April 2016 | 

The Power of Price: Creating Profitable Strategies

The Power of Price: Creating Profitable Strategies
  • A European firm is facing decreasing market share. Their high-end coffee has a premium price that many consumers are not willing to pay. It’s not attracting new, younger customers either — which doesn’t bode well for the future. Should they lower the price and hope to appeal to younger buyers to drive market share? Or introduce a second, lower-priced brand? How might either option damage the premium brand?
  • A pharmaceutical company spends 2 billion dollars to develop a successful drug. Then they must go through a lengthy approval process, including clinical trials. At the end, they have only a few years on their patent to capture the value they created. For these reasons, they set a very high price, believing it is the only way to recoup their investment and have enough money for future R&D. The inevitable result is push back from consumer advocacy groups, patients, doctors, and politicians — a result they are willing to ignore.

Both of these organizations are looking at pricing incorrectly, says Wharton marketing professor Z. John Zhang. “These kinds of challenges are common. You believe you have to choose one price that satisfies one concern but ignores another. In fact, there are pricing strategies — not one perfect price — that can satisfy both. With the right strategy, you can kill two birds with one stone.”

Zhang, who teaches in Pricing Strategies: Measuring, Capturing, and Retaining Value, explains that most of the executives who come to Wharton’s unique program have struggled for years with two extremes: set the price high and volume suffers, set it low and margins suffer. “You need to get out of that bind and think in new ways about pricing. You don’t have to make that tradeoff if you use a more creative strategy.”

For a decade, Wharton marketing professors and international pricing experts Zhang and Jagmohan Raju have been showing participants in the program a number of safe and highly effective ways to play with pricing that will increase profitability. Zhang continues, “If you care about increasing profitability, there are only a few levers you can pull to achieve that goal. Typically, executives try to increase volume, by advertising more, doing more promotions, or finding new markets. Or they focus on reducing cost by removing inefficiencies and becoming leaner. It’s rare that firms get beyond those options and think about the most effective lever: pricing.”

Zhang says that new research — and new challenges — keep the program highly current. “Ten years ago, if you were a retailer you didn’t need a pricing strategy that would encompass your brick-and-mortar store with your online sales. Today, that is a necessity. It’s a very complex environment. Consumers are shopping around armed with mobile devices, looking up prices online. How do you deal with the ‘showroom effect,’ where they capitalize on all of the services you provide in person and then buy from someone else?”

Zhang says there is no one strategy that will work for every company, but the issues they need to work through are the same. “Where do you want to drive traffic: your brick-and-mortar or online store? How you direct traffic will affect pricing. And how do you capture sales from omni-channel shoppers in your brick-and-mortar store? The right pricing strategy takes these kinds of concerns into account and can kill multiple birds with one stone.”

Ultimately, says Zhang, “We’re showing participants how to build their expertise. Playing with price to boost profitability is complex, but there are many powerful research-based ideas and best practices that can guide you. If you implement just one, the program will more than pay for itself.”