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TJ Tedesco

View from Mount Olympus

By TJ Tedesco

About TJ

T.J. is team leader of Grow Sales, Inc., a marketing and social media services company operating at the intersection of compelling content, clear vision and quality communication practices. In this blog, fire is a metaphor for print. Hang on, this ride will be weird...

Prometheus crept into Mt. Olympus, stole fire, returned to the lowlands, ran from house to house distributing it, got caught, was chained to a rock, lost his liver to a huge ugly bird and was rescued by Hercules. Leveraging his fame, Prometheus started Fire Enterprises Inc.  (FEI). Since fire was the hottest technology of the time, company success came fast and furious. Two generations later, fire isn't such an easy sale. Now led by Prometheus' grandson Org, FEI's growth is non-existent, competitors are pounding and prices are in the toilet.
 

Determine Your Pricing Objective to Drive Product Success

 
Over the past few weeks, the FEI tribe has been learning the advantages and disadvantages of various survey methods. This week, Marka and the tribe discuss the first in a series of topics on intelligent pricing strategy. Remember, fire = print.

The FEI marketing meeting was abuzz over product guru Lucy’s recent invention of “matches.”

“They’re so convenient!” Marka cried.

“They look great and they’re easy to distribute!” Zoot said.

Numo brought the party to a halt: “How much do we charge for them?”

“That’s a good question,” Marka agreed.

“Whenever we develop a new product or introduce one into a new distribution channel or geographical area, we must set an initial price. Our product’s price is integral for determining its demand levels, profit margins and total revenue,” Numo lectured. “Our pricing policy should begin with selecting a pricing objective. Later, we can determine our product’s potential demand at various price points, estimate production costs, analyze competitor’s prices and select a pricing method. All of this can ultimately help us strategically arrive at a final price that accomplishes our objectives.”

“So what is our pricing objective?” Marka asked.

“Rapid adoption,” Org offered.

“Long-term profits,” Lucy suggested.

“High profit margins,” Numo added predictably, while curling his bony fingers into a fist.

“Let’s see if I understand what’s been said,” Marka began, blowing a few stray strands of golden hair away from her face. “Rapid adoption sounds like it would involve a low pricing strategy to encourage consumer trial...”

“Not necessarily,” Zoot interjected. “Sometimes, consumers equate low prices with uninteresting or low-value products and avoid them.”

“Interesting,” Marka agreed. “I understand how low prices might actually turn off people. Numo, would you agree higher prices should lead to better long-term profits and higher profit margins?”

“Not always,” Numo quickly responded. “If we enter the match market at too high a price, Flintstone and Pyro may be encouraged to enter as well. If we price matches low enough, they may concede this market to us.”

“I understand,” Marka said. “Low pricing may reduce potential competition in a product category and make it easier for us to become the category leader. In some cases, owning most of the market share in a product category can make up for the smaller profit per unit that results from offering a lower price.”

“Exactly!” Numo exclaimed like a proud professor.

Org leaned back, trying to avoid smiling too much. He knew he had the right team to tackle the prickliest of business challenges.

“Another factor we have to consider is pricing elasticity,” Lucy pointed out. “That’s a discussion for next week.”

Today’s FIRE! Point
Whenever your company develops a new product or introduces one into a new distribution channel or geographical area, you must set an initial price. The price of your product is integral in determining its demand levels, profit margins and total revenue.

Possible pricing objectives can include rapid adoption, long-term profits and high profit margins. Though rapid adoption can involve a low-price strategy to encourage consumer trial, markets that require rock-bottom prices to compete in sometimes aren’t worth entering in the first place. Though higher prices often lead to better long-term profits and higher profit margins, keep in mind that entering a new market at too high a price may encourage competition.

FIRE! in Action
Occupying Different Price Points Helps Marriott Succeed

The international hotel chain is known for developing different brands at various price points, including Marriot Vacation Club (high price), Marriot Marquis (slightly lower), Courtyard (mid-priced) and Fairfield Inn (low price.) This diversification strategy has helped Marriott rebound from the recession and post a 7.2 percent year-over-year revenue increase in the third quarter of 2010.
 

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