How to develop a pricing strategy that will make the rest of the business listen
Despite ‘price’ being one of the 4Ps of marketing, not all marketers are in charge of developing their business’s pricing strategy, so how can marketers take control?
The 4Ps of marketing are the building blocks of many a career in the industry, but unlike product, place and promotion, which are about creating value for the customer, the final P – price – is about getting value for the business.
As a result, there is often debate about whether it should in fact be marketers’ responsibility, meaning it doesn’t always fall within marketers’ remit despite many wanting to take ownership of it.
If marketing does not lead on pricing, however, Chris Duncan, managing director of Times Newspapers at News UK, believes businesses run the risk of ignoring the bigger picture.
“Pricing, when imposed from outside marketing, tends to focus on the revenue gains and can ignore the knock-on costs of defending market position or improving the product or reward scheme in line with price rises,” he explains. “This is particularly true when operating at a price premium in a long-term subscription relationship with customers – the collective reader memory for price rises is long.”
At The Times and The Sunday Times, while other departments are involved, it is marketing that leads the charge on pricing.
The most important part about engaging the wider business is about how you frame the question.
Chris Duncan, News UK
“There are many other stakeholders from finance to editorial and our exec teams who will debate the implications of pricing, but it is part of the marketing discipline to understand how pricing sits within the whole customer proposition,” says Duncan. “We have a range of pricing to manage, from casual newsstand to print and digital subscriptions, all of which may have different internal drivers.”
Nikki Vadera, marketing director for laundry and homecare at FCMG company Henkel, agrees, describing the 4Ps of marketing as “fundamental to portfolio decisions”. “The decision process should always begin with a recommendation from marketing based on consumer insights and research,” she adds.
READ MORE: Direct Line’s three rules for developing a robust value proposition
How marketers can take control of the pricing strategy
In order to get the rest of the business to take note when it comes to pricing, Duncan says the language marketers use is critical.
“The most important part about engaging the wider business is about how you frame the question. Don’t ask ‘is this the right price’ instead say ‘if that’s the price, is this the right product today and tomorrow?’ Ultimately, though, the best way to get business buy-in is through growth of audience and of revenues,” he says.
By asking the right questions, The Times has determined that demand-based pricing is the right approach for digital editions, which have near zero marginal cost, compared to print editions, which incur production and distribution costs.
“In reality, for The Times we have had to create a premium market, which values digital new provision correctly to reflect the fixed costs of a professional journalism operation and the challenge of long-term sustainability of news. This approach allowed us to move price from £100 to £300 per year in under three years and to close the gap between print and digital pricing,” he adds.
Developing a solid pricing strategy
One way to ensure the voice of marketing is heard when it comes to pricing is to use value-based pricing, based on the perceived value of a brand’s product or service to the customer, according to Mark Bergen, professor of marketing at Carlson School of Management, University of Minnesota, and an expert in pricing. He says: “Companies who don’t understand the value they create for customers are ‘flying blind’ on pricing and are at a tremendous disadvantage to competitors who bring their marketers and customers into the centre of their pricing processes and capability development.”
Value-based pricing is central to the strategy at male grooming brand The Bluebeard’s Revenge. “We are selling a premium service with our products; an experience that you associate with the barbershop,” says marketing manager Nick Gibbens. “We have tried to create a desirable brand, something that consumers are happy to pay a little extra for as they see us as premium, and respect the fact we are endorsed by professional barbers. Perception is everything and we use our pricing strategy as a marketing tool to distinguish us from cheaper high street brands.”
Another approach is through ‘behavioural’ pricing, according to Bergen, which means understanding how customers make sense of prices and the psychological and sociological biases people have about pricing. With the availability of customer and transaction data growing, brands also have increasing opportunity to garner complex customer insights and use these to inform their pricing strategy.
Craig Wheeler, chief operating officer at retail business Scotts & Co, which owns brands including Scotts of Stow and The Original Gift Company, says data has enabled it to build a strong pricing strategy that resonates with the wider business. “Data is king; we have built historical and theoretical models to show full costs to market allowing sensible pricing decisions to be made.”
He adds that while retail buyers should find strong products with a good USP and a default selling price will drive enough margin, this is complemented well if marketers are given “the freedom to use data to work out optimal demand versus margin, something that inevitably drives profit and ROI”.
