Pricing strategy is a critical component to any product marketing plan. It drives not only product margins, but determines its overall profitability–as its a primary lever to product positioning.
Pricing strategy begins with a simple question–to skim or to penetrate the market? Price skimming involves introducing the new product or service at a relatively high price point. Then, with time, as competition increases, the pricing for the product is lowered. Companies typically engage in this strategy when they’re first to the market and feel they have a substantial lead or enough barriers to entry against its competitors.
On the other hand, penetration pricing involves introducing a product or service at a low initial entry price point, often lower than competing products in the market. The motivation behind this is to capture as much market share as possible. Companies should only engage in this low-cost player strategy if they can sustain a lower cost structure relative to peers. This lower cost structure can be derived to a specific advantage, be it a process, technology, resource, legal, geography, or other differentiator.
LearnPPT has created a very comprehensive toolkit on Pricing Strategy development. You can find the product here:
The toolkit is 40-slide PowerPoint presentation that includes the topics of price skimming versus penetration pricing, pricing tactics, product adoption lifecycle, price curve analysis, and price sensitivity analysis. Furthermore, the document includes an accompanying pricing sensitivity Excel financial model. (You can find a detailed description of the document at the bottom of this post.)
LearnPPT is a leading online resource for presentation materials. Its range of products range from PowerPoint templates to business strategy frameworks (like the one on pricing strategy). All documents were created for an by top management consulting firms. Since its founding in 2010, the LearnPPT documents have been used by customers in Fortune 500 companies, top MBA programs, and leading management consultancies across over 45 countries.
DETAILED DESCRIPTION OF THE PRICING STRATEGY TOOLKIT
The Pricing Strategy Toolkit includes both a 40-slide PowerPoint and a Price Sensitivity Excel Financial Model. The PowerPoint portion contains instructional slides around developing a solid pricing strategy, as well as documentation for the included financial model. It is divided into 5 sections:
- Pricing Strategy (7 slides)
- Pricing Approach (8 slides)
- Price Sensitivity Analysis (10 slides)
- Pricing Tactics and Terminology (11 slides)
This first section presents a detailed discussion around the overarching pricing strategy of Price Skimming or Penetration Pricing. These two strategies are compared and put into the context of where your product sits along the Product Adoption Lifecycle. Advantages and disadvantages are enumerated for both Price Skimming strategy and Penetration Pricing strategy.
This section focuses on the quantitative approach to calculating your optimal price point, based on your selected pricing strategy. We walk through a three-phase approach to determining the appropriate price point: 1) data collection, 2) analysis and insights, and 3) pricing. Price curve analysis is introduced, along with several examples illustrating how price curve analysis is used.
Price Sensitivity Analysis
The focus of this section is price sensitivity modeling. We walk through a five-step process to deriving a formula for price sensitivity. This process addresses, defines, and teaches the following concepts: 9 drivers to price sensitivity, elasticity factors, and threshold of no elasticity. The 9 drivers to price sensitivity are as follows:
- Reference Price Effect
- Difficult Comparison Effect
- Switching Costs Effect
- Price-Quality Effect
- Expenditure Effect
- End-Benefit Effect
- Shared-cost Effect
- Fairness Effect
- The Framing Effect
At the end of this section, we show how to create a financial model out of the derived formulas. This is the embedded Excel financial model. Documentation for the financial model is also included in this section.
Pricing Tactics and Terminology
This toolkit closes with overviews for a number of pricing tactics. These pricing tactics are as follows:
- Value Pricing
- Loss Leader Pricing
- Psychological Pricing
- Going Rate Pricing / Price Leadership
- Tender Pricing
- Price Discrimination
- Predatory Pricing
- Absorption Pricing
- Marginal Cost Pricing
- Cost-Plus Pricing
For each pricing tactic, there is a slide showcasing the tactic’s definition, examples, and list of related pricing tactics.