In a previous article, we argued that you shouldn’t be looking to your competitors when setting your price. While this is true, knowing how your product or service is positioned in the mind of your customer will help you understand how you stand out from your competitors. And if you find your product is positioned pretty similar to a competitor, you can use price positioning as a tool to build a strong USP (Unique Selling Proposition) by setting a new price that is relatively higher or lower than your competitors’.
What Your Customer Perceives in Your Product
Brand positioning is complex and there aren’t any clear rules for how your price point will influence your customer’s perception of your product. For instance, a clothing brand will typically signal high quality and prestige by charging a high price, while a software company marketing their software as “disruptive” and “innovative” may have to set a lower price to convey sophistication as consumers associate disruption and innovation with increased cost-effectiveness. It is important that you understand your specific customer segment and their value-drivers; there’s no matrix that can tell you exactly how a price change will influence your brand positioning.
Long-Term vs Short-Term
Your short-term price positioning involves short-term price changes as a reaction to shift in demand or vis-à-vis competitors. This is done to maximize revenue under current conditions, but note that it is, indeed, short-term thinking.
Your long-term positioning is concerned with setting a price that will influence your brand positioning; that is, your customer’s perception of your product’s quality, prestige, and benefits.
Generally, you want to make sure that your short-term strategy is largely guided by your long-term strategy. It may be tempting to hunt those easy profits, but a strong long-term position should be the priority.
Don’t Change Your Price Too Often
Often, companies tend to focus too much on their short-term price positioning and hunting short-term revenues. In the long-run, hunting these revenues will not maximize revenue. There is a trade-off: every time you change your price, you damage your brand equity. A price change creates uncertainty around your brand’s quality and positioning, which increases the customer’s perceived risk of purchasing your product. Imagine if Louis Vuitton reduced its prices with the demand shift during the financial crisis: it would lower the quality perception of not only products purchased at the reduced price, but also those products purchased at a higher price in the past, thus depreciating the value of these bags, too. This is a potential risk to a customer considering purchasing a new Louis Vuitton bag in 2017 who will be asking herself: “What if they reduce the price in the future, and people will think I bought my bag at a reduced price, too?” Not only will the bag lose value in terms of a lower selling price, but also in terms of the social recognition she gains from carrying the bag.
Summary: Price Positioning is a Long-Term Strategy
At the end of the day, your price positioning should be a marketing tool and not a mean to maximize revenue in the short run. The damage incurred from the relative price fluctuations that come with employing a short-term price strategy outweighs the benefits in most industries, and should at the very least be done using the long-term strategy as a strict guideline.