READ MORE: Richard Shotton – Consumers trust precise prices mean a fairer deal
How marketers can build a pricing strategy
Bergen is in little doubt that the perspective of the marketer is essential in building customer-based pricing capabilities. “Pricing is absolutely every marketer’s responsibility, to bring customers’ realities into the pricing decision-making processes at their companies. Marketers’ role as the keepers of the customer’s conscience for organisations is central to success – for sellers, buyers, markets and economies.”
He adds that while responsibility for pricing varies by company – from finance, to operations, to marketing, to sales – it requires all of these business functions to collaborate to build the most effective strategy. “Customer value must be balanced with costs and operational/finance considerations for companies to be able to survive and succeed.”
At Henkel, which owns brands include Bloo and Dylon, Vadera says the approach to pricing is “hybrid”.
“The recommended shelf price of a product tends to be set by marketing after comprehensive market analysis, profit and loss (P&L) simulations, as well as considering brand positioning,” she explains, adding “there is, of course, an ongoing dialogue with the sales team to understand recommended shelf price from a retailer perspective”.
Perception is everything and we use our pricing strategy as a marketing tool to distinguish us from cheaper high street brands.
Nick Gibbens, The Bluebeard’s Revenge
The buying team at Scotts & Co is responsible for setting product prices at a headline level, but promotions and discounts are determined by the Scotts & Co marketing team, which also works with martech firm Pure 360 to personalise offers.
Wheeler believes pricing has got to be part of marketers’ remit, especially when they are measured on ROI, return on ad spend and a need to convert shoppers. “Product listing advertising doesn’t work if your product isn’t priced correctly, and your whole proposition across the board is determined partially by your pricing,” he says.
Given the overarching view marketers have of businesses, Gibbens at The Bluebeard’s Revenge says that while it is ultimately the managing director that sets the company’s prices, he and the sales manager work closely to develop the pricing strategy. “Arguably, we see the bigger picture a little more,” he says, adding that the marketing department influences product pricing with its messaging and in-depth understanding of the competition.
“I think it’s hugely important that the marketing team is fully involved with the pricing strategy as we spend a lot time communicating with the consumer and therefore know what they’re looking for,” says Gibbens. “For example, our demographic wants a product that’s aspirational without being so expensive that it’s not realistic – we’re the lower end of premium.”
Likewise independent confectionery brand Buttermilk takes a collaborative approach to pricing. “You have to find a price your target audience is willing to pay, while offering retailers the margin they require, and still allowing for all internal costs of manufacturing and internal margin requirements. This has to be a team effort or the product doesn’t work,” says marketing director Olivia Hope-Hawkins.
When Buttermilk rebranded three years ago it reviewed all product formats and pricing at the same time.
“As the marketing director I had a key role to play in this, as I needed to determine the right formats to meet consumer needs, and then assess what they would be willing to pay,” she explains. “This was a combination of market research, competitor research and consumer research. The brand then needed to justify this price positioning. And of course our finance director and operations director had to check the viability of this pricing.”
While the success of a business does not rely solely on who is in charge of pricing, the businesses that perform best are those where marketing leads on pricing and is taken seriously by the rest of the company.
Bergen concludes: “Companies that involve marketers centrally in their pricing decisions are more likely to succeed.”
Great article – value-based pricing ensures that marketers and their organisations reap the rewards for all their hard work. Our experience shows, however, that in many organisations, marketing relinquishes pricing responsibility to sales or finance. Marketing shy away from taking the lead as they believe they don’t have the skills and experience. Pricing is an emotional and political subject in many companies, so for marketing to step up can be a challenge. It often takes a change management process and investment in training and skills for marketing to take the lead.
“…not all marketers are in charge of developing their business’s pricing strategy”? How about hardly a single one. Pricing is a difficult task and needs a real financial understanding and rigour applied to it, and as Dr Robert Shaw makes the point in his MARKETING PAYBACK book, marketers and marketing courses don’t give financial issues anything but a cursory run-through. (Still love that book; doesn’t get enough credit).
Pricing policy is definitely part of a Marketers remit as at the end of the day the wider and most simplistic remit of Marketing is to make money for the company and its shareholders. That said, I would always advise consultation with Sales and of course as mentioned some rigorous P&L simulations and sensitivity analysis to test the limits.