Have a beautiful day. Last week, indeed we had the opportunity to start our “core essence” kick-off subject, which is the concept of formulating pricing.  On one side, the majority of us all over the world are used to fix a price based on a “cost-plus formula”, which is nothing else than using the variable cost (fixed plus variable) as a starting point and then add a profit or margin. That pricing method is wrong. On the other side, inevitably we also find pricing experts or specialists in price management who believe that setting prices is to ask ourselves what prices allow us to maximize the margin in each of our products. This second pricing policy means defining the price before the cost as a starting point. Two extremes sides, but for me, these two pricing methods are partial, and are not the solution to our pricing problems. For Eleonora Escalante Strategy: None of these 2 methodologies are the rule of thumb or the golden answer to pricing. And I am taking a huge risk with this statement. For Eleonora Escalante Strategy pricing is an art, that requires more acumen than what business schools or pricing specialists tell us. So how do we assess which is the right pricing strategy? How do we wake up to our sleepy attitude towards pricing calculations?

The cheap-stake philosophy of life applied globally without any respect for high-quality artisan or handmade industries has destroyed our humankind in less than 30 years. Particularly in the current global context of NAIQIs and the “throwaway low-budget” philosophy of life. A philosophy that every single person on earth has experienced since the 1990s decade, with the low bargain pricing strategies; to the point in which one whole generation of people (Generation Z- those who have been born after the year 2000) have switched hand-made high quality for cheap fabrics, cheap manufacturing, cheap technology, and cheap salaries. The premises of pricing based on value (price plus perceived quality) are not as valid as in the past anymore because the philosophy of the “as cheap and disposable is” has affected us, particularly the soul, the mind of the new generations.

Last week, I also introduced to you our first example of the season: The AES El Salvador “Call for watercolor art”. We will use this example several times, not just to elaborate how badly handmade artists are in terms of pricing strategies, but also to illustrate the cliff in which the whole system of industries is, by putting every single industry and economic sector under the pressure of “commodity”, using huge internet trading web portals or e-commerce/shopping marketplaces as amazon.com, ebay.com, aliexpress.com, etsy.com; and its Chinese peers as taobao.com, Tmall.com, pinduoduo.com, etc.

When all the global world (artisans, small, medium, and big companies) turn to sell its products and services in huge electronic commerce malls as the latter ones, all the assumptions of added value begin to shrink. Little, by little. Competition rises in one single shopping e-website. Making it difficult to keep the differentiation strategies that help to enhance the prices and be successful in those marketplaces.  By the end of this saga you will fully understand why do we dared to release our pricing discoveries, but at the moment let´s continue with the basics.

Today´s topic is Pricing Policy: Setting the pricing policy and its objectives (I have changed the outline a bit, please take notice of the updated one below).

What is a pricing policy? It is a policy defined as a course of action, (or a guiding road-map of steps and procedures) or a plan considered as advisable, convenient, prudent, or advantageous for pricing. So any pricing policy responds to a pricing strategy. And therefore, each pricing strategy depends on the strategic focus of different multidimensional objectives.

How should a company or a business owner establish the price? In general, there is a guideline of procedures (a policy) to develop a pricing strategy. As you already know, I always try to be very academic when it comes to frameworks. This time, I will stick to Professor Peter Doyle´s framework instead of professor Kotler’s pricing strategy structure. If you compare both frameworks (Doyle vs Kotler), Eleonora Escalante Strategy has chosen Doyle because it is somehow more general and more helpful for pricing decisions. For example, Professor Kotler has his own 6 steps in setting pricing, but, personally, I like Doyle´s pricing framework because it is more adaptable to the “VALUE” concept, our center of attention when it comes to understanding and analyzing the impact of low-cost bargain strategies which are destroying the high-quality standards in the world. For your reference, I also show you steps in setting a pricing policy (according to Marketing Management 14^th edition by Kotler-Keller).

Developing a pricing strategy (Peter Doyle´s framework). This is the framework that we will use to sail the waters for developing a pricing strategy.

Today we will cover the first two steps.

Step 1. Assess Price Competitiveness.

