Pricing Pugilism

I once raised the price of a product as more competitors entered our market and they were lowering their prices.

My boss looked at me as if something were growing out of my head. The COO publicly second-guessed my decision for a year. Our competitors made it a selling point. Yet our top-line revenues rose, unit sales increased, and we drove two top competitors out of our market segments and one into bankruptcy.

Pricing is mainly science, but it requires a bit of black art. Measuring the market and triangulating the three major pricing perspectives is essential to ballparking product pricing. But in ever shifting markets and especially in those where there are both young and mature players, pricing also requires thinking beyond mechanical elements and entering the mind of the market itself.

raise-pricesWhile composing a customer satisfaction survey, I decided to add a pricing measurement. I did so mainly because the product price had been chosen long before I arrived in that marketing VP role and there was no rational basis for the existing price and model. Customers, who were highly happy with our software, said they would have paid 15-25% more for the product. All other things being equal, it was safe to raise the price by 15% just to soak-up the excess market price elasticity.

But at that time, the market had several key competitors for which I had already devised segment dominance strategies. One competitor was particularly troublesome because they had a very important feature that we lacked, and had been making measurable inroad with our primary strategic partner. Yet they, along with some other competitors, had shifted their pricing down.

Down-pricing is a sign of fear. Seize on competitor fear.

Our COO, who mistakenly assumed he understood marketing, blew the horn of dread, claiming that raising prices while our competitors lowered theirs would choke sales and crush our top-line. Yet the opposite occurred. Not only did we get a handy 15% bump per sale, our unit sales started rising at a faster rate. Much of this was due to my segment dominance strategy, but a measurable part was market perception.

People distrust discount goods. Cheap price is often equated to cheap wares. Hence, when the market and our strategic partners saw the price divergence, subconsciously they assumed our competitors had inferior offerings. Customers may also have been influenced by the Mercedes Effect, whereby the perception of quality is assigned to goods with higher prices. Most interestingly, our competitors started selling our products, though they were not aware of it (amazing what you can learn by just hanging around a competitor’s trade show booth). They would almost proactively mention our “expensive” competing product, which increased our brand recognition and made buyers wonder what they were missing, leading to them were calling us. With enemies like that, who needs friends?

Our fortunes kept rising and at one trade show the CEO of a competing company said to me “Guy, you chased us out of this market.” I tried not to gloat. Not sure I succeeded.

Never assume your pricing is right. It changes based on changes in the market, competitive pressures, economic realities, and how well you are fulfilling evolving whole product definitions. Seek the unexplored top-end and you might be surprised at both how easy it is to make some extra green while simultaneously making your competitors see red.


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