Pricing: Marketing rules you cannot ignore

 Pricing: The necessity of following basic market rules in order to be successful

 

Study Case

In the last few months a lot of consumers in Denmark experienced a shock when the market leader in milk products Arla increased the prices of fresh milk, both ecological and regular, by correspondingly 14 % and 25 %.

 

Otherwise no mystery there, prices do go up more or less on a regular basis. However, the reasoning behind the decision becomes quite unclear when one looks at market rapports quoted by the Danish press showing that demand is falling and the reason seems to be the high price of milk.

Even more mystically, the price of regular milk jumped with 25 % as reported and reached almost the price level for ecological milk. All this despite the fact that other producers still keep prices of regular milk on a price level 33 % lower than the Arla’s prices even after the recent increase of their own prices.

 

The net result for the company is yet to be measured, however the trend is for grocery chains to periodically put Arla milk on offer in an attempt to sell it or bail on it completely (observed at Kvickly, Rema 1000 and Netto, Denmark, September and October 2013). As for the consumers there is little doubt that they will choose the lowest price of the same product class and thus ditch the pricy Arla milk which does not offer anything beyond what other brands are able to provide on a much lower price (see an article on the topic, in Danish!).

 

Pricing

Pricing is usually decided on by conducting marketing research, evaluating demand, and benchmarking with competitors. A company could employ different pricing strategies depending on market position, brand value, product value, availability of alternative products, demand and supply. A market leader can often put pressure on the market by increasing its prices if there is an indication that either competitors will follow or consumers will stay loyal to the brand. The other way around, which also seems to be the case more commonly, the market leader can win the battle with competitors by lowering its prices to levels unreachable for smaller companies.

However, either move has its risks and limitations. While the risks seem to be easier to identify, the limitations are hidden within the corporate policy and corporate marketing strategy. Lowering or increasing prices is not always an option, as for example, a low cost brand cannot out of the blue come up with pricy products marketed as top quality. Similarly, an expensive brand can seriously damage its image by lowering inexplicably its prices only to win customers over.

This is the reason why low cost brands committed to changing business profile to quality need to go a long way. And this is the reason why many regular or expensive brands employ countless discount tricks in order to sell or to attract new customers.

The marketing policy aside, prices need to be compatible with business logic. Increase in prices should mean increase in quality, higher costs along the supply chain, new taxes, or market monopoly. Most importantly, that logic needs to be translated to consumers. They need to understand why they are supposed to buy your brand and pay more for it now than before.

If you skip that simple step you risk losing your otherwise loyal customers. An example can once again be the Danish dairy queen Arla. When they increased their prices in a country still in crisis and with price conscious consumers the result just a month later is almost constant discounts and special offers putting the milk price below the level from before the increase. Would Arla do that if they were not losing too many customers?

The problem with the increase was that it did not make any sense. No higher quality, yet much higher than the average price of competitors and just few Euro cent under the price of ecological milk which traditionally is sold on much higher prices. Why buy it?

To be successful you need to remember that no matter which pricing policy you choose, it is essential to communicate and explain your policy to consumers so that it does make sense to them. Another bonus of communicating openly with your customer stakeholder group is getting important and timely feedback on planned business moves and thus protecting your business and your image from damage.

In two words: to be successful you need to follow clear business polices, to avoid the thrill of a quick win and to establish open communication with your stakeholders.

DIDI