Can Pricing Be A Strategy?

December 4, 2006

How many times have you heard people say that they can lower the price of their product and be successful?   The question, of course, is can you be successful with a low price strategy?

For manufacturing companies, the answer is probably no.  Pricing as a strategy is easily duplicated by your competition.  Even if you are the low cost producer, financially stronger competitors can still match or beat your pricing in order to gain market share.  Pricing must be looked at from a holistic perspective.  If you have a unique product which is competitively insulated, you probably have an opportunity for “premium” pricing and achieving significantly higher margins.  Separately, if your product is in the “fashion” business, or “image” business” you might want to consider a pricing strategy to reinforce your positioning (think perfume). 

If you have little product differentiation, and you decide to lower your price to achieve competitive advantage, think again.  Your  competition could match your price or even go lower, putting you in an untenable position vis-a-vis margins.

Where does a low-price strategy work?  Let’s examine the one obvious example:  Walmart.  But, now let’s examine why Walmart can win at this game.  Through a combination of volume and the best and most efficient distribution system probably in the world, Walmart can drive their costs down and truly be the lowest cost “producer.”  As a result, they can price their products lower then almost anyone else and still maintain an adequate margin.  It would be very hard for anyone to duplicate their systems today without a huge investment in a new infrastructure.

So, when you approach the strategic issues surrounding pricing, tread softly.  Keep in mind that price reinforces your overall positioning and that once established, pricing is difficult to modify.

I will discuss pricing in a service business in my next post.

Rich

Bizvice:  Strategy, Marketing & Entrepreneurship

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2 Responses to “Can Pricing Be A Strategy?”

  1. patmcgraw Says:

    Remember to keep in mind that Wal-Mart’s strategy is “advertised low price” – which gets you into the store, chasing after the advertised loss-leaders with the hope/intent that once in store, you will also pick up other products that are not low price and have significant margins.

    That’s why competitive shopping teaches us so much more than the PR.


  2. patmcgraw is right.Pricing strategy is very important for retail,but not manufacturer.


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