Pricing Strategy for Profitable Growth
As a retail strategy consultant, I have worked with several firms who are planning to enter the Indian market. Last week while working on the pricing strategy of new brand, I noticed an interesting phenomena that we call the Pricing Paradox. Our client’s new offering is fundamentally different from the competition – in terms of design, material and effectiveness. While all of us are excited about the new launch, the initial trade feedback was “Price is too high”.
As a result, our client is now jittery. He is unsure about the brand’s pricing strategy. How low should he go to win volumes? At what price will he make loss? At what volumes can he realistically expect to break even? These questions regularly arise in our engagements – specially for start-ups and businesses entering new categories. And we observe that while most entrepreneurs understand the basics of sales and marketing, several need help when it comes to pricing strategy.
There are multiple theories on how to do pricing. Based on my experience both in blue chip MNCs and helping small firms grow faster than competition, I have put together some suggestions. These points can help anchor a pricing strategy discussion :
Get Full Clarity on Cost Data:
Most firms calculate the basic cost of product (raw material, packing material and direct labour) correctly. However often the core product cost is but a fraction of total costs. Hence firms need to account for the total cost of servicing consumer’s requirements. It’s easy to miss indirect costs or forget to consider all aspects that will facilitate customer satisfaction. Hence businesses often take pricing strategy decisions on incomplete information.
- A client of ours offers Solid Waste Composting solutions for apartments & restaurants. As his offering is ‘hassle-less & smell-free’ we realized manual servicing on location is a critical part of this offering. Hence the cost of the product needed to include the cost of servicing as well. Without the latter, the client’s core brand proposition would not hold true.
Building the correct Fixed Vs. Variable Cost Classification:
Early stage firms don’t have the right management costing frameworks. Incorrect classification of costs leads to over or under estimating the commercial break-even unit sales. This in turn is a critical input when looking at Price Vs Unit Sales curve.
- After Sales Service costs in most scenarios are fixed in nature but in the example above it has to be considered as a product variable cost.
Input Costs at different scale of operations:
There are significant cost savings which come with scale. Most entrepreneurs know higher volumes will lead to better negotiating power on input material. However we observe they need help to plot how costs like material wastage, direct labor, product logistics etc reduce with increasing utilization and batch sizes.
- A B2B Pharma client is launching a line of FMCG products. The firm’s cost estimates were done using the existing scale of operations which is completely different from the industry he was planning to enter. Using those data points would have led to over stated costs and products becoming non-competitive in the market. We worked with FMCG/Pharma experts to get estimates of different cost lines during the launch and in steady state for different level of production quantities. This led to an appropriate pricing strategy.
Cost of Promotion & Distribution:
Our clients are usually great innovators. As a result their product or service has brisk initial sales – either direct or through affiliative marketing channels. Hence the cost of marketing the brand or the setting up a distribution channel is rarely considered in the initial pricing model.
In our country e-retailing is still in nascent stage and setting up a direct distribution system is very expensive. Hence not including trade margins in the retail pricing model limits the market’s scope/size. Going to trade for feedback prior to launch can assist in getting reliable ‘terms of trade’ directly from distribution partners. This is an essential part of building a ground-up retail entry strategy.
- Trade returns are a part of life. It has to be included in pricing in some form or another. A F&B client who was vehement that he would not take back stock had to finally increase margins in order to gain retail entry.
Competition in the market:
Often clients believe their brand offering is unique. Unfortunately, this is rarely the case. We recently met a snack food maker who believed that the product had no competitor in the market. However, a quick discussion with the trade indicated there were several competitors to the brand in the unorganized / imported goods sector.
- Collecting competition pricing (direct or indirect) is an essential part of pricing strategy. Customers rarely buy new brands without looking around at competition.
Long Term Firm Sustainability & Value Capture:
We work with the business leaders to ensure that the pricing model supports the long term vision of the firm. If the founder is looking at building a long term profitable business then the pricing has to incorporate marketing, sales team, supply chain, new product development and other costs. Not thinking it through can limit the firm’s long term growth and at times even viability.
Though demand elasticity and other complex models are important, young firms need help on getting the right and comprehensive cost data in one place. Once costing is done, pricing strategy for sustainable growth can be defined. This is a critical part of business as the future of a brand depends on how much profit it can generate.
Hence getting the pricing strategy right is essential. A successful launch depends on the brand’s ability to delivers more value than the price charged.
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