penetration pricing harvard business review

PENETRATION PRICING HARVARD BUSINESS REVIEW HOW TO

PENETRATION PRICING HARVARD BUSINESS REVIEW HOW TO

In addition, they need to be thoughtful about how to manage the downside, how competitors will respond (disruptors can face dramatic reactions from competitors), and what to do if / when others follow suit. To succeed with this strategy, companies need to conduct in-depth analytics and model scenarios to understand the range of outcomes for both sides. These models can include profit sharing with customers, pricing agreements that factor in risk (e.g., cost-of-materials triggers), and changes in the unit sales model (e.g., per hour of use vs. These approaches are often founded in a belief that more value can be unlocked for the customer and the supplier through a new model that reduces the downside or increases the upside for either party. Pricing DisruptersĬompanies in new categories or in categories under significant threat often look to bolder, disruptive pricing strategies to define or defend their business model. The tiered pricing and positioning strategy allowed Dow Corning to target a much broader part of the market while protecting the profits of its existing offering. Instead of succumbing to price pressure, Dow Corning introduced a different brand (Xiameter) with different service levels, different customer experience and lower price points. As the company’s web site explains, Dow Corning did a deep analysis of their customer segments and discovered a large and emerging group of price-sensitive customers who were pulling prices down. In the late 1990s and early 2000s, the silicone industry was seeing declining margins due to commoditization, unfavorable changes in legislation, and increased competition. To succeed, margin expanders must have clear insight into margin leakage (i.e., where, when, and how the “pennies roll off the table” and what the impact of that is) and relentless discipline in rectifying the issue.Įxample-Dow Corning: Price and brand differentiation. This approach allows companies to expand their profitability over time without disrupting competitive dynamics or customer expectations. This can mean expanding margins through small regular price increases, defending against unnecessary giveaways, segmenting the offering, applying surcharges, passing on changes in cost to serve, and pricing in additional sources of value (e.g., service). Still, we’ve found that periodically reviewing strategic options is helpful in challenging established thinking and sparking new ideas about how to approach pricing.įor many companies in mature markets where there is heavy competition, the prudent and realistic pricing strategy involves small, incremental steps to improve margins, usually within the existing segments, products, and pricing structure. Not every strategy will be relevant or even feasible for every company – much depends on the market context, the business strategy, and your own capabilities. In an analysis of hundreds of companies and pricing approaches, we found four pricing strategies that deliver sustainable results (see Exhibit 1). In our experience, effective pricing strategies and tactics can deliver a 2 to 7 percent increase in return on sales. And if you have to have a prayer session before raising the price by 10 percent, then you’ve got a terrible business.”Īs the quote reflects, pricing is the most powerful lever for driving or destroying the operating margins of a company. “If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. “The single most important decision in evaluating a business is pricing power,” Warren Buffet, CEO Berkshire Hathaway, once said.

Penetration pricing harvard business review