Have a beautiful weekend.

Classic pricing theories doesn´t demerit the fundamentals of our concepts. Before starting, I would like to clarify again the reason why I choose Professor Doyle´s pricing strategy framework process instead of the most modern and recent pricing material from newest books. The reason why I chose the pricing steps process based on Doyle´s textbook is very simple. It is conceptually and robustly classy. Doyle´s steps are extremely explicit to remind us of the two most crucial philosophic principles of good pricing:

1. The cost must never be the main determinant of setting prices
2. The price cannot be the same for all.

Pricing that starts from calculating the costs is mistaken. But for some reason during the last 30 years, the methodology of pricing that begins with the estimation of the costs has been popularly established as the starting point or the bottom floor (the base) for what we then will charge as a price. This misconception has evolved to distort or misconstrue the process of classy pricing. And to start pricing with the cost estimation is not just wrong but fallacious. Please remember the phrase “the cost decides my selling price” is dangerous and incorrect.

Asia low-cost bargain pricing strategy has been positioning into our societies at expense of the local producers. Since the most populated country of the world in Asia selected the low-cost bargain strategy to expand its products and services into the rest of the planet as of the decade of 1990s, then we mistakenly believe that China’s penetration pricing strategy is the role model to follow. Regardless that China’s products and services have gained a substantive market share not just in terms of volume of trade, but also in terms of critical mass preferences by the consumers, we can´t think that China´s pricing objectives are the only “right” ones to pursue. If many domestic companies in many industries are not best-loved anymore by the same local population, because customers prefer to buy the Chinese low-price bargain offer, this is not fair for the local producers, particularly those which have been barred or excluded completely. These local producers are not just the handmade artisan sector, but any other small-medium-big enterprises which were doing economic profits before the products imported from Asia came into the table of our societies.

Don´t get me wrong, I am not judging at all the case of Asia´s trade to the world. As a nation, China has proved success when it comes to their penetration pricing strategy. We are simply analyzing why did China and its value chain partners choose this ambitious penetration pricing strategy?

Why did China selected the penetration pricing strategy instead of going for the skimming pricing strategy? It is obvious. The choice of low-cost bargain was made by China, in order to consolidate its nation market share and its industry leadership as “the factory of the world”. In addition, China wanted to be considered as the supplier of the components of multiple industries, particularly the top technologies and strategic industries designed in the US and other industrialized countries. China’s investments in manufacturing, logistics and e-commerce are supreme, but the low-cost strategy is only for first mover penetration. Once the market is knowledgeable of all these trade-commerce situations, and customers begin to think judiciously about how to spend their salaries or income, China´s may bear the same risk of what happened to other companies that disappeared from the map because of lack of multisegmented strategies. To build large manufacturing plants, setting products offer as low as possible, winning a large market share is not sustainable for the long term, neither good for the whole commerce world. Regardless, that later, it always attract a high parade of strong competitors; with time, these new competitors may force China to continue competing on low pricing, experiencing much more falling costs, cutting its prices further as costs fell. The downside of the Chinese penetration strategy is that some day, sooner or later, a higher competitive environment retaliation may destroy the industry margins; or if consumers wake up and change its preference to demand other products (not produced in Asia), or if the customers decide by their own will to select and support their own local production innovative products or technologies instead. Educated customers have the power to shift the trends of commerce, and it may be possible to establish some type of boundaries beyond the trade tariffs wars. At the end of the day, everything depends on the clients who may wake up, and decide only to buy domestic produced inputs, instead of only imported from other countries. Who knows, maybe one day in the future, we will see this situation to happen.

The next two steps in developing a pricing strategy, that we will revisit today are:
Step 3. Strategic price focus
Step 4. Target market segments

Step 3. Strategic Price Focus: Here we have to visit the stage of evolution of the market. The evolution of the market determines the needs and wants of their required products and services for different segments. In several occasions I have explained to you the importance of understanding the context of each country or society, which are full of customers that have so diverse needs and wants, in different levels.

For example, let’s analyze Africa. in certain regions of Africa, which are somehow rural and living in extreme-poor precarious conditions, the demand for goods and services is vast, but given its null economic possibilities; the low price penetration strategy is natural to follow because this huge segment of the African population are living with less than US$1.16 dollars pppd (for a four members family, that means income of US$ 140/month per family). Given the pauperism for this segment of extreme poverty, any first-mover firm that decides to serve the extreme-meager in Africa, may focus its pricing strategies under the penetration objective (with the purpose to gain market share), from all these poor first-time buyers or extreme needy market segment members which had nothing on the first place. But for the African buyers that have already left poverty, or are African middle-class members, which are high in tech, and are aware of the market trends in the world; the penetration strategy may not be the right one. Since the Middle-class African segment is able to spend more, it is extremely stupid to continue using the penetration pricing strategy of low-prices “only”. For these African Middle-Class customers, their needs and wants are drawn by the benefits of the global innovation pressures, and its’ better economic condition catapult them to be eager or willing to pay higher prices. For this Middle-Class segment of the African population, the skimming pricing strategy would be beneficial, even though it will require investments in marketing, selling, advertising, even some promotions and discounts to open the markets.

