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High Quality vs Low-Cost Bargain: The Current Dichotomy! (XI). Evaluating competitive strategies in pricing.

Today´s article is to continue sharing about the process to develop a pricing strategy.

“Ducky duck”. This is one of my first exercises when trying to paint a bird. I wasn´t successful with it. I share it because mistakes happen when we learn. To push the whole world towards cost-based pricing is a mistake, and we must correct it.

Again, I am writing this saga against the currents of the discipline of marketing present-day education. Do you know what is to shake the roots of our pricing current theories? Well, it is more than a daring adventure of peeling onions to discover new things. It can be considered defiance against the highest construction of conceptual pricing of this century. Who would make a bold statement to affirm that the whole chapter 10 “Pricing: Understanding and Capturing Customer Value” of the book Principles of Marketing by Kotler/Armstrong is incorrect? Who can take the risk to go against thousands of Ph.D.’s, and/or marketing authors and professors who have embraced the cost-based pricing (including the Internet pricing disparity) as the norm? Who can say something against those who are pushing us to go for the Marketing @ the 4th Industrial Revolution? Who could dare to say that just because one nation in the world applied the cost-based pricing (which is the wrong way to create value), we have to include this pricing theory as a principle of everything? or what is worst, to catalog the cost-based pricing strategy as one of the most preemptive pricing strategies on earth?

Eleonora Escalante Strategy is stating that cost-based pricing is not the only correct way to go. And that is what I am doing at the moment. During the last 20 years, particularly since the 2010 decade, the books of marketing classified and privileged 3 pricing strategies in textbooks 1) Value-Based Pricing, 2) Cost-Based Pricing, 3) Competition Based Pricing, and put the customer value-based pricing as one of three options we all can choose. After the rising of the Asian superpower in terms of cost-based pricing strategies, the most recognized publishing editors of marketing books changed their approach when it comes to teaching pricing. So if books and professors teach us that the cost-based strategy is the rule of thumb for success… then everything is twisted.

Comparison of the three most important pricing strategies. Source:

The current global problems of trading in the world are not to be fixed with trading policies or using instruments of trading policy such as changing tariffs, taxes, subsidies, import quotas, export restraints, local content requirements, or adding more anti-dumping policies. Why? Because the cause of the imbalance in trading is not found there, but in pricing. It is a pricing policy issue based on an incorrect business marketing theory that is the essence of the selected business strategy. Meanwhile, companies pursue the development of their pricing policies based on cost-based pricing (which for us is the trendiest nowadays, but is the most dangerous of the named three), governments are trying to fix trading imbalances with trading policies. Totally erratic.

Cost-based pricing is the dominant approach in business, and this option has caused terrible issues to all of us with the advent of ubiquitous NAIQIs ( NAIQI means Nanotechnology, artificial intelligence, quantum supremacy, and the Internet). Trying to solve a business conceptual issue with government trading economics is not the way to go. It is like trying to set a salsa dancer to dance the Nutcracker with a classic ballerina. Researchers Sammut Bonnici and Channon (see reference below) mention 4 current trends in market structure that have impacted our pricing strategies. But for Eleonora Escalante Strategy these 4 trends are the consequences of using cost-based pricing in the context of NAIQIs:

  1. Retail consolidation and the elimination of handling intermediaries costs
  2. Reduction of Manufacturers Costs of Sales and Trade Allowances (promotions)
  3. Price Optimization Modeling: the NAIQIs and their mathematical algorithms are filled with cost-based assumptions to forecast the pricing strategy
  4. Internet pricing disparity: Omni-channel retailers (with online and traditional stores) have issues keeping their consistency in pricing across all their channels. Shipping costs add disparities in the final price paid for a product. The growth of online marketplaces through social media is triggering a faster price information comparison for clients, resulting in pressures for retail prices to converge to the low-cost.
  5. Eleonora Escalante Strategy supplements, Risen of the customer low-pricing tyranny. With the NAIQIs, and the global supply chains serving the low-cost, and particularly with the customers´ mobile empowerment as of the 2000s, the cost-plus pricing has been generalized all over, cannibalizing opportunities for decent profits of artisan hand-made product sellers. And customers don´t care at all for the artisans or hand-made producers, but only for the low-price, they pay.

