Pricing your Product — Price Positioning, Structure and Tactics
Price Positioning, The key element of Pricing Structure and the Minimum Viable Pricing Framework, and from Science to Art of Pricing with Pricing Tactics
This is the second part on the Pricing Strategies. In first part, we talked about Pricing Principles, the role that value based pricing plays in maximising the returns, concept of Exchange Value to Customer, and finally we looked into why Product Team is the right stakeholder to drive Product Pricing.
In this part, we shall run through the concept of Price Positioning, that focusses more on the inward dimensions of a firm. We shall then talk about the key element of Pricing, the Pricing Structure and shall present a simple framework to help choose the pricing structure for your product. However, no framework changes the fact that ‘Pricing is more art than science’. And, with that we shall explore the last lever in pricing strategy and decision — the Pricing Tactics.
Let’s begin with Price Positioning
Firm’s customer acquisition strategy is directly reflected by its price positioning decisions, while keeping in mind its company and competitive strategy. Price positioning, thus has more to do with the inward dimensions of a firm.
In general, there are three price positions to choose from (Smith, 2016): Market Skimming, Market Neutral, and Market Penetration.
As inferred from several literatures, incl. classical books on Marketing:
- Skimming Pricing is a preferred option in case of an innovative, high- quality, differentiated offering and conveys prestigious image. It gives the firm an opportunity to cover the initial costs of production and reduce the prices in the future. Also, the conditions laid out as per (Nagle & Holden, 1995), (Monroe, 2003), (Lovelock & Wirtz, 2001): competitors should not be able to easily enter the market and undercut the high initial price, and a significant number of customers should exist in the market and be willing to sacrifice low price for high quality.
- Penetration Pricing on the other is the preferred alternative when a company is trying to entice a new customer in order to incentivise to try the new offering, achieving satisfactory market share and creating relatively high barriers to entry for the competition. In industrial products or services, this is most of the times compelled by clients’ familiarity with the specific offer category and the market’s average costs & prices. (Indounas & Avlonitis, 2011)
- Neutral Pricing, or pricing similar to competition is the preferred option when the market is characterized by intense competition and low differentiation among competing offers. (Fill & Fill, 2005)
Depending upon strategic goals of the company, each of three price positioning choices could be strong positioning decisions. These have their merits and demerits, and specific areas of applications. For example, skimming in case of time-segmentation-strategy for new products (Stokey, 1979).
What is that one company, that has really done great with Market Skimming? Well, that’s going to be Apple. An example for Market Neutral pricing would be Netflix, while Market Penetration pricing has been excellently executed by Reliance Jio in India lately.
Though, Price Positioning can be complicated, but it is still straight forward, ties back to the product and business strategy, and is still more science than art. However, as we move to the next lever, Pricing starts becoming more intuitive from decision making point of view. The third and the key element to the pricing strategy and decision — the Pricing Structure.
Pricing Structure — From Science to Art of Pricing
Pricing structures are associated with the way actual prices are presented to the customers (Lowengart & Mizrahi, 2000). Also referred to as Price Menus or Pricing Methods, is the way to present target transactional price.
Some of the leading examples being: unit pricing, tiered pricing, subscription etc. In industrial goods context, a traditional and simplest pricing structure of Capex-Opex is more common, e.g., the customer pays a CAPEX upfront to perpetually own the assets, and pays another annual OPEX for service, support and maintenance.
To really tap into the value delivered to the customer, pricing structure decision requires choice of metrics, which must be aligned to the benefits being delivered on a per-segment basis. Some examples of metrics: units-sold, number of users, number of clients connected, customer’s transactions, customer’s revenue etc.
The decision of structure, though may sound trivial, but may make or break the product journey from adoption, to growth, to maturity. Where Salesforce differentiated was not just changing the software product industry by making the CRM available 24x7 over the cloud, but also bringing-in the Software-as-a-Service (SaaS) based pricing structure which just made it incredibly easier for early-adopters to try it out without much capital risk. A pricing structure, or it’s variations, that is almost standard to the software product industry today.
