The Price Strategy defines the criteria to set the price level.
It must be measurable without mentioning the price itself.
For instance, the price strategy of an iconic brand we all know was:
[BRAND X] should deliver superior profitability
at a price on parity with competitors
with comparable product performance and marketing support.
The overall goal of the Price Strategy is to find that combination of market share and profit that maximizes the long-term brand profitability.
On price and profit
Increasing market share can be dangerous if you do so at the expense of profitability.
Being profitable is better than selling more.
Lowering prices is a deadly decision because the lowest price is never low enough. Price discounts can easily make customers happy. As a result your market share grows but your profitability sinks.
Do not ask customers how much they would pay. As a strategic marketer it is your job to find out what customers value of your product and to translate that value in monetary terms.
The value price of a brand is made of the price of the most appealing alternative to your product plus the value of your brand distinctiveness.
Read this post about how to calculate value price of a product.
How to set the price
How to set the price – Prices are not set according to competitors, unless you want to be a reactive follower.
Prices are not set based on costs, unless you want to lose sales due to a wrong cost allocation (costs sink with growing sales volumes). In fact, you incur costs only to produce value products that you can sell for a profitable price.
Prices are not set according to customer wants, unless you want to give away value.
Prices are set according to the value your brand delivers, and they are set in a reverse manner: you first find a profitable price, and then you determine the costs you can incur. This is what Lee Iacocca did when he created the Ford Mustang [1].
When to lower prices
Prices should be lowered in two cases only:
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- When the product value cannot be any longer justified in comparison to competitors
- When we know competitors cannot match our lowest price [2].
Lowering prices in any other situation will cause a loss of competitiveness and/or profit.
What is brand defense?
Brand defense is a tactic game. Perhaps the toughest one.
The overall goal of brand defense is that of demotivating competitor attacks in order to defend market share and profit.
You can do so in a preventive or reactive manner. In both cases ask yourself whether it is worth the risk.
Price wars can be very costly, not only in monetary terms.
When you must react to a price attack your very goal is to set back the competitor’s expectations.
Focus your reaction on:
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- Clients most sensitive to the competitor’s offer
- The incremental value under attack
- Geographic areas where the competitor has a high stake at risk
The story of Fuji launching a massive attack against Kodak in the USA is emblematic [3]. Kodak didn’t defend their brand in the US where Fuji attacked. They reacted to Fuji in Japan because Kodak knew Fuji couldn’t fight on both fronts. And Fuji withdrew their attack in the USA. A lesson learned for the future.
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[1] Lee Iacocca, IACOCCA. An autobiography. Bantam Dell 1984.
[2] Michael E. Porter, Competitive advantage. Free Press 1985.
[3] Read also Tim Calkins, Defending your brand. Palgrave MacMillian 2012.