Marcos Fava Neves

What is creative pricing strategy

By Marcos Fava Neves (chinadaily.com.cn)
Updated: 2010-08-27 10:53

One of the most difficult decisions nowadays for companies is the pricing of its offers, including both products and services. An adequate, sustainable and creative pricing strategy is based on the equilibrium of financial returns desired by companies and well being of consumers in the tough global competitive arena.

I work with a framework method that has three major phases for this creative pricing strategy (CPS) process. The first phase is the understanding of the initial value of the product or service given by the consumer. The second is about increasing this value, and finally, the third is the strategic pricing movements. Let's move to the first.

Understanding the initial value given by the consumer

Before any pricing decision is taken, a company must analyze the external environment: economic, income and demand conditions (1).

After this, a company should look to the target consumer, understand his behavior, his perception of the reasonable price (using surveys, experts, "food labs") and do initial pricing experiences in different marketing channels. Analyze the total consumer costs when buying the product (money needed, time expended, knowledge acquisition, training costs, and psychological costs) that may be working as "buying barriers". All the consumer´s risks in buying the company's product or service should be raised (2).

The third analysis in this first phase of CPS process is related to competitors, competing products/solutions and their prices, and how the consumer values and compares with competitors the product attributes (3). To finish this first phase, a company could establish objectives and understand its cost structure with different sales levels.

The analysis of consumer, competitors and economic environment will facilitate a company to understand the value of its product or service in the initial perception of the consumer. After this first phase (understanding) of the CPS framework, comes the second, where a company can try to change the initial view the consumer has of its products or services by.

Increasing the value strategies

The idea is to search and create a unique value position. This can be reached by reducing the importance of substitutes of the product and comparison possibilities, blinding consumers towards competitors (4).

Another opportunity is to compare the cost of the product as a proportion of the consumer's income or total expenditure, measuring and communicating (5). A company can use lock in strategies, using the product as a complement with other assets acquired before by consumers (6).

It is important to try to communicate the importance of attributes the product and service has and the danger of having problems if this attributes, for instance, quality and safety, are neglected by competitors (7). A company may also think in a possibility of offering a "problem solution driven" package of products and services to conquer the buyers, what is sometimes called as "bundling" (8).

A list of possibilities to mitigate consumer´s buying risks of the product that was raised in phase one is also an idea (9). Some markets offer possibilities of skimming price strategies for new solutions (image, status, and exclusivity), capturing value from innovative consumers, first movers and status oriented market segments (10).

A last point in this second phase of CPS is to show economic benefits to consumers (like lower production costs) in buying the solution of the company with simple messages and credible commitments (11).

The points raised in the second phase of CPS framework are related to increasing the value strategies.

Strategic pricing movements

In this phase, a company should be monitoring and previewing competition´s pricing movements (12), establish discount policies and promotions analyzing seasonality and other factors (13), having an integrated product line approach and their pricing interactions (14), thinking about the pricing adaptations needed when the market faces any macro environmental (economy) changes (15) and finally, using web based strategies, solutions and experiences in pricing (16).

I have used this framework with some companies, transforming each of these 16 points in questions and answering them with executives and management of companies. These questions can be done for existing products and services, for new products, and even to help to suggest some consumer research and other information searching activity. It is my contribution and I hope these concepts and questions are useful for China Daily readers facing challenges in pricing strategies.

-- The author is professor of strategic planning and food chains at the School of Economics and Business, University of Sao Paulo, Brazil and international speaker.