As the market develops, however, once Africa will attract more foreign or local competitors, of course competition rises. If Africa does not develop its own industrial base of companies, the competition will be in hands of overseas companies which will be plentiful. And, in the case of the African Middle-Class segment, with time, this group will become more price-sensitive. With more competitors, then price wars begin (offering lower prices and better value to the customer). This phenomenon, together with declining unit costs and new rival firms, usually requires the companies to lower its average price to maintain momentum, and then a pricing dilemma occurs. For companies, it is advisable to introduce new brands or brand extensions, in which premium brands are targeted towards the more sophisticated (less price sensitive) and discount brands to the new more price-conscious buyers. By multi segmenting, this helps the firms to curtail the erosion of its gross profit margins as the market evolves.

Step 4. Target Market Segments: Every single market on earth has different market segments. These segments are always changing, are dynamic, and continually evolving. Every segment is attacked by companies with different strategies, as well as by the pressures of external changes in taste, technology, economic forces and pandemics. What is more interesting, is that even in neighbor countries, the culture identity shapes different wants and needs, and in consequence the prices diverge or deviate enormously. In the past, prices between economy and premium segments were differing by a factor of at least 10 to 100 times or even more. But nowadays, many premium brands have eroded their value added, with the purpose to offer medium-value pricing strategies. The mental shift of people to look for low prices, instead of high quality is even affecting the theory of pricing strategies and its value implications. And this is not good for the sanity of the economies.

Nevertheless, since we decided to stick to the classy Doyle´s framework, the segmentation step that helps to choose the market segment (or segments) for our pricing and profit performance will depend upon the evaluation of the demand: size, growth, profitability and competitiveness of the competition alternatives as well as an analysis of the brand’s ability to compete in them. When a company (or a country´s value proposition) only limits itself to one segment of the population, it affects the global commerce, as it is the case of China. Eleonora Escalante Strategy would have advised the Chinese companies, 30 years ago, to offer multibranding (and distribution omni channels too), to allow its companies to obtain more intense distribution by entering different segments of the population, instead of forcing everyone to go to the low-price economy segment.
Having a range of expensive, mid-price and budget customers through premium plus second and third tier brands under different names, helps to cover the whole market with balance, without sacrificing the profit obtainment on upper niche brands, and without killing the local or domestic artisans-producers that can still compete with prices against the Chinese pricing range of high-quality offer too.

To illustrate this step let´s see the following example: Integral Bathroom solutions for those who do not have it.
According to UNICEF around 60% of the population (4.5 billion people) don´t have a toilet (a proper bathroom). There is a huge demand to fill in the world in this area. Particularly for companies that produce bathroom fixtures. Given the non-existence of bathrooms, each family house has to create at least a minimum space for the bathroom fixtures: a washbasin, a toilet, and a shower. And of course, for the ceramic tiles and the rest of materials that accompany the bathroom infrastructure. Even if there is no sewerage public systems, there are different solutions that may help families to have a basic bathroom (for rural and urban areas). Septic tanks for homes or for the community are the solution meanwhile the public sewerage system arrives.

Bathroom fixtures companies must focus this deprived target segment with integral bathroom solutions, instead of selling bathroom fixtures. The companies should sell bathroom integral solutions, that even the poorest slum neighborhoods in the planet can afford. A bundled strategic alliance between the toilet-washbasin-shower suppliers and a water-environmental construction company that will design and build the septic system/bathroom infrastructure; could be the successful way to go for it. This bundled solution can help the community as a whole to obtain the minimum bathroom requirements. A financing option (bank or financing entity included) to pay it in several installments (let´s say 24 or 36 or 48 months) should be attached for each family household. Once you read this, you know of course that the lack of bathrooms is not a problem of pricing, but a problem of lack of imagination from bathroom fixture companies on how to create new market segments through creative problem solving, strategic alliances with other parties and innovatory pricing.

Next week we will continue with the rest of the pricing strategy steps. Wishing you a lovely weekend, see you again soon. Blessings.

Source of theory 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