While some businesspeople may consider pricing to just be one of the 4 Ps of marketing, pricing professionals understand just how intertwined successful pricing is with firm profitability. Any firm that is going to optimize its profitability will ultimately have to tackle some very fundamental (and very consequential) pricing questions.
There are many questions to ask. What is the best metric to use for pricing (per unit, per hour, per mile, per project, etc.)? What is the ideal list price? Will discounts or rebates be offered? How much of the price is negotiable? How will you respond to competitive pricing? Which investments in people or technology will your pricing strategy require? Is your pricing strategy truly aligned with your business strategy?
And these questions are not addressing theoretical minutiae that will never amount to anything. All it takes is a cursory look at the news to find plenty of examples of the pricing issues of well-known companies being covered in the public sphere. These examples can help us to determine which pricing concerns are most important to management. While any pricing concern could be most important to a given company at a given time, there are a few recurring themes across industries.
One of the high-level pricing decisions that should be made sooner rather than later is determining the price positioning of an offering. There are three options: skim, neutral, and penetrate. A price skimming position means that the price is higher than what customers would generally expect given the benefits offered in comparison to alternatives. A price penetration position means that the price is lower than what customers would generally expect given the benefits offered in comparison to alternatives. Finally, the price neutral position means that the price is about what the customer would expect given the benefits offered in comparison to alternatives.
Generally, these decisions are made long before the general public is even aware of the existence of the offering. But just because these decisions are not generally discussed in public does not mean that this is not a decision of paramount importance. Price positioning will impact what type of customer your offering is targeting and whether you will use discounts and rebates to entice purchases.
Pop superstar Madonna appears to understand the importance of price positioning. Her “Madame X” tour kicked off in September 2019 exclusively at small theater venues seating approximately 2,000 people instead of the usual arenas that could hold 20,000.
Limited supply naturally leads to higher prices at the upper end. While the cheapest seats started at $50 (only slightly more than her previous tour), the most expensive non-VIP tickets sold for about $750 (much higher than the $350 tickets in previous tours), and the VIP packages went as high as $2,000. With such a limited inventory, every single ticket was sold out. And the profits went to the artist instead of to ticket scalpers taking advantage of high demand for underpriced tickets. Madonna approached her business problem with a solid pricing strategy, and she was able to profit.
Apple is another company that is well-known for its price skimming positioning with its smartphones. However, I also found a recent example of Apple pursuing a price penetration position for services. In September 2019, Apple entered the crowded, chaotic world of streaming with its TV+ video-streaming service and its Arcade videogame-streaming service. Both services were launched at a price of $4.99 per month, substantially undercutting rivals.
This does not mean that Apple has done a 180 with its pricing strategy. As Carolina Milanesi, an analyst with Creative Strategies, pointed out, Apple has the flexibility to offer discounts on services without affecting its brand reputation as a maker of quality hardware.
Price Variance Policy
Another important pricing concern is how to manage discounts and rebates, which can be treacherous indeed. This area of pricing can be difficult and confusing to navigate without a proper price variance policy. A price variance policy defines which customers get a discount, how deep that discount is, and the precise criteria that must be fulfilled to receive that discount.
As with all things pricing, companies can find success using a variety of approaches. Some firms became famous for rarely (if ever) offering discounts, such as Apple. In some industries, like certain consumer packaged goods, discounts or rebates are ubiquitous (just check your junk mail).
Companies also try to change their price variance policy, with mixed results. JCPenney tried to essentially eliminate all discounts from 2011 to 2013, choosing to pursue a strategy of “everyday low prices.” This effort ultimately failed when customers reacted negatively and sales plunged.
On the other hand, Abercrombie & Fitch successfully embraced promotional discounting in 2009 to 2011 due to competitive pressure. This change in strategy happened after they initially resisted discounting in the immediate aftermath of the Great Recession. (It should be noted that at the end of 2011, Abercrombie had to grapple with whether the pendulum had swung too far in the direction of discounting and if they were merely trading profits for temporary market share.)
Some firms change their price variance policy for a bit, only to realize that the change in direction may not be appropriate for their organization. In June 2019, luxury retailer Neiman Marcus announced that it had started experimenting with its promotional strategy in an effort to compete better in an unforgiving retail environment. In March 2020, they announced that they were moving away from offering discounts and were going to refocus on their luxury customers. This strategic move also included plans to close half of its Last Call discount stores.
