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This post was originally published as a LinkedIn post on August 27, 2017. The original can be viewed here
Why is Pricing Strategy Important?
For product, brand, and marketing managers, the pricing strategy one chooses is critical because pricing decisions directly affect the bottom line. The prices that customers are willing to pay is the culmination of your marketing, R&D, product development, and sales efforts(Sahay, 2016).
For healthcare administrators, appropriate pricing of certain procedures(ie elective surgeries, patient paid procedures) can help advance social impact and revenue goals.
One area where pricing strategy can add value is in Price Segmentation. The price points that a firm chooses can help drive profitability, growth, and value creation by helping to define and establish new customer segmentation opportunities(Hogan et al., 2011, p.4).
Price Segmentation
If a product is offered at different price points across different dimensions(ie geography), greater profitability, social impact, or revenue can result. The same product may provide different benefits to different customers. See diagram below:
In Scenario A, a product is offered to a customer segment at price $1 which is purchased by 5 people resulting in a total profit of $5. Potential revenue from those who would have paid lower or higher is lost.
However, in Scenario B, the same product is now offered at $2 for another customer segment which is purchased by 2 people, generating $4. Scenario B, with these two price points, achieves a total profit of $5 + $2 = $7
A pricing strategy of introducing different price points along different dimensions allows more revenue to be captured from a broader section of your customers. The goals is to capture revenue from sales where value is higher while accepting lower revenue where value is lower to drive still profitable volume(Hogan et al., 2011, p.47)
Below are 2 examples of price segmentation based on dimensions that may matter to customers. Incidentally, the below dimensions can also be combined with each other in many different ways.
Ie. Pricing 10mbs at 1Gb between 7am-11:59pm in a rural area
References:
Sahay, A. (2016). Pricing [Lecture Slides]. Retrieved from PRICING, Section 7.
Hogan, J., Nagle, T., & Zale, J. (2011). The Strategy and Tactics of Pricing: A guide to growing more profitably. New York, NY: Pearson Education, Inc.