This is a management theme that unites two large and deep areas of a business. Although the strategy is something super wide, it is often through pricing that it will translate into reality. Therefore, in a nutshell, the pricing is the way in which you will use your price and collection business model to put your strategy in progress.
See also: Complete Pricing Guide
What is Strategy?
We have many posts talking about with you to carry out your strategic planning and use the most different types of analyzes and matrices to enrich your knowledge about your business environment and the strengths and weaknesses of your business. For this post, just understand that the strategy is a way, composed of goal goals, to make the company move from a position A, to a position B in a certain time interval.
What is Pricing?
The activity of pricing or form pricing is more "operational" in the sense that it has a very practical application to define mathematically, viable prices and the method of charging for its products or services. In general, the issues involving pricing are fixed costs, variable costs, definition of contribution margin e breakeven.
Continue reading about What is pricing?.
Types of Price Formation Strategy
Although everyone understands more or less what you are talking about, there are some different ideas that come to mind and are all viable ways to define your pricing strategy.
1) Defining Your Marketing Mix
The most famous theory involving price strategy is the marketing compound or marketing mix. Basically, this model says that every business can and should define its marketing strategy, and pricing, through the famous 4P's: product, price, square and promotion.
This is a very simple and interesting way, because it allows people to understand that the main strategic decisions of a business, can not be taken alone, as they affect the entire company. The marketing mix can also be understood as market positioning, as it serves as "coordinates" to define where and how the company will act.
Let's look at a simple case, just to illustrate the power of the marketing mix in the pricing strategy. You started the sale of homemade coxinhas, as you live in a small town, decided to knock on each customer's door and sell, so your strategy could be defined by:
- Price: R $ 2,00 the coxinha
- Product: homemade hairpins
- Square: your city
- Promotion: door to door
Now, you have had a lot of success in sales, your thigh was recognized as differentiated, and over time, you started to sell your frozen thighs throughout your state.
- Price: $ 40,00 the package with 10. That is, $ 4,00 the drive. This new price reflects the knowledge of your quality of your product and also your new costs of production and transportation
- Product: Frozen Pouch Pack
- Square: your status
- Promotion: regional sales team, radio and internet announcements
2) Pricing While Business Model
Throughout the post, we came across dating the concept of pricing as a business model, but we do not make that quite clear. In many, many industries, we experience the pricing strategy to totally revolutionize the business model, destroying competitors and opening up new opportunities. We do not have to go far to understand, do you remember when renting videos in a unitary way? Remember how much of the rent was to pay a fine? What about the music industry? Let's remember.
What I want to talk about Business model: is the way a company generates and captures market value.
Music Business Model up to 2000 decade: independent of the media (disc, tape or CD), until the end of the decade of 90, was paid the purchase of the complete album. Unique payment for a physical product that was yours forever.
Business Model up to the 2010 decade: this decade was marked by the first pricing revolution. Instead of buying full albums, stores like iTunes, allowed the individual purchase of tracks! Of course, the new pricing strategy was also supported by the possibility of downloading the files. The interesting thing is to note that this strategy allowed and encouraged a greater consumption, since people could buy many songs singles, although the value of the whole album has increased!
Business Model up to 2020 decade: we are currently experiencing yet another revolution with streaming services, now you pay a monthly fee, around what would be half a album a month, to get access to virtually every song in the world! Again, you have increased your total market by generating unparalleled value around guaranteed above-average consumption.
Note in the chart above that, despite the great fall suffered in the 90 decade, as a result of piracy and the fall in music sales by physical means, the new pricing strategies, captained by streaming, are recovering the historical record and possibly pointing to new records of music sales! All this without changing the product itself, but despite the way to price and deliver. After all, music is still music.
3) Pricing Strategy Matrix
Last but not least is the pricing strategy matrix. It is less well-known, but it should be more used by companies to think about their strategic decisions, which will also affect their business model. Basically, this matrix will give a guideline of how to think of its price according to its quality of value in relation to the competition. There are 4 basic crosses:
- Premium: This is the case where your product has the highest quality and the highest price. Here, it is important to keep its quality right from time to time, as typically premium products can have a higher contribution margin to generate more returns to the business.
- Discount: This is the case for your product having high price but low quality. This strategy is good when your market is very driven by promotions, news and discounts. By keeping the price high, you value your campaigns and create a sense of exasciscy in your customers.
- Penetration: This is the case that its quality is above average and its price low. This strategy is widely used by companies that are entering new markets and need to fight customer skepticism and encourage testing of their products and services. We have recently experienced this with transportation services like Uber, cabify and all taxi applications.
- Economy: This is the case where your product is of low quality and very cheap. This strategy is almost a must for companies that sell products without any differential, that is, commodities. Here, what will make the difference is the management of the costs to be able to maintain a margin above the competition.
This post covers the main methods and theories for pricing. However, there is always a distance between theory and practice. If you are facing challenges in the most mathematical way, be sure to test our spreadsheets for pricing. If you would like to exchange an idea or ask for a second opinion, leave a comment that we would be happy to help!