The first task is to determine which competitors in the market are seen by customers as offering the best value. Value is a combination of price and perceived quality. Therefore assessing value requires research into how consumers perceive the quality of alternative offers. There are several methods that require some degree of research and technical sophistication to measure such perceptions on people. Even though I won´t name any particular method, the most  useful of these techniques follow the next method:

• Identify the dimensions of the product and service attributes or quality dimensions that customers are looking for when they choose. For example, These dimensions are of a huge range such as durability, reliability, precision, customer service, degree of excellence of raw materials, delivery, packaging, different payment financing alternatives, warranty terms and conditions, respect for the environment process, etc.
• Weight attribute dimensions: This level means to determine which of the attributes are regarded as more important by customers. When you rank in an order of importance, clients will offer to you the characteristics of why they choose the product between your competitors.
• Measure competitors along dimensions: Clients are then asked to rate competitors’ offers along the dimensions of quality (attributes) that have been identified.
• Discover price/quality preferences: What are the combinations of price and attributes of your competitors, most preferred by customers.

Once you have a comparison of the attributes perceived by the customers between different products/services, we are able to display it on a value perceptions map. In addition, before assessing the price competitors’ value perception map, it is important to understand that these have to be compared in the same client segment, otherwise you will end up messing it all. And here is a key point for you to remember: if we have different products for different segments, there is a space to have different prices. But when you use global e-commerce marketplaces, these tend to cannibalize prices, leaving no room for differentiation.

Step 2. Set pricing objectives: There are different objectives (with different life-cycle and time contexts) when it comes to pricing. I have gathered the most relevant ones below:

• Survival: Companies that pursue this pricing objective are usually those with overcapacity, intense competition, or those who want to change the customers’ way of thinking (for example in these pandemic times). These companies are happy with staying in business to cover variable costs and some fixed costs. But Survival is a short-run objective, otherwise, companies in survival mood will inescapably face extinction.
• Maximize current profits: These are the companies that estimate the demand and costs associated with different price scenarios choosing the price that produces maximum current earnings, cash flows, and rate of return on investment. Usually, these companies, utilize financial modeling to estimate their financing ratios, and then they set the price. This strategy is pivotal to the question what price allows us to maximize the profit?
• Maximize or at least maintain market share: These companies believe that higher sales volume will lead to lower unit costs and higher long-run profit.  Usually, these entities set the lowest price they can with the purpose to gain market share. If you read in between lines, you can perceive that our Asian giant fabric of the world kicked off its pricing strategy with this objective in mind. In the case of China´s companies, they practiced this market-penetration pricing for several years (building plants, setting prices as low as possible). Now they have won a larger market share on the planet, but if their growth or expansion does not continue, and the philosophy of cheapskate remains, they will be in financial troubles. Even if Chinese companies are aiming to expand the business, this doesn’t mean that low-price is the right approach.  To breakthrough or penetrate the global markets to gain market share with low-prices doesn´t mean that companies are or will be profitable for the long-run unless they keep all the costs as low as possible, or are subsidized, or these firms force the world to reduce costs in their every-day life. Can you grasp what is happening, and why are we being pushed to reducing costs in our life-styles?
• Maximize market skimming: With skimming prices, the firms set their prices as high as possible to achieve high unit margins, recognizing that it will attract only a small layer of high-end customers.  In the case of new technologies, these companies have favored setting high prices. So what you see is the objective to maximize market skimming.
• High-Quality leadership: These are the companies that seek to be the leaders in premium price niches ignoring the mass market, cultivating customers who can pay substantially more for superior products. In addition these companies segment for the affordable luxuries segment, because they can price just high enough combining quality, luxury, and premium prices based on high levels of perceived quality, taste, and status. This is the pricing strategy followed by Starbucks, BMW, and several luxurious cosmetic brands.

There are more pricing objectives that are related to non-profit and public organizations that usually only follow pricing objectives that require to cover its operational costs. But  when non profits sell themselves following the wrong method of cost-plus formula pricing, they are leaving out the possibilities to charge for the perception of their value. Non-profits that let their costs or the market determine their final pricing are not correct in their pricing objectives.

I will stop here. We will continue next week with the next steps at developing a pricing strategy. Thank you for reading to me,  blessings.  

Source of reference for this article
https://www.amazon.co.uk/Marketing-Management-Strategy-Peter-Doyle/dp/0273693980
https://www.amazon.co.uk/Marketing-Management-Philip-Kotler-Keller/dp/9332557187
Disclaimer: Illustrations in Watercolor are painted by Eleonora Escalante. Other types of illustrations or videos (which are not mine) are used for educational purposes ONLY.  Nevertheless, the majority of the pictures, images, or videos shown on this blog are not mine.  I do not own any of the lovely photos or images posted unless otherwise stated.

Published by eleonoraescalantestrategy

Corporate Strategy Artist, San Salvador, El Salvador View all posts by eleonoraescalantestrategy