Given the last explanation, we will stick to the value-based pricing initial theory of Peter Doyle´s framework when it comes to pricing strategy. Eleonora Escalante Strategy is simply trying to put the correct theory in place. If we wish to change our current trading issues, we have to change the pricing theories or mindset frameworks in marketing, and we have to go back in time, to the moment in which the pricing theory was correctly taught. Fair for the high-quality appraisement.

Steps to develop a pricing strategy. By Peter Doyle.

Today is the turn to explore step number 5 of our framework: Evaluate competitive strategies.

Step 5. Evaluate competitive pricing strategies. After we choose the target market segment or segments (step 4), we have to comprehend the likelihood of the rest of the competitors´ responses. Please remember this phrase and coin it in your heart:  “It doesn´t make sense to enter the market with a low price if it triggers competitors into cannibalization price-matching strategies”.

In setting prices, companies are obliged to estimate the likely reaction of current competitors. But that is just the beginning. Any change in prices or a new product with different prices provokes a response from the industry, from customers, from distributors, suppliers, and even the government. With the arrival of new technological advances, there are several possibilities to use mathematical models (algorithms) and specialized tools, to react to changes in the market and forecast immediately using all the assumptions that you wish to measure (with statistical modeling and data mining). Cost-based pricing is based nowadays on data from cost calculations, and cost-plus pricing. It is basic data converted into machine learning and neglects everything that artisans and hand-made industries offer because their suboptimal prices are too low.

Several factors have to be considered when evaluating competitors responses to our pricing:

  • Size (market share). If the firm that introduces the change is a major player (holds a significant market share) in the industry, the whole industry can´t afford to ignore its moves. But if the firm doesn´t hold an important market share, or it doesn´t erode the profits of the rest of the players, then a low price entrant will not cause tickles to the rest.
  • Economic Booming or Recession. When countries are in deep troubles such as a recession, the market doesn´t grow, and a low-price entrant is seen as highly aggressive and threatening for the whole industry. Retaliation as a response to a recession cannot be sustained. Meanwhile when the economy is booming, then any significant change in price differences will be dismissed by the rest. Usually when the economies are growing, or if the industry is growing, and there are substantial differences in the positioning segment strategies of all the competitors, retaliation is again less likely to happen.
  • Economies of Scale.   Producers with higher economies of scale with high fixed costs will be loath or unwilling to lose volume production, causing prices to drop to very low levels, sometimes with dumping, eroding profits for the whole industry; and destroying the small and medium-size entrepreneurs value propositions and profits.
  • The velocity of Information.  When buyers are highly informed (that is the case with social media and the Internet) competitors with homogeneous offers (in the same segment of clients and similar product attributes) are most likely to react and retaliate or cannibalize. Either using discounts or stretching their pricing too low levels. All these moves with the purpose to catch the attention of the client and be selected. When there is collusion in the industry, it is unlikely that the velocity of information affects them. But collusion is illegal and not a good practice in a free-market and has to be eradicated.
    Collusion: This is a secret or illegal cooperation or conspiracy, especially organized by competitors of one industry to deceive the clients using the same bars of pricing. A plot between some competitors in an industry can destroy other competitors through pricing.

For example, around 11 years ago, the first Dollarama (Dollar City brand in El Salvador) opened its first store in Metrocentro, a popular commercial center in San Salvador’s capital city. In the beginning, this company’s offer of products was extremely basic and limited. It didn´t cause any harm to the traditional department stores or retailers. After testing its business model of product mix, pricing, promotions, and locations in El Salvador, it has grown now 52 stores in El Salvador, 145 stores in Colombia, 67 in Guatemala. For a tiny country as El Salvador, the entrance of the Dollar City retail chain impacted the whole retailing stores’ industry in town. Dollar City has pursued a robust seasonal low-pricing strategy that has reached critical mass at every segment of the population. It has obliged the rest of the local retailers to change their product mix and pricing, more than their stores look and feel.

In my next publication, I will disclose the meaning of alternative pricing strategies and value implications as it was defined 20 years ago. Everything with the purpose to illustrate the next three steps to pursue when developing value-based pricing strategies.

Source of references cited today:

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