Kotler's Pricing Strategies
Finding the Right Price for Your Product
What factors do you consider before making a purchase?
For instance, do you care most about the quality of the product? Is price your biggest consideration? Or, do you aim for a balance between the two?
If you're the organization making the product or providing the service, pricing it correctly can be tricky. And it can be a disaster if you get your price wrong. Each market is influenced by different factors, so you have to consider these before deciding on the best approach to take.
In this article we'll look at Kotler's Pricing Strategies, a simple model that can help you find the right price for your product or service.
The Importance of Pricing Strategy
It is incredibly important for an organization to identify the right price for its goods. This impacts its present-day performance and profitability, as well as its future growth.
For example, when the price of your product is higher than customers' perception of its value, few people buy it. When it is too low, profitability is affected; this, in turn, limits innovation and growth.
Kotler's Pricing Strategies
Philip Kotler developed his model of nine possible pricing strategies in 1972, and the idea was expanded by Peter Doyle in his 1998 book, "Marketing Management and Strategy."
The model is shown in figure 1 below.
Figure 1: Kotler's Pricing Strategies
The three strategies along the diagonal, and the three to the right of the line, provide an appropriate level of quality at an acceptable price; your customers consider these good value. The final three strategies, to the left of the line, represent overpricing. This is where prices do not align with the quality of the products or services, and are therefore unsustainable.
The Three Groups of Strategies
Let's look at each group in greater detail, and discuss how you can apply the most useful ones to your product or service.
Group 1: Economy, Medium-Value and Premium
These strategies represent good value for your customer, because there is a close alignment between the product's quality and price.
- With an Economy Strategy, price and quality (defined as the perceived inferiority or superiority of the product) are both low. The strategy is best used when your target market is concerned about price, and is willing to accept a lower-quality product to save money. It is often unsustainable, because margins can erode quickly when a competitor enters the market using the same pricing strategy, and drives prices down further.
- A Medium-Value Strategy is used with products of medium quality, at an average price. Customers in this category care about both quality and price, and try to balance the two.
- A Premium Strategy is used when quality and price are both high. Customers are willing to pay a premium for what they perceive as a superior product.
Group 2: Good Value, High Value and Superb Value
The three strategies in this group are all effective for countering the approaches in group one.
- A High-Value Strategy is useful against a Premium-Strategy competitor. With this approach, you have a similar, high-quality product but you charge less for it.
- A Superb-Value Strategy communicates a similar message, but at an even lower price.
- A Good-Value Strategy also has a similar message, but with a product that's lower in both price and quality.
Group 3: Rip Off, Overcharging and Poor Value
These three strategies are unsustainable because they represent low-quality, over-priced products. Customers who feel they have been ripped off or overcharged will quickly move on to a competitor that offers them better value. It's best never to use these strategies in your organization, unless you're thinking in the very short term.
Identifying the Best Pricing Strategy
You need to consider a number of factors when choosing the pricing strategy that works best for your organization. Following the steps below will help you to determine the right approach.
Step 1: Recruit a Representative Sample of Informed Customers
When you're deciding on a pricing strategy, carry out market research among customers and potential purchasers who understand the market. While you can't realistically do this with every person who is likely to buy or has bought your products, you can consult a representative group of them, and apply the results to your wider audience.
Use market segmentation to gain a deeper understanding of who your best customers are likely to be, and decide whether it's appropriate to talk to its members individually, or to use surveys or focus groups to gather information.
Step 2: Ask Them to Rank the Products
When it comes to setting a price, you have to consider your competitors.
If your product is already on the market, ask your customers to rank it, and similar products from your competitors, on a scale of one to 10 for quality and for price. For example, they might give your product a nine for price, and a seven for quality, and your closest rival a nine for price but a three for quality.
If you have yet to launch your product, you will need to ask these people to test it, so they can give it an appropriate ranking.
Step 3: Ask Them to Quote a Fair Price
Ask the members of your sample to say what they would be prepared to pay for low, medium and high-quality versions of your product type. This will give you a range of what your customers are willing to spend.
(Be aware that it's in their interests to underestimate – take their answers with a healthy "grain of salt!")
Step 4: Plot the Quotes
Next, plot the average-value price for each product on a grid that runs from one to 10 for both quality (x axis) and price (y axis). For example, one customer may have said she'd spend an average of three units on a low-value, five on a medium-quality, and seven on a high-quality version.
Similarly, your customer group may have said that a competitor's product had an average quality of eight, and an average price of two units. Plot this on the grid. (Clearly, this product should concern you!)
Step 5: Replot the Products on Kotler's Pricing Strategy Matrix
Use this information and your judgment to replot your competitors' products, as well as your own, on the Kotler's Pricing Strategies matrix. This will help you think about how much your customers are prepared to pay for your product or service, based on its quality, so that it competes effectively with your competitors' products.
Kotler's Pricing Strategies model identifies nine potential approaches that organizations can use when to setting prices. These range from offering a high-quality product at a high price, to offering a low-quality product at a low price.
To determine the best approach, follow these steps:
Step 1: Recruit a representative sample of informed customers.
Step 2: Ask them to rank the products.
Step 3: Ask them to quote a fair price.
Step 4: Plot the quotes.
Step 5: Replot the products on Kotler's Pricing Strategies matrix. The price you should choose depends on your competitors' prices, and it should be on or below the Economy/Medium-Value/Premium line.