Approach pricing strategy

Step 1: Investigate the company.

  • How big is it? What products does it have, and is it the market leader in this field?
  • What’s the business model (sources of revenue) of the company?
  • What’s the cost structure of the company? What are the principle cost charges?
  • Is it in charge of their own pricing strategies or is it reacting to suppliers, the market and competitors?

Step 2: Investigate the product.

  • How does it compare to that of the competition?
  • Are there substitutions or alternatives?
  • Where is the product in its growth cycle?
  • Is there a supply-and-demand issue at work?

Step 3: Determine a pricing strategy.

Three main pricing strategies to think about:

  • Competitive analysis
    • Are there similar products out there?
    • How do our products compare to the competition?
    • Do we know the competitor’s costs?
    • How are they priced?
    • Are there substitutions available?
    • Is there a supply-and-demand issue?
    • What will the competitive response be?
  • Cost-based pricing
    • Break-even point
  • Price-based costing
    • What are people willing to pay for this product?

 

Source: Case in Point, Marc P. Consentino

Consulting framework: Porter’s 5 Forces

« Five Forces » Market Analysis

  • Barriers to entry
    • Economies of scale, capital costs, cost advantage of existing competitors, barriers to exit, patents
  • Market Rivalry
    • Number and size of competitors, industry growth rate, product differentiation factors, industry margins/pricing
  • Buyer power
    • Significance of purchase relative to cost structure, switching costs, purchase volume, threat of backward integration
  • Supplier power
    • Number and size of suppliers switching costs/product differentiation, availability of substitutes, possibility of forward integration
  • Substitutes
    • Relative price/value of substitute compared to industry’s product, cost of switching to substitute, buyers’ propensity to switch

Consulting framework: 4 Ps

The « Four Ps »

  • Product
    • What are the product’s differentiating attributes?
    • Why does the consumer purchase this product?
  • Place (Distribution)
    • How is the product distributed to consumers?
    • What new methods of distribution are coming available?
  • Promotion
    • What advertising medium is currently used?
    • What is the most effective method of getting the word out?
  • Price
    • How is this product priced?
    • How are its competitors priced?

Consulting framework: 3 Cs

« Three Cs »

  • Cost
    • Break down the company’s cost structure (fixed/variable)
    • Estimate the competitor’s cost structure
    • Understand trends in the cost structures
  • Customers
    • Segment the company’s customer base (new vs. existing, loyal vs. switchers)
    • Examine company profitability by segment (how much do customers purchase, at what price ?)
  • Competitors
    • Identify major competitors (traditional/unexpected substitutes)
    • Determine competitors’ strengths & weaknesses (profits/costs)
    • Investigate market share