What are Pricing Objectives and why are they important?
This has been a hot topic for our team this month. We have worked hard at setting up our Ideal Client Profile and Tailored Account Plans, but we found ourselves coming back to the question of pricing again, and again.
We needed to do more work on what our pricing strategy was looking to achieve. Now that we have, I wanted to share some of the guiding principles that we used, and how you can use them to get clear on what you and your team are trying to achieve when it comes to price.
So, we’ll start with a quote.
Peter Drucker provides a nice quote for our backdrop: “Strategy is a commodity, execution is an art.”
Now, I’m going to go out on a limb and guess he wasn’t talking about pinning down a pricing strategy for your business, but that quote still applies in that context — although maybe with a little less dramatic flair, and more rolling up our sleeves and thinking it through.
You need to have firm goals in mind when you price your product or service — some direction that can inform smarter, more incisive, more effective strategic choices.
How to Define Your Pricing Objectives
Those goals are most commonly referred to as pricing objectives. From here, let’s reveal the concepts that we have worked with, and take a look at some common examples.
Pricing objectives are an essential component to consider when pinning down an ideal price point for your business offerings. What you charge for a product or service can’t be chosen indiscriminately. Having no idea why you’re choosing a certain price point makes that point, well, pointless.
It means you don’t have a clear idea of what to expect from your pricing strategy, or, what your company stands to gain from it. Without an objective, you’re throwing prices at the wall and seeing what sticks — and that’s no way to do business.
Without an objective, you’re throwing prices at the wall and seeing what sticksNick Fagan
That said, landing on a pricing objective isn’t always straightforward. And, the one you go with typically rests on a variety of factors — elements like timing, broader business goals, market position, and financial circumstances can all have a place in making that decision. This is where Drucker is right: hard work and execution is a must.
Ultimately, your pricing objective will be specific to your company’s needs and interests — but there’s a good chance it will revolve around some common threads. Here are some of the more prominent examples of pricing objectives.
When considering pricing objectives, the following five principles can come in very handy:
- Improving Retention
- Maximizing Profit
- Increasing Sales Volume
- Matching Competitors’ Prices
- Shifting Brand Image
1. Improving Retention
Customer retention — the sum of a company’s efforts to keep its existing customers on board — is an essential, cost-effective process that any growing business needs to prioritize. Successfully implementing a strategy to improve yours often has a lot of layers.
Doing the right practice involves aspects like providing exemplary customer service, investing in a solid customer success team, or creating customer loyalty programs. But the avenues you can take to improve customer retention aren’t limited to those more directly interpersonal elements — and the effect pricing can have on retention is a testament to that.
Maximizing retention is a popular pricing objective. If you elect to go this road, your prices will probably be tailored to retain the prestige of your product without raising prices to the point of alienating current customers — that generally translates to keeping prices relatively consistent.
2. Maximizing Profit
Maximizing profit is one of the most popular, conventional pricing objectives. And that makes sense — it’s not exactly revolutionary to point out that businesses that don’t make money generally don’t survive.
Businesses who typically go this road do so by raising prices and cutting costs wherever possible — ideally to see significant improvements on return on investment (ROI). Pursuing this particular pricing objective often comes at the expense of sales volume or general revenue.
This pricing objective tends to manifest itself in a couple of different ways. In some cases, a business might be interested in maximizing short-term profit, acquiring users without being too mindful of potential churn down the line. Or a company will make long-term profit their objective — in which case, it will price with more careful intention.
3. Increasing Sales Volume
Some companies set and modify their pricing strategies to maximize sales, setting prices specifically dedicated to fostering immediate, meaningful growth. In some cases, the endgame is getting a business off the ground — carving out a piece of a market and settling in.
In other cases, an already-established business might be interested in claiming or maintaining a specific share of its competitive landscape — strategically adjusting its prices to account for shifts and fluctuations that could alter its place in its market.
And sometimes, companies might adjust their prices to make concentrated pushes to maximize their market share. In these cases, their pricing objectives are still set with intention — but are a bit more indiscriminate than they’d be otherwise.
4. Matching Competitors’ Prices
Sometimes a business needs to make a product or service more competitive within its broader market.
Maybe, the sales volume that company is raking in isn’t what they’d like it to be — it could be losing out to lower or higher priced options.
In that case, simply matching competitors’ prices is one of the more effective pricing objectives a business can pursue. This goal’s underlying premise is relatively straightforward.
It doesn’t take much guesswork and effort to identify and mirror what a competitor charges. But its simplicity doesn’t necessarily undermine its efficacy — it can be an excellent way for businesses to gain a competitive edge within their industry sector but may not be the most sustainable approach.
5. Shifting Brand Image
Pricing has a significant impact on how consumers perceive a business. Ideally, higher prices create an air of prestige and luxury, while lower one’s signal value. But public perception doesn’t always shake out how companies want it to.
Certain prices or pricing models might leave a business with an image it’s not particularly happy with. In those instances, companies might look to raise or lower prices to capture and project fresh brand identities — ones that they believe their target consumers will be receptive to.
At the end of the day, you can’t gauge the effectiveness or legitimately understand the nature of your pricing strategy without a clear goal for it in mind.
How can you expect to see the results you’re looking for without actually knowing what you’re looking for in the first place? You need a definitive pricing objective to set and keep you on the right course — so always establish one before you start hashing out your ideal price point.
As always, reach out to me and I would be happy to share our insights and tools that may help you and your team on the way.
Keep on Scaling folks!
Nick & The Next Practice Team