed. If organizations don’t have a clear, wellconceived strategy, they may find themselves reacting to the competition, rather than taking a proactive approach to pricing.

Growth: Dramatic growth necessitates a sharp increase in the number of pricing decisions that must be made and in the number of different situations that may arise that could cause an inferior pricing strategy to unravel.

Economy: It is easy to fall into a pattern of “fear-based pricing” in a bad economy if companies don’t have a pricing strategy designed for tough times.

All of these factors contribute to a loss of control in pricing. And when that happens, it means you either don’t have a strategy or it is not working.

As you develop your organization’s pricing strategy, here are four questions you should answer:

1. What are our share objectives? A dominant market share usually brings superior profits. However, many companies blindly chase share, which often leads to disastrous price wars. As one executive put it, “Share is vanity, profit is sanity.” Setting realistic share objectives is an important step in developing an effective pricing strategy.

2. What are our profit objectives? I often ask senior executives what their priorities are. Typically, they respond: share, profit and margin. But good strategy necessitates tradeoffs, often between price and volume. It is a fundamental law that as you raise price, demand goes down, and as you lower price, it goes up. So when developing a pricing strategy, you need to consider that relationship and your profit objectives for both the short and long term. Most companies can grow profits in the short term by taking a price increase, but that often hurts their longer-tem viability. A pricing strategy prevents a “knee-jerk” reaction of raising prices to “fill a profit gap,” focusing instead on both the long and short term.

3. What is our competitive position? Building a pricing strategy based exclusively on the competition is generally not the way to go because it means you are reacting to your competitors rather than charting your own course. However, developing a pricing strategy that is oblivious to the competition is even worse. It is critical that you see it from the customers’ point of view. How do they consider their options? Which competitors do they consider? What is their perception of the relative differences? Once you can answer these questions, you can establish your competitive position and develop a pricing strategy that is durable and that can be adapted to changing competitive conditions.

4. Who is our core customer? A good pricing strategy is built upon a strong understanding of your core customer. I wrote an earlier article for this newspaper titled “Want a Pricing Strategy? Fire A Customer!” Companies often try to sell their products and services to everyone, which waters down their value proposition. Some customers simply don’t value your offering as much as others, so if you are not careful, you will end up selling your highly valued item to one customer at a very high price and to another at a very low price. The high-priced customer will find out and either stop doing business with your company or demand similarly low prices.

In summary, you have probably heard the saying: “I’d rather have an average strategy with great execution than a brilliant strategy with poor execution.” That implies that execution is more important than strategy. Hogwash! Both are critical, and that’s why pricing strategy is so hot right now. Companies are struggling to find their way, and without a robust pricing strategy, they will waste time and alienate customers no matter how well they execute.

So I would rephrase the statement as follows: “I’d rather have a great strategy with good execution than a good strategy with great execution.” A great strategy puts the wind in your sails – and that gives you momentum and leverage.

Paul Hunt is the president of Pricing Solutions, an international pricing strategy consultancy dedicated to helping clients achieve world class pricing competency. His pricing column appears monthly in the Financial Post, and he is a regular blogger at the FP Executive blog.

National Post