There are several known pricing structures to choose from, and many more that may not have been tried or even known yet. Flat rate (buying a House), Leasing (a Car), Subscription (Netflix), Pay-per-use (electricity), Dynamic (Hotel, Flights), Razor-Blade (Printers), Pre-sales (buying Planes) and Bundled (Mac Meals) to name a few common and known ones.
So, how do we decide which one to go for?
Minimum Viable Pricing Framework — A Framework for Pricing Structure Decisions
Depicted below is the Minimum Viable Pricing Framework, a pricing decision framework that can help narrow-down the choices when evaluating applicable pricing structures and methods, esp. when pricing new products.
It starts from branching out between and OPEX and CAPEX choice, and then follows a decision path by way of yes-no answerable questions to narrow down to the potential choices of pricing strategy and methods. We can always put a check on multiple methods of pricing as we go along, and then go for a pro-con analysis for each one considering the business scenario at hand, and then take a final decision.
An interesting thing to note here is that no matter which pricing method has been chosen, the last strategy that can always be applied with some thoughts is the bundling strategy.
Not represented in the framework is differentiated pricing, which refers to offering different prices to different segments of customers. Segments could be basis a number of decision criteria, e.g., the size of customer, size of account, complexity of solution, size of consumption, geographical locations etc. Also, Tiered Pricing, and Non-Linear Pricing are specific forms of differentiated pricing.
In the framework, differentiated pricing can be applied parallel to Bundling Strategies. It can also be seen as a component of up-selling, where you bundle more features or capabilities at higher prices. Some may argue that differential pricing is not really a structure, but Pricing Tactics (more on that later). However, the same can be said about all of the structures, esp. Razor-Blade, Bundled, Dynamic etc. There is no real rule (Science vs. Art).
Pricing Tactics — Deep into the Art of Pricing
So, you have decided the Pricing Principle you want to go for, i.e., Value Based, Cost Based or Competition Based. Your product and business strategy, also enabled you to decided on the Price Positioning, i.e., whether you will use Penetration, Skimming or Neutral pricing in terms of the value you plan to charge to the customer. You have also decided upon one of the many Pricing Structures using the Minimum Viable Pricing Framework on how you plan to present the pricing to your customer. Congratulations, we are through to the 95% or even 99% of the work.
However, you have the last lever left in your pricing strategy to make the pricing attractive to your target customer. This last lever is the part where you reach from 95% or 99% to that 100% mark of customer acquisition. This is where you get deep into the art of pricing. This is where you manage the Price Variances, with tactics such as Price Segmentation, Differentiated Pricing, Discounting etc.
Price segmentation is nothing but charging different prices to different customers for similar or related products or services (offerings). Different customers or different market segments generally derive different benefits from the product or service being offered, and hence they should probably have different willingness and ability to pay. Firm’s customer strategy is reflected in the price segmentation decisions, while keeping in mind the company’s own capabilities. A great example for Price Segmentation being special prices for senior citizens, specially abled, or for people of certain races and social status.
Price Variances, on the other hand, include promotional or tactical discounts, e.g., rebates, coupons, special-discounts etc. It is a strategic choice to profit enhancement, and the firm is free to decide whether to adopt price variance management as a strategic choice or not.
Some firms use it very strategically to increase sales of last released product while the new release creates the market. Apple Inc. exemplifies the use of this strategy everytime it releases a new model of its flagship iPhone. While other firms like Walmart and Amazon use a Pricing Tactics called “Everyday Low Prices” where the products are almost always at a discount. Early Bird discounts, Freemium with in-app purchases, Product Trials, and truly innovative of all, referral discounts pioneered by Paypal, are all examples of Price Variances.
Pricing Structures, as explained earlier, have come a long way from traditional pricing structure of Flat Rate with perpetual ownership, and pay-per-use models to new innovative models and structures which have the flavours of Pricing Tactics built in.
