We’ve been exploring pricing strategies in the past several blogs from Hermann Simon’s Confessions of the Pricing Man: How Price Affects Everything.
Simon suggests success factors from three other strategies in his book: Ultra-low Price, Premium Price, and Luxury Goods.
Simon is unclear whether a company can sustainably generate adequate profits with ultra-low price strategies. I’m only providing the success. If your strategy is ultra-low I recommend you read Confessions of the Pricing Man: How Price Affects Everything to discover examples and relevant ideas on this pricing strategy.
Success Factors for an Ultra-low Price Strategy
- Think “simple yet robust”: A company must strip down a product to the bare essentials, but without making it too primitive or rendering it dysfunctional.
- Develop locally: The company must develop the product in emerging markets; that is the only way to guarantee that it meets the customer requirements in the ultra-low price segment.
- Lock in lowest cost production: This requires the right design and the ability to manufacture in the lowest wage locations which still ensure adequate productivity.
- Apply new marketing and sales approaches: These will also require keeping costs as low as possible, even if that means forgoing traditional channels and approaches.
- “Easy to use, easy to fix”: These two aspects are of paramount importance, because customers may lack the background to understand complicated functionality and service providers may lack the resources to make anything but the most basic repairs or adjustments.
- Provide consistent quality: Sustained success is only possible if the quality of ultra-low price products is not only adequate, but above all consistent. The key challenge in the ultra-low price segment is to find an acceptable level of value to customer which will attract enough buyers and still keep costs at extremely low levels.
Success Strategies with High Prices
Two more likely approaches for mid-sized growth companies are High and Premium pricing models.
High Price. High margins. High profits. Simon’s notes, “Intuitively that trio seems to fit together well, at least at first glance. But the relationship is not quite that simple. If a high-price positioning always guaranteed success, every single company would adopt one.”
To achieve success in High prices, at least two other conditions must come into play to make this equation work. Costs and volume, the two other drivers of profit, must be managed well.
Simon notes, “If you have high costs, a high price does not guarantee a high profit margin. A high margin results only in high profit if you achieve a sufficient gap between price and costs. That is not a trivial observation. Customers will only pay high prices for a product or service when they receive high value in return. High value, in turn, often requires high costs to produce and in real life, that is often the case: it costs too much to achieve and sustain the level of value needed to support a high price.”
But even when your company achieves high margins, you still need to sell enough units to make a high profit. When price is so high volume remains very low, your company struggles on the profit front.
To be clear realize we aren’t talking about small price differences. In both percentage and absolute terms, these are massive price differences. Simon notes however it is not unusual for a premium product to have a higher market share than cheaper alternatives. Often the premium product is the market leader.
How is that possible?
Gillette The global shaving and personal hygiene giant Gillette offers a classic example of premium pricing. The company invested $750 million to develop its Mach3 system, the first razor with three blades. Gillette priced the Mach3 razor 41 % higher than its previously most expensive product, the Sensor Excel. Gillette followed up the Mach3 with a series of innovations, including the Fusion, which has five blades. With each new innovation, the company continued to charge higher prices. Gillette practices premium pricing of the best kind: creating value through innovation, communicating that value, and then extracting it with premium prices. Fusion’s price is almost three times the price of the original Sensor.
Is Gillette going too far?
Today Gillette has a global market share of almost 70%, its highest market share in 50 years. Competitors Wilkinson Sword (12.5 %) and BIC (5.2 %) trail by a wide margin. Resistance to Gillette’s high prices has, however, been growing in recent years. Online competitors have sensed an attractive opportunity
Success Factors for a Premium Price Strategy
The common factors behind successful premium pricing strategies:
- Superior value is a must: Premium pricing will work over time only if a company offers superior value to customer.
- The price-value relationship is the decisive competitive advantage: In contrast to luxury products, which depend heavily on the prestige effect, the successful premium products derive their true competitive advantage from their high value (in objective, absolute terms), translated into an appropriate price-value relationship.
- Innovation is the foundation: In general, innovation provides the foundation for a successful, sustainable premium price position. This applies to groundbreaking innovations as well as continual improvements, such as Miele ’s under the motto “Forever Better.”
- Consistent, high quality is a must: This prerequisite comes up time and again. Successful premium suppliers maintain high and very consistent quality levels. Their service must also meet the same requirements.
- Premium pricers have strong brands: One function of these strong brands is to transform a technological advantage—which is often temporary—into a long-lasting image advantage.
- Premium pricers invest heavily in communication: They know that they have to make the value and advantages of their products perceptible and understandable to consumers. Remember: only perceived value counts.
- Premium pricers shy away from special offers: They are hesitant to offer promotions and special offers. If the promotions they offer are too frequent or too steep, these instruments can endanger the premium price position. The key challenge in premium pricing is the balance between value and costs. The emphasis here is on high value to customer, which includes not just the core product itself, but also the extensive “envelope” of other benefits which surrounds it. Nonetheless, costs must remain within acceptable levels.
Pricing Strategy is one of many pieces of your company’s overall strategy. The result of getting your strategy right is top line revenue growth. Pricing as shared earlier in this blog is a result of getting Execution right in your business. We’ll be exploring Strategy, Execution, People and Cash as the Four Decisions that drive growth in your business at our Scaling Up Business Growth Workshop Cedar Rapids, IA, Wednesday, November 2nd at The Hotel Kirkwood Center. Plan to attend to make 2017 your best year ever. You can register by following the link above or click on the links in the upper right hand column of this blog.
What’s the difference between premium pricing and luxury pricing? We’ll explore this and more from Hermann Simon’s Confessions of the Pricing Man: How Price Affects Everything in our next blog.