Pricing Strategy
Pricing Strategy
What is pricing strategy?
- How to decide what to charge
- Pricing on cost, competition, or value
- Price is also a signal of quality
When you change pricing, more than one number changes. The first sentence sales says in front of a customer changes, and so does which customers you chase and which proposals you give up on. A sales team at a cost-plus company opens with 'How much can we take off?'; a team that works backward from the customer’s results opens with 'This program cuts new-hire attrition by this many percentage points.' When the pricing basis changes, the language of sales changes. That is why pricing strategy is less a finance calculation than a way of designing the behavior of the sales organization.
In practice, price has to be viewed in three layers: the list price, the actual contract price, and the discounts, options, and payment terms that fill the gap between them. Most meetings cover only list price and never manage discount authority, yet profit leaks out of the second and third layers. On a product with a 10% operating margin, giving a 5% discount wipes out half the profit. Managing discounts moves profit more than setting prices does. Tier design follows the same logic. The top tier exists not to sell in volume but to make the middle tier look like the 'reasonable choice'.
Penetration pricing versus skimming is a matter of conditions, not taste. If switching costs are low and volume directly lowers unit cost, enter low and capture share first. If a product is hard to replace once adopted and early customers are sensitive to performance, start high and step down gradually. B2B adds one more variable: the people who use the product and the people who sign off are different. Business teams look at impact, while the purchasing team looks at unit price. So a proposal should include a unit-price comparison table and the basis for the impact estimate as separate pages, so each reader has a page of their own to open.
The most common misconception is that 'value-based means charging more.' Value-based pricing works only when you can show the customer’s results in numbers; raising prices without a basis quietly gets you eliminated at the purchasing review stage. The opposite direction is just as risky. A 40% discount given to a first customer becomes not a reference but a benchmark price announced to the market, and the moment you quote list price at the year-two renewal, it comes back as a complaint: 'Why are you suddenly raising it?' The cost of reversing a price once cut is far higher. Before you follow a competitor down, first check whether price is really why you are losing.
John KimInstructor John Kim, author of B2B Marketing Design and CEO of Nanum Consulting
Euijung KimBrand strategist with 30 years in advertising, formerly a division head at Daehong CommunicationsOne of the four Ps of the marketing mix, it has grown into a range of pricing strategies through economics and consumer-psychology research.
Let’s look at a hypothetical case. Company A, an industrial measuring-instrument maker with 90 employees and annual revenue of roughly KRW 14 (≈ US$1) billion, had always priced each new product by adding 30% to cost. But over the past three years its average discount rate rose from 12% to 21%. Revenue grew 18%, yet operating margin sank from 9% to 5%. The CEO said, ‘At this rate, the more we sell, the more we lose,’ and told the head of sales to re-examine pricing.
- The head of sales split two years of contracts, 1,140 in all, by discount band. The 92 contracts discounted by more than 30% alone were costing roughly KRW 400 million (≈ US$299,300) a year in profit.
- To check whether they really lost on price, they reviewed 60 lost deals through interviews with sales reps. Only 19 were lost on price; the rest came down to late delivery and complaints about after-sales calibration service.
- Instead of leaving the list price alone, the head of product planning created a new 'Standard' tier bundling regular calibration with a 3-year warranty, and moved the existing spec down to 'Basic,' setting the middle tier as the anchor.
- They tiered discount authority: sales reps up to 10%, the head of sales up to 20%, and anything higher needs CEO approval. Each approval request now had to answer, in one line, “why is this customer the exception?”
- Eight months later, the average discount rate had fallen from 21% to 14%, operating margin rose from 5% to 8.6%, and 47% of new contracts came in at the Standard tier.