For example, Dynamic Pricing in the Minimum Viable Pricing Framework can be replaced by Differentiated pricing, where pricing is differentiated based on demand, usage or performance requirements, e.g., Uber, Evernote, and Netflix respectively. Tiered Pricing is another such structure/tactics. Other examples of structures having flavours of Tactics being, Price Bundling strategies, which is more of a tactics than a structure.
Completing the Puzzle — Bringing it all together
To wrap it up, let’s take a look at some examples. Netflix’s Pricing Principle is absolutely Value Based pricing. From Price Positioning point of view, its Market Neutral but somewhat closure to the Market Penetration. A typical cable cost in the US is about $60 — $80, while a Netflix subscription costs about $9.99 — $13.99, and a broadband costs about $60 — $70 a month brining the overall cost to about same as cable, with additional value of being able to use broadband internet for purpose other than watching Netflix. It has a Tiered Subscription based Pricing Structure, with one, two and four screen viewings at different monthly subscription values. Lastly, from Pricing Tactics, it uses a time based free trial as a strategy.
Overall, Netflix has figured out a perfect pricing strategy for its target segment while brilliantly managing the variances between the segment assuming fundamentals of flat sharing, i.e., max four students or young professionals sharing an apartment together may want to share Netflix, just like the traditional Cable. That is how deep Pricing Strategists at Netflix went ahead to think of the value they are delivering to the end consumer to build basis for their pricing.
In industrial, or B2B pricing, Amazon’s AWS serves great example. It absolutely follows a Value Based pricing principle, supplemented by its ‘Everyday Low Prices’ strategy to build it Market Penetration price positioning by bringing the overall cost of running a server to its customer by half or even less than that (given your server is spec’d right). It has adopted a Pricing Structure that is an amalgamation of On-Demand Dynamic Pricing and a resource reservation based Subscription Pricing. Where Amazon AWS does incredibly well is in the way it has structured its Pricing Tactics, which is extremely important esp. in B2B/B2E scenarios where value and volume play a major role in pricing, and some form of discounting has traditionally inevitable.
Amazon AWS delivers discounting in two forms, time based and volume based, i.e., earlier you transact than the actual time you need the services, the higher the discount is, and larger the volume you go for, the higher is the discount. These three together serve the needs of most of the customers who do not wish to own a server infrastructure of their own.
More Art than Science
So, what makes pricing more of an art than science? The fact that Pricing has to be customer centric. As Pricing directly impacts the customer, who is mostly rational, but highly unpredictable, a pricing strategy might work at one point in time, or with one segment of consumer, may fail catastrophically for a different set of consumer or at a different point in time.
The other aspect that makes pricing more art than science is that there are multiple dimensions to the whole pricing strategy. A pricing strategy has to follow a balanced approach between the inward and outward dimensions of the firm, which is nothing but the four aspects of Pricing Strategy as discussed above — Pricing Principle, Price Positioning, Price Structure and Price Tactics. Different possibilities in each of these dimensions gives finite but large number of possibilities to chose from, making it extremely complicated and difficult to chose one, and apply.
Also, any Pricing Strategist must remember that any change in outward dimensions, e.g., Pricing Strategy, must be met with a counter balanced approach in the inward dimensions, e.g., a different operating model. For example, if you fundamentally change your pricing strategy from Pre-Payment based pricing structure to a Lease based OPEX model, to manage the working capital and cash flows, the operating model need to bring-in a partner to finance the operations, and hence shall impact the inward looking financial strategy of the firm.
A Great Differentiator
However, more so because it is at the end an art, it becomes a great tool for creating large competitive differentiations. With not just the Market Penetration strategy, but with simple and innovative Pricing Structures, e.g., Subscription against Flat Rate, and some interesting Pricing Tactics, the four pillars of Pricing Strategy, together and independently, gives Product and Marketing managers an excellent lever to play and differentiate against competition.
A version of this article has been Published on LinkedIn.
