Pricing – Strategy and Tactics

Pricing is about profit maximization. A business must take all actions required to deliver long term  profit growth. Market share goal is secondary and is relevant only if it is essential to deliver long term profit growth. Pricing has both strategic components and tactical components, the latter is relevant only within the scope of the chosen strategy.

Strategy is about making choices – choices about the markets you want to play in, segments you want to serve and channels you want to use to reach them. If there are unlimited resources you do not need a strategy, you can play in any market you choose. But the reality of limited resources requires to make choices. Pricing strategy is flows from the overall marketing strategy of segmentation and targeting.

Tactics are designed to take advantage of short term situations, like promotions and other methods that rely on consumer behavior. For example, deciding whether to sort the price list or keep it random, whether to list items with $ sign or not (Cornell report, Yang, Kimes,Sessarego, 2009) and whether to have prices that end in  9. There are also more advanced statistical methods like the one from QCue.

The problem occurs when the marketer tends to focus more on tactics at the expense of strategy or worse apply all tactical optimizations to fix strategic shortcomings. The Cornell Hospitality report I quoted above reports on customer acceptance of higher prices when the prices are listed as just numbers without the $ sign. There are also other consumer behavior methods based on anchoring (and reference price) that increase customer willingness to pay. But if the restaurant does not understand the customer segments it is targeting, does not know the value/benefit added to its customers and does not have competitive advantage then any number of tactics employed in menu pricing will not stop its failure.

Tactics help you achieve precision but there is no point in being precisely wrong.