Instead of courting customers with a lower willingness to pay, Neiman Marcus’ CEO committed to the upscale market, including the 20% of their customers that spend an average of $50,000 per year in their stores. To me, it sounds like Neiman Marcus explicitly chose a target customer segment and set about aligning the rest of the organization (including their pricing strategy) with that customer goal.
Anticompetitive Pricing Behavior
A third area of pricing concern involves anticompetitive pricing behavior. There are a few types of anticompetitive pricing behavior, such as predatory pricing. It seems to me that the type that comes up most often in the news is price-fixing. The basic case of price-fixing is one in which two rivals agree on a set price for their product or service. The damage to consumers occurs because prices would be expected to be lower (i.e., competitive) if this agreement did not artificially keep prices high.
I have written recently about investigations into the chicken industry over alleged price-fixing by Tyson, Pilgrim’s Pride, and Claxton Poultry Farms. There have also been investigations into price-fixing in the beef industry. But perhaps an even bigger flurry of price-fixing allegations has been occurring in the drug industry over the last few years.
These price-fixing investigations and allegations date back to at least 2016, involving 3 separate lawsuits (all of which are pending). In June 2020, the Connecticut attorney general (in union with 50 other states and territories) filed the third lawsuit against generic drug manufacturers and their executives for unlawfully inflating their prices on at least 80 skin care products. The third lawsuit names 26 companies or subsidiaries as defendants, as well as 10 current or former executives. Among the allegations is that some companies agreed to not compete for customers and to increase their pricing simultaneously.
Naturally, no executive wants their company’s brand associated with price-fixing. Some markets are so competitive and dispersed that price-fixing would be practically impossible. However, price-fixing is a pricing concern that generally captures the attention of the public, so executives would do well to be acquainted with it and to ensure that their management teams are trained in how to avoid it (or even the appearance of it).
Managing Pricing Concerns
These are just a few of the pricing concerns that occupy the minds of executives. These are not always simple problems, and they frequently defy simple solutions. The stakes are frequently high, and failure is rarely forgiving.
While managing pricing concerns is not always an easy job, take heart in knowing that plenty of other bright, capable executives wrestle with these concerns every day as well. You are not alone.
And even more importantly, take heart in knowing that there are trained, experienced pricing professionals out there waiting to help, should you need it.
Al-Muslim, Aisha. “Neiman Marcus Offers More Discounts to Stay Competitive.” The Wall Street Journal. Dow Jones & Company, June 11, 2019. https://www.wsj.com/articles/neiman-marcus-reports-wider-net-loss-falling-sales-11560264389.
Gara, Tom. “In The Battle Against Sales, Retreat May Be Near For J.C. Penney.” The Wall Street Journal. Dow Jones & Company, December 11, 2012. https://blogs.wsj.com/corporate-intelligence/2012/12/10/in-the-battle-against-sales-retreat-may-be-near-for-jcpenney.
Kapner, Suzanne. “Neiman Marcus Backs Away From Discount Business.” The Wall Street Journal. Dow Jones & Company, March 11, 2020. https://www.wsj.com/articles/neiman-marcus-backs-away-from-discount-business-11583943355.
Mickle, Tripp. “Apple Undercuts Rivals With Streaming Price.” The Wall Street Journal. Dow Jones & Company, September 11, 2019. https://www.wsj.com/articles/apple-unveils-new-products-at-annual-showcase-11568137932.
Sebastian, Dave. “States Sue Drug Companies, Executives Over Alleged Price Fixing.” The Wall Street Journal. Dow Jones & Company, June 10, 2020. https://www.wsj.com/articles/states-sue-drug-companies-executives-over-alleged-price-fixing-11591823821.
Shah, Neil. “Madonna’s New Concert-Ticket Strategy: Higher Prices, Smaller Venues.” The Wall Street Journal. Dow Jones & Company, September 16, 2019. https://www.wsj.com/articles/madonnas-new-concert-ticket-strategy-higher-prices-smaller-venues-11568644941.
Talley, Karen. “Pricing Weighs on Abercrombie Margins.” The Wall Street Journal. Dow Jones & Company, November 17, 2011. https://www.wsj.com/articles/SB10001424052970203611404577041752731023654.