How companies can use premium pricing strategy to increase profits

Organisations have an economic and social responsibility to make healthy sustainable profits. It is only through profitability that a company will make a fair return to its stakeholders.

Profitability is also a demonstration that a company has utilised the economic resources in a socially responsible way by retaining a surplus and eliminating wastages.

The taxman equally expects firms to be profitable so that they provide the local capital necessary to drive the national development agenda.

Profitability is the number one measure of business success. No matter what you do, if you are a commercial enterprise and you are unable to retain a fair return to your stakeholders, you are not going to get far. Consequently, managers must think and focus on profitability, within the confines of ethical, moral and legal obligations.

Being a function of revenue and costs, profitability requires proactive and creative approaches on twin cost and revenues management. In some companies with dwindling fortunes, the panic mode invariably pushes managers to rush and push the cost-cutting button, while leaving out the price strategy to market forces.

This is a recipe for failure and you are more likely to face a vicious attack on price when a close competitor detects your woes, leaving your company vulnerable on the two uncomfortable fronts.

Defensive cost management practices by capping your costs and investing in a clear and robust pricing strategy could set you apart from the competition in ways that will transform your business beyond imagination. The key goal of every company is thinking of creative ways of becoming different and better than the competition.

Companies that have their pricing strategies right, among other things right, not only dominate at the Nairobi Securities Exchange but also the global securities exchange as well and the list is an open secret.

The conception of a pricing strategy starts at a very basic level. Companies want to make more money and more profits, thus there will be a push for revenues to go up and costs to remain stable. Revenue, being a function of price and quantity, is variable and you will need a robust sales effort and correct pricing to push the required numbers.

To increase revenue, a company can either increase quantity sold, price charged or both price and quantity, holding price elasticity rules constant. I will look at how to increase price using a premium-pricing strategy.

A pricing strategy takes into account all production and input costs, labour, advertising expenses, brand equity, segments or industry practices, ability to pay, market conditions, competitor actions amongst others and then add on

a certain margin so that your company can make a profit. Any incorrect pricing approach will cause your company sales to plummet at your company’s expense and for the benefit of the competition.

Companies can choose variants from four basic pricing strategies to creatively move towards excellent pricing and achieve profitability. These are premium pricing, skimming, penetration and economy pricing strategies.

Premium pricing is used where a company deliberately sets a high price for its products. Highly successful companies continue to use this strategy as a differentiation tool that has worked to effectively wade off completion and create large loyal niche markets. Such pricing strategies work in segments and industries where the company has created a strong brand name and competitive advantage for itself.

Look at Porche cars or Apple products and the traction they have gained locally and even globally. This is not to forget our own Safaricom, which is the most expensive telecom enjoying supernormal profitability in the region using a similar premium pricing strategy.

These companies make products and offer services that resonate with customers by appealing to the customers’ emotions and psych. Associating or dealing with these products comes with a unique sense of success and privilege.

One walks into these companies and you immediately notice a difference and leave with an experience. Price alone will not stop you from enjoying this unique experience. It becomes a goal, a target to be achieved, as there is no replacement for the feeling of accomplishment once you have attained this goal.

Premium companies do not copy what the completion does, but they study the competitor moves to set their game and ground rules.

Weaker competitors are quick to cut prices to earn business but premium companies do not play the price game, as it is an expensive game. Many competitors have failed because they cannot generate enough cash flows to sustain the price war. Playing the price war is the fastest way to push your product or service into the commodity category.

The challenge is to create and sustain a brand that supports your premium pricing strategy. There is, therefore, the need to create a strong value proposition around your product or offering. To do this, a company will identify the features that are considered high-end enough on the value scale and then highlight these crucial elements in its marketing outreach and branding.

Companies offering premium service and charging for it are discouraged from hiding the high price but instead, should explain this value to the customer, and demonstrate the return on investment associated with this service or product.

Companies must invest in building and developing a powerful brand equity and image. Premium companies will go full throttle to provide premium service and product with excellent customer service. They exude confidence and project financial success and generate positive attractive energy around them.

They anticipate customer needs and proceed to give customers an experience knowing that all clients want a good experience, and most will pay for it.

Skimming strategy on the other hand is where a high price is charged for a product until competitors set in after which prices can be dropped.

The idea is to recover maximum money before the product or segment attracts more competitors who will lower profits for all concerned.

This is very prevalent in the technology and electronics business such as mobile phones, VCRs and other electronic items.

With more investments in research, branding and strong value proposition, skimming strategies can be turned into sustainable premium pricing strategies.

Skimming companies should resist the temptation to drop to the commodities market where the price is given. They should strive to develop a strong value proposition and move permanently into the premium market.

Penetration pricing is another pricing strategy usually used when introducing products. It is like test marketing and ideally, is never long-term. The price is set artificially low to gain market share quickly.

The best name would be the promotional price, which can be set to last for a definite period as the company gathers market information. It is clearly understood that prices will be raised once the promotion period is over and market share objectives are achieved.

Companies must strive to create value around pricing so the selling point is not the product or service, but a whole package of customer experience. Gather relevant market information, ask what the product is going to alleviate or help solve, show distinctive differences with available remedies and help move your product or service to the premium category.

However, it is always much more difficult to increase the price as opposed to reducing the price. If your company has been marketing its products or services as low-cost options, it is difficult to move up the price ladder without devoting significant investments to aggressive marketing and realistic differentiation between product offerings.

Therefore, even with penetration pricing, the price level should not be too low such that proper future increases to profitable pricing levels become impossible to achieve.

Economy pricing is basic pricing with little or no value addition other than place and convenience provided by the seller. It uses cost plus mark up and full stop. Margins are razor-thin with very low overheads like marketing and advertising costs are almost nonexistent. Products are known more than the companies that sell or distribute them.

This applies to essentials products, commodities and merchandisers. Economy pricing targets the mass market and the higher the market share the bigger the profits.