Maximize Your Profitability: Making The Case For A Forward-Thinking Pricing Policy
Pricing, as one of the marketing mix tools, should have its own policy, yet it often serves as a safeguard to the other members of the marketing mix family. Corporate executives usually think of pricing as a compensating instrument that they can use when under severe pressure from competitors or if they are not using the other marketing mix components effectively. The natural advantage of a pricing structure is that it can be adjusted in just a few minutes. More often than not, though, it’s incorrectly used to compensate for the underperformance of the remaining marketing mix components whose design and implementation require several weeks.
The business world is driven by the desire to increase three elements: market shares, sales revenues and, of course, profitability. Pricing is the key player in any strategy concerning the growth of these three goals. Nevertheless, companies are often quick to assume that a small price cut will lead to large market share increments and higher retail exposure. In reality, however, such a price reduction might engage the company in a vicious downward price spiral that negatively affects its bottom line results.
Regrettably, the Middle East –including the small number of high per-capita income countries– is known to be a price-driven region. Companies in the region tend to rely on price cuts in order to sustain volume. Price structures are often influenced by two factors: cost-plus (maintaining prices at a level that exceeds product costs by a certain margin) or opting to follow the market leader’s price structure and being completely driven by its policy. When faced by any amount of cost inflation, or by adjustments in competitors’ prices, each company tends to adopt its own pricing method.
Engaging in a pattern of continuous price discounts places an entire industry at high risk. This has been happening in the tourism industry in both Egypt and Tunisia where hotel management, concerned by room occupancy rates, kept offering bigger and bigger discounts. The result has not only been a substantial deterioration in the quality of services and food offered; the entire destination has been also been classified as a low-budget destination– when in reality both countries offer magnificent tourist attractions.
If we were to portray pricing as a runner, it would be quite difficult to expect an out-of-shape person to perform well in a tough race. However, if we work upfront on enhancing the competitor’s overall fitness, the runner will easily be able to participate in, and win, many races. If companies wish to continue to use pricing as a rescuer, they need to develop a healthy pricing structure (equivalent to an athlete’s physical endurance and flexibility), making it possible to easily rescue a product whenever the need arises.
A forward-thinking pricing policy is essential for strengthening pricing as a lifeguard mechanism. It’s important to anticipate well in advance the multiple factors affecting fluctuations in any price structure, and then to work on enhancing product competitiveness to persuade consumers to accept new product prices. This strategy has helped a number of our global clients to increase their bottom line by 2–3% and substantially more in the Middle East. There will always be room for maintaining higher profit margins during prosperous times, which helps companies to maneuver in times of crisis.
For many companies, having relay runners is the ultimate solution; a team of good runners would enhance each athlete’s performance and compensate for the deficiencies of individual team members. Thus, developing a portfolio of diversified products could certainly help to sustain an overall healthy pricing structure; introducing a number of products, packages or even temporary offers will better enable companies to apply the right consecutive or simultaneous marketing strategies.
Pricing has been, and will continue to be, the most complicated element in the marketing mix family. The natural price dynamic should encourage marketing executives to develop their own pricing policy instead of constantly being tempted to reduce prices. A proactive pricing structure will help companies to sustain a healthy product margin and to maximize their profitability.