The Strategy and Tactics of Pricing

"Pricing is the moment of truth—all of marketing comes to focus in the pricing decision." How can you harness pricing strategies to both boost your profits and amplify the perceived value of your products?

1. Pricing Is a Strategic Powerhouse

Pricing isn’t just an afterthought—it’s a cornerstone of success. As customers become savvier and more price-sensitive thanks to the internet, businesses must approach pricing strategically.

Pricing has become essential because information about competing products is more accessible than ever. Customers can easily compare options, pushing companies to rethink how price reflects value. For example, Apple turned its high price for the first iPhone into a statement of exclusivity, creating a reference point for the market.

Apple’s expensive iPhone strategy exemplified how strategic pricing can set the tone for an entire market sector. Meanwhile, Walmart demonstrates the opposite by using steep discounts on essential items to draw customers in, later making up for it with higher-margin products. Whatever the approach, smart pricing starts with understanding that it’s not just about selling a product—it’s about creating a profitable perception.

Examples

• Apple’s high-priced iPhone positioned it as a premium product.
• Walmart’s discounted essentials strategy draws customers in while maintaining profitability.
• Luxury brands, like Gucci, justify sky-high prices with exclusivity and superior branding.

2. Common Pricing Pitfalls

Relying on simple pricing tactics often leads to avoidable mistakes. Businesses that base prices on production costs, customer expectations, or competitors risk undermining profits.

The cost-plus method, where costs are tallied and a profit margin is added, seems logical but is risky. What if customers aren’t willing to pay that price? Other companies rely on what customers think they’ll pay, which oversimplifies value perceptions. For instance, early computer buyers thought PCs had little practical use, drastically undervaluing them.

Pricing wars triggered by undercutting the competition can be another misstep. Companies like BMW avoid this trap because they know that slashing prices often results in short-term sales but long-term profit losses.

Examples

• Early PCs, considered extravagant luxuries, were grossly undervalued by consumers.
• Cost-plus pricing often fails when customer demand doesn’t meet cost expectations.
• BMW refrains from price wars, safeguarding its luxury market positioning.

3. Align Pricing With Value, Proactivity, and Profit

Successful pricing balances three elements: value perception, forward planning, and focusing on profit. Value-based pricing adjusts based on what the product offers compared to alternatives.

Proactive pricing involves anticipating market shifts, such as emerging technology or economic changes, and adapting accordingly. For instance, Alan Mulally at Ford reduced their car lineup during the 2008 recession to focus on profitability rather than market share, keeping the company solvent.

Lastly, the profit-first mindset might mean scaling back rather than expanding. A business should focus on pricing strategies that generate meaningful returns, even at the cost of smaller overall sales figures.

Examples

• Apple lowers older iPhone prices as new models launch, syncing price with perceived value.
• Ford’s decision to focus on profitability during the 2008 recession saved the company.
• Loyalty programs with incentives like discounts or points maintain customer reliance amid market shifts.

4. Understand What Drives Perceived Value

Customers evaluate value based on emotions and the alternatives available to them. Your pricing must resonate with their understanding of your product’s worth.

Pricing involves knowing not just your costs but also what differentiates your product. For instance, Rolex watches thrive on consumer desire for status rather than function. Similarly, EasyJet’s low-priced flights capture budget-conscious travelers by emphasizing affordability over luxury.

Value isn’t just about the product’s features. Sometimes, it’s about emotional connections created through branding and service. Economical pricing paired with distinctive branding can elevate a product’s overall appeal in any market.

Examples

• Rolex charges a premium because wearers associate it with prestige, not just function.
• EasyJet focuses on affordability, differentiating itself from pricier airlines.
• A cancer drug with unprecedented efficacy can command steep prices far above competitors due to its perceived necessity.

5. Segmentation and Tailored Pricing

One-size-fits-all pricing limits potential revenue. Different customers assign varying levels of worth to the same product depending on their needs and resources.

Segment pricing considers different consumer groups. Airlines segment by class, offering different prices for first class, business class, and economy. Vacation resorts also achieve this by providing packages, such as all-inclusive golf for avid golfers or pool-only deals for families.

Tailoring pricing to fit diverse market groups ensures each customer segment feels they’ve received good value, while your company maximizes revenue across demographic boundaries.

Examples

• Airlines segment tickets into economy, business, and first class options.
• Resorts offer premium packages, like golf-course access for keen players.
• Software companies develop “free,” standard, and premium subscription tiers to target varied budgets.

6. Bonus Features Strengthen Perceived Value

People value clarity, especially when deciding what to buy. Help your customers understand why your product stands out, and emphasize any extra benefits.

Marketers address this need by directly demonstrating product advantages. Duracell, for example, markets its batteries by highlighting how much longer they last compared to competitors. For experienced goods, offering trials or free samples lets customers experience value firsthand, easing hesitation.

Clear, straightforward communication about product strengths simplifies decision-making and can win customer trust and loyalty.

Examples

• Duracell’s advertising communicates its superior longevity compared to other batteries.
• Gyms often incentivize memberships through free trial sessions.
• Skincare brands build trust through sample kits, reducing barriers to purchases.

7. Psychological Pricing Persuades Purchases

Psychology plays a hidden yet vital role in how customers perceive prices. Discounts, comparisons, or even wording tricks can create entirely different customer reactions.

For example, gas stations that list discounts for paying in cash might make the “deal” feel especially rewarding even if it’s the same as another station’s surcharge. Additionally, presenting higher-priced premium items alongside mid-range ones elevates perceived value for mid-tier options.

Studies show consumers focus on proportional, not absolute, savings. A $5 discount on a $15 item feels significant, while a $5 discount on a $120 item feels negligible—even though the savings are identical.

Examples

• Wine lists often feature high-priced bottles to make mid-tier options seem appealing.
• Hotels bundle perks like "free breakfast" to emphasize value over mere cost reductions.
• Retailers position high-price items as “anchors,” influencing what customers consider reasonable.

8. Form a Pricing Policy to Handle Challenges

A clear pricing policy establishes boundaries and reduces conflict with customers during challenging scenarios. Transparency fosters trust.

For instance, when airlines change pricing or enforce no-refund policies, their success stems from being upfront with customers about the rules. Such policies ensure consistency and eliminate uncertainties for both the company and buyers.

When raw materials cost more or market trends shift, having predefined policies helps maintain both customer relationships and profitability.

Examples

• Airlines’ dynamic pricing standby depends on strict adherence to no-refund policies.
• A company faced with material cost spikes communicates changes transparently to avoid alienating buyers.
• Subscription services clearly define renewal policies to prevent cancellations due to confusion.

9. Sustainable Pricing Is a Long-Term Game

Sustainable pricing ensures profits while maintaining fairness and trust. This process involves setting an initial pricing range and adapting as values and perceptions shift.

Start with a pricing ceiling and floor based on reference points in the market, capturing value-added benefits unique to your product or service. As customer understanding evolves, explain price changes to garner support, not backlash. Ford demonstrated sustainable pricing by refocusing on fewer, high-margin products over volume.

Sustainability ensures that pricing aligns with business goals over time, adapting to customer needs without overshooting expectations.

Examples

• Ford’s profit-first approach kept operations sustainable during economic turbulence.
• Subscription services like Netflix consistently communicate price hikes with added features, reducing resistance.
• Tech companies like Apple set competitive price ranges and adjust over time without alienating buyers.

Takeaways

1. Engage customers through segmentation by creating pricing tiers tailored to varying needs and budgets.
2. Leverage psychology by framing discounts or reference prices to make your offerings more appealing.
3. Practice transparency with proactive pricing policies, explaining changes to maintain customer trust.