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HOW TO DEFINE YOUR PRICING STRATEGY: PRICE POSITIONING

This third installment on our pricing strategy series will deal with pricing as a positioning tool.  It is important to note that this article is for managers of small businesses, self-employed professionals and employees seeking to know how to set their prices.

Pricing as a positioning tool is a lot more common than one might think.  Take, for example, the Dollaramas of this world, where everything is 1$.  With this strategy, they want you to think that shopping there is an economical process.  Another example: ÉconoFitness gyms where you only pay $10 per month.  Sure, they have other options but they sure are positioning themselves on the market as the cheapest price out there. 

On the other end of the spectrum, we have the luxury market, which may be heavily focused on advertising, branding and quality, but also features a price premium that presides over the costs of these other elements.  Some examples that come to mind: Rolex watches or Luis Vuitton handbags.  Without a doubt, the craftsmanship of these products commands a higher price.  But part of the premium is to build in a “cost of ownership” that grants an elite status to the owner - and some consumers definitely want to be in that club. 

A third option is the loss leader pricing strategy.  This is a widely used strategy that was made famous by the computer printer industry; sell the printers at a very low price and get a captive market for the cartridges.  Supermarkets also use this strategy.  They understand what goes into a typical family grocery cart and discounts many of these products. This gives the appearance that they are the cheaper option when in fact other products in that same basket actually compensate for this price drop. 

So how can you use these three strategies for you or your business? 

Firstly, let’s look at establishing your price either above or lower than the one found on the market.  Here are some elements to consider:

  1. What is your operational capacity?  If it is low, than having low prices to capture market share might not be a good option as it may very well strain your business by demanding a larger local, more employees, more inventories, etc.  All of these elements will negatively impact your bottom line and if you lower your price on top of these added expenses, the net profit might very well not be worth it.  

    But if your operational capacity is able to take on more clients without much impact on your operating costs, then lowering your prices might be a good strategy to position yourself in a given market. You become more well-known, you establish a client base, you generate a positive cash flow, and then you can review your pricing strategy to gradually increase your prices or offer complementary products/services at a premium (increasing the average transaction amount). Another way to view this strategy is that you are using your main pricing as a “loss leader”.  

  2. On the opposite end of the spectrum, you might want to consider positioning yourself towards the higher end of the market.  However, as in the examples we used before, a certain justification is necessary.  If you are a professional, this justification can come from your track record, your results, your client type, your response time, your waiting line, the uniqueness of your expertise, your studies, etc. All are differentiation factors that can justify why you should be more expensive than your competitors.   Another advantage of this strategy is that your profit margin per transaction is higher, hence you do not need to have such a high transaction volume and still net a nice profit.  So why is  this strategy not more widespread?  Because it is not that simple to get a differential factor that can justify the price increase.  It is one thing that you got a nice degree with a lot of effort and sacrifice on your part, but if the market does not perceive the value of it, then none of this effort can be converted to a higher price.  Ultimately, the deciding factor of the value of an attribute is the market.  And sometimes, there is a disconnect between effort and perceived value.  

Our last strategy is that of loss leader.  We touched upon it with our “lower than market pricing” strategy,  but we can push things a little further.  For example, if you are a consultant and are looking to build your client base, a good strategy to use would be to organize meetings or training at no or low costs to the participants.  In doing so, you would attract potential clients that are interested in what you have to offer. Obviously, a certain amount of participants will not turn out to be clients, but if a few do, this strategy could be a good one for you as you will have clients that have learned who you are and how you work, and you will have established a relationship of trust with them.  For some, offering a loss leader might be a very good strategy indeed.  

Should you have questions or comments, feel free to contact me. In the meantime, happy price planning.     

 

Stéphane Elmaleh-Riel, B.Ed, MBA
Marketing consultant