PRICING 

Pricing is the most basic marketing tactic that has been around for hundreds if not thousands of years. It is the most direct way of communicating value to customers and at the same time it has the most direct impact on the bottom-line. At the same time price as a marketing instrument is difficult to leverage effectively because it involves integrating decision-making vertically and horizontally within the organization. Pricing has multiple levels of implementation; at the highest-level is Strategic Pricing, which takes into account long-term profit objectives of the organization at brand or franchise level. The next layer is tactical pricing, which optimizes price to take into account short-term market dynamics including demand shifts and competitive effects.

The lowest layer is execution-level where SKU (Stock Keeping Units) level dynamics and inventory and supply management come into play. Pricing optimization is the process by which revenue is optimized by maximizing buyers for minimum reduction in price, or conversely maximizing price for a minimal loss of buyers. This is a tricky trade-off as under-pricing directly impacts bottom-line and over-pricing indirectly impacts market-share. Pricing relies on tried and tested concepts from economics like demand-supply equilibrium and utility functions. Pricing has a greater leverage for products or brands with higher price elasticity, since small changes in pricing can result in substantial changes in revenues (Price elasticity is the percentage change in demand/revenues for a percentage change in price). The effectiveness of pricing as marketing lever is also affected by competitive pricing activities especially for brands and products with high cross-elasticities. Cross-elasticity is the percentage change in the demand for a product for a percentage change in the price of a competing product. Pricing effectiveness is also affected by other marketing tactics like, promotions and advertising. The true impact of pricing strategies therefore has to be measured by controlling for these different drivers of demand, which is typically done through a market-response or marketing-mix model.

Pricing has several business objectives which can become the primary pricing strategy or may form a portfolio of pricing  strategies that can be alternated to meet different market conditions:

Profit Maximization: This is pricing for maximum profit and can be pursued if the product is sufficiently differentiated in the market.

Target ROI or ROA based pricing: Here price is simply Cost of Goods Sold + [target return times total investment or total assets].

Market-Share Growth: For well-capitalized firms, a short-term offensive strategy may involve lowering price to almost break-even levels to increase market-share. In addition to greater market-share, which can be later leveraged to increase prices, this strategy also helps in increasing margins by lowering costs from the economies of scale achieved through higher volume.

The above Matrix, which is an adaptation from the well-known BCG Matrix, shows Pricing and Market-share for four hypothetical brands. Brand A has a low price and low market-share; it is a small player that will eventually either buckle under the pressure of the large volume players, or get acquired. Brand B is the high-end market-leader, that enjoys a a price premium; an enviable position to be in. This is not usually a sustainable position unless the player has a considerable competitive advantage that acts as a barrier to entry for other players. Brand C is the niche market player that enjoys a price premium, usually for the high-end segment of the market. A profitable but risky strategy due to a lack of diversification. Brand D is the hi volume price discount player (like Wal-Mart for example), it maintains its market position by keeping very low margins and making profits on volume.