Two Constants for Retailers’ Pricing Strategies
Alan Perlis, the first head of the computer science department at Carnegie Mellon University, often told his students that "one man's constant is another man's variable." Pricing is one area in which understanding how constants can become variables can help businesses be successful.
The first pricing constant is that price is always on the table. Every customer in every purchase setting is aware of price. It's always one of the factors that enters into their decision. If other factors such as product attributes, service and location are seen as equal, price becomes the factor. We can all cite a few examples we've observed where that wasn't true, but most of them fall into the realm of "you can fool some of the people all of the time and all of the people some of the time."
Fooling customers is rarely a business model that leads to sustained success, particularly in today's era of price transparency online. It's far better to believe in this first constant and recognize that price is always a factor.
The second pricing constant is more uplifting. In every market, there are segments that will reward a different offer with a premium price. Most businesses aspire to be in this environment. The basis of differentiation can vary widely from product to product and market to market, but there's always one there if you look hard enough.
It may be embedded in the product — e.g., a better way of sourcing music via iTunes or a better tasting hamburger from Five Guys. It may be associated with surrounding services such as short lead time delivery, expert support, on-site warranty repairs, etc. The examples of how one business differentiates itself from its competitors are incredibly varied, often provoking amazement as to how someone thought of that (or why others hadn't).
The secret of success in reacting to this constant is quite different from that associated with the first constant. The prescription here is to thoroughly understand the segments of your market — i.e., know what drives their purchase decisions — to become best-in-class at delivering on those decision drivers.
What does Perlis' quote tells us? There's a fine line between these two constants. A business can suddenly find that it's differentiated offer has become a commodity available everywhere, with their business world shifting to one in which price is the factor that matters most. Many businesses have failed when such a transition occurs.
Sustained success for businesses that are differentiated requires very proactive planning, for the day will inevitably come when the first pricing constant comes into play. There are only two real options: you either have to be prepared to compete and prosper in an environment where price dominates consumers’ decisions, or you have to constantly be a step ahead of the game in learning what will keep your offer differentiated. Either is hard work, but the reward comes from close-to-the-customer strategies that allow you to remain a lap ahead of the competition.
Like every other element of business strategy, pricing is demanding and an arena in which innovation and creativity often pay off. The advice above about the two approaches to sustained success brings to mind another quote from Perlis: "There are two ways to write error-free programs; only the third one works." Remember the two pricing constants, but always look for opportunities to inject a dose of innovation.
George F. Brown, Jr. is the CEO and co-founder of Blue Canyon Partners, a strategy consulting firm working with leading businesses on growth strategy. George can be reached at firstname.lastname@example.org.