Author: Per Sjofors

Given the swift and unpredictable shifts in the market, companies must possess the agility to adapt and remain competitive. Strategic adjustments in pricing enable companies to proactively respond to these changes, staying ahead of the curve and maximizing profits. This article emphasizes the crucial impact of strategic pricing research on companies’ profitability and competitiveness. By aligning prices with customer preferences, businesses can optimize profits, increase market share, and foster customer loyalty, as the author explains. Per Sjofors, a.k.a. “The Price Whisperer,” founded Sjofors & Partners and is a thought leader on using price for higher growth and profits. He can be reached at per@sjofors.com.

The Pricing Advisor, March 2024

The way markets operate today, companies cannot rely solely on cutting their costs on one side and innovation on the other side in order to drive profits. Instead, pricing research has become a critical tool for gaining a competitive edge by informing companies to focus on the innovation that the markets wants and how to set prices that customers are willing to pay. By using pricing research to set not only prices but also product and marketing positioning, companies will improve business results, increase profitability, and stay ahead of competitors.

Whenever companies base their prices on their costs, they are essentially setting prices based on how much it costs them to produce and deliver a product or service. While this approach may seem logical, it can actually be detrimental to the company’s bottom line. When prices are set based only on costs, companies risk setting prices that are too low or too high for their target market, which can lead to lower sales and lower profits. Additionally, if the company needs to lower prices in order to remain competitive, they may not have enough room to do so without taking a hit to their profit margin. On the other hand, when companies set prices based on customers’ perceptions of value gathered by pricing research, companies are taking into account how much their target market is willing to pay for the product or service. This pricing best practice approach requires companies to have a deep understanding of their customers and what they value in a product or service. By setting prices according to perceived value, companies can capture more of the market and maximize profits.

Relying on customers’ perceptions of value, as opposed to costs, stands as a fundamental pricing research practice for companies seeking to boost sales, minimize expenses, and optimize profits. This approach enables companies to establish prices that resonate better with their target market, steering clear of the adverse outcomes associated with pricing exclusively based on costs.

When companies exclusively anchor their prices to market rates, they neglect the distinctive value proposition inherent in their products or services. This oversight contributes to a scenario of commoditization, wherein a company’s offerings become hard to differentiate from those of its competitors. Consequently, customers are more inclined to base their purchasing decisions solely on price, creating a price war that undermines profit margins for all parties involved. Furthermore, the absence of differentiation poses challenges in attracting and retaining customers, as there is no compelling reason for them to favor one company/product/service over another. To avoid this error, companies should focus on creating additional value tailored to specific market segments. This entails comprehending the unique needs and preferences of diverse customer groups and customizing products or services to meet those distinct requirements.

When companies try to attain uniform profit margins across diverse product lines, they risk overlooking distinctions in customer segments and their respective willingness to pay for specific products or services. Instead, it is imperative for companies to acknowledge that different products or services hold varying degrees of value for distinct customer segments. Employing pricing research, such as considering specific customer segments and their willingness to pay, enables companies to find the value from each product or service. This involves making price adjustments based on factors such as the product’s features, benefits, and perceived value, as well as market demand and competition. Through this strategic pricing research, companies can enhance profitability and better serve the unique needs of their customers.

When companies keep prices constant for an extended period, they lose the chance for increased profits. Neglecting changes in costs, competition, and customer preferences may result in lost sales and diminished profitability. Given the swift and unpredictable shifts in the market, companies must possess the agility to adapt and remain competitive. Strategic adjustments in pricing enable companies to proactively respond to these changes, staying ahead of the curve and maximizing profits. However, it is crucial for companies to approach price adjustments with careful consideration. Excessive and frequent changes may be perceived negatively by customers, causing confusion and eroding trust. To mitigate this, companies should communicate the reasons behind price adjustments, ensuring they are grounded in real market data and customer feedback. This commitment to transparency fosters trust, building a foundation for long-term loyalty and increased sales.

Implementing discounts is a commonly employed strategy by companies aiming to attract customers and boost sales. But remember that excessive discounting can yield unfavorable outcomes. When companies lower their prices excessively, they compromise profit margins and may find it challenging to meet their costs. This can result in a decline in the quality of their products or services, ultimately affecting the brand. Additionally, continuous discounting might lead customers to perceive the product as lacking in quality or question its value. Instead, companies should opt for selective price promotions while concentrating on fortifying their brand’s value proposition. This involves highlighting the unique benefits and value that the product or service delivers to customers. Differentiation from competitors can be achieved by introducing additional features or services that competitors do not provide.

Understanding customers’ price sensitivity is crucial. Thus, companies must engage and conduct pricing market research and customer profiling. This undertaking allows companies to comprehend the various segments within their customer base, encompassing both willingness to pay and price sensitivity. Through the segmentation of customers based on their price sensitivity, companies can formulate precise pricing strategies aimed at maximizing profits. Knowing customer price sensitivity empowers companies to retain their most lucrative customers, attract new ones, and ultimately optimize profitability.

In summary, pricing stands as a pivotal component of business strategy, having a direct impact on the company’s financial performance. Despite this, numerous companies allocate insufficient resources to pricing research, thereby overlooking valuable opportunities to enhance profitability, expand market share, and foster customer loyalty. To avoid this oversight, companies ought to invest in pricing research and expertise in order to develop a holistic pricing strategy. Utilizing data analytics for analyzing customer behavior, comprehending the competitive landscape, and pinpointing pricing opportunities is essential for staying ahead in the market.

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