Pricing policy is an important element of the strategy of any mature and developing company, as pricing directly affects the financial results of any enterprise. Before setting the price, it is important to determine the main goals and principles of pricing, evaluate the strengths and weaknesses of both the good and the store, external and internal factors, and the atmosphere of competition.
A structured price strategy will lead to an improvement in financial efficiency, and the first step to achieving these goals is to select the right strategic approach.
The key to the consumer’s heart
In marketing, there is a 4P theory describing why a consumer chooses a particular seller of goods or services:
- place – location, the convenience of location, accessibility;
- product – services or assortment, its breadth and quality;
- promotion – promotion, advertising;
- price – price, discounts.
These four points act as a weapon of the struggle for the customer, and a valuable advantage for any of them increases business efficiency.
Pricing is precisely designed to find the optimal balance between a high-quality price offer and the profitability / profitability of the company. Without a structured approach to finding such a balance, and pricing engine architecture the business simply will not survive.
Price and value. EDLP Strategy
So, the EDLP strategy means an approach in which the network assures affordable costs. In truth, guaranteeing such pricing is physically impossible because you will need to implement an entire business infrastructure for tracking market prices, therefore it would be more accurate to identify such a policy as “low prices every day.”
Discounts promotions. HL/P Strategy
The HL/P strategy implies more freedom in making decisions on prices: prices can be either above the market (including competitors with an EDLP strategy) or below them. And the inverse disproportion of price and value, in cases where the price of a product is higher than that of competitors with EDLP, is compensated by regular promotions and sales. Companies that have chosen the HL/P strategy, as a rule, are able to properly manage marketing activities and clearly track the demand for products in comparison with financial efficiency.
EDLP and HL/P. What to choose?
Pricing, of course, can give a quick effect that does not require large financial investments, but this applies only indirectly to the choice of strategy. It is important to emphasize that EDPL or HL/P will give the expected “response” only in the long term. It will take several sales cycles of 2-3 years to form a “correct” buyer’s idea of pricing policy. During this period, the network may repeatedly lose marginality in the short shoulder or, conversely, get its sharp growth.
Therefore, if a company decides on the choice of a particular pricing strategy, it is worth considering such changes as financial and temporary investments, and their volume cannot always be predicted with sufficient accuracy.
If, despite this, the management still decides to switch, it is important to remember that there are no “good” and “bad” pricing strategies, and when choosing it, it is worth focusing on some points:
- The HL/P strategy assumes the presence of competitors with or close to the EDLP strategy. It is important to understand that the pricing strategy is a tool for the struggle for the buyer between market participants. Consequently, the strategy is selected with the competitive context in mind.
- The EDLP strategy implies saving customers, whereas HL/P is focused on quality (not only of the product, but also of the service).
- It is important to take into account the economic situation in the region where the network is represented. If there is a crisis in this country, most likely, buyers will focus on low prices and companies with an EDLP strategy will receive an additional impetus for development.
The buyer does not think about the abbreviation describing the prices in the store, but evaluates the price-value ratio. You can sell expensive and with high value in the form of first-class service or cheap, but in stores with rude staff.
Selecting the correct price plan is always a unique scenario for practically every organization, because the variety of market players influences the contemporary economy’s growth. And, while there is no ready-made formula, we can be certain that the pricing strategy systematizes and explains the company’s operational conduct.