Principles and Traps of Price Differentiation

Why do we accept that we usually do not get the same price as the person sitting next to us on the same flight? On the other hand, why did Coca Cola create a massive fuss when differentiating beverage prices out of the vending machines depending on outside temperature and inventory? While price differentiation depending on availability and time of booking in the airline or hotel industry is absolutely common sense, it is not accepted or not even attempted in other industries. But what are the principles of price differentiation and what are the key questions?
Price differentiation is defined as using different prices for the same type of product or service in order to exploit the customer’s individual willingness to pay. There are many dimensions according to which price differentiation can be executed. The most common are:
  1. Customers: different prices for various customer segments, for example business to consumer prices versus business to business prices.
  2. Country: differentiation of prices for example between Switzerland and the European Union
  3. Channels: different prices in relation to the channel in which the products are sold, for example online versus offline.
  4. Product: different prices in relation to different features or quality.
  5. Product Life Cycle: price differentiation in relation to the life stage a product/a service. A well-known example is the iPhone: every time a new version is introduced to the market, Apple significantly reduces the price for the last version.
Price differentiation affects one of the most important aspects of consumer psychology: fairness. Before deciding to differentiate prices, companies have to ask themselves if the differentiation will affect the perceived price fairness.
To answer this question four aspects have to be considered:
  • Is a price differentiation for the customers comprehensible?
  • What is the maximum accepted price difference?
  • What is the strategy against arbitrage?
  • Are fences needed in order to exclude certain customer segments from low-price offers and how can they be reinforced?
Price differentiation is a very interesting topic in the field of pricing but it’s also very tricky. Differentiated prices require a well-considered approach.
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The Power of Pricing

The single most important decision in evaluating a business is pricing power. If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. And if you have to have a prayer session before raising the price by 10%, then you’ve got a terrible business.

Pricing power is a company’s ability to raise prices without losing too much sales volume because of this increase. This factor has some clear advantages from a financial point of view, as higher prices usually mean bigger profit margins for the company and higher returns for investors in the long term.

Also, pricing power says a lot about a company’s competitive strengths. Competition tends to keep prices at bay. If a company raises prices too much, consumers will typically go for a competitor’s cheaper product. Businesses with superior pricing power are those with competitive differentiation, meaning that consumers find something unique or superior about that company and its products.

To have pricing power, you need competitive strength. This can come from a higher-quality product, a differentiated brand, or technological superiority, among other possibilities. In addition to generating higher profitability, competitive strengths protect the business from the competition, and this substantially reduces the risks for investors.

Learn how Stratinis can endeavour to optimize and manage your prices through our pricing software

5 Steps To Above-Market Growth

Pricing is an important source of revenue and profits, but only companies that increase their level of analytical rigour and practical know-how will unlock its full value. They believe companies need to do five things to turn pricing into a profit engine:

  • Provide meaningful transparency into pricing data
    It has been argued that pricing managers often lack a clear understanding of how profitability varies between regions and product lines, knowing even less about how it can vary among individual customers or transactions.
  • Understand what customers really value
    The price of a product or service ultimately depends on how much your customer thinks it is worth. The best companies augment their pricing analytics with detailed customer insights. This helps in identifying all the key buying factors that determine how much a product is worth.
  • Move from sales reps to value negotiators
    Determining the best price means nothing if the sales rep can’t convince the customer to accept it. For this reason, it’s critical that price setters sharpen their business skills. Building negotiating skills in particular is critical. In practice, this often requires spending time understanding how the price recommendations are made and what the reasons for them are so that the rep has confidence that the price makes sense and is defensible.
  • Provide on-the-job training to build confidence
    While most companies understand it is important to build the pricing skills of their people, few move beyond basic training in classes or online. Successful companies, however, use adult-learning techniques, such as experiential learning, to embed the new skills in the front line. The most effective programs rely on a mixed model of education and implementation known as “field-and-forum.”
  • Sustaining long-term success
    Companies need to overcome entrenched habits and shifting priorities that doom most change programs. Ingraining pricing success over the long term requires putting in place an “influence model” that includes: role modeling, fostering understanding and conviction, developing talent and skills, and implementing reinforcement mechanisms.

Learn how Stratinis can endeavour to optimize and manage your prices through our pricing software

Challenges To Your Pricing Strategy

One of the key questions for senior leaders is how can the Pricing lever be used to support my business growth ambitions? Even a 1% improvement in price can have a dramatic impact on the bottom line and bring 3 to 4 times the impact on profitability than doing a 1% enhancement in cost management. Here are some common challenges when it comes to Pricing and that should be avoided when determining companies strategy:

  • The lack of internal alignment on the pricing objectives within a company and between the different functions concerned
    Not sharing the same definition of expectations and goals across the different functions involved in Pricing generates missed opportunities to enhance business performance. We sometimes even see different departments in companies having objectives that are in direct conflict and that inevitably result in missed opportunity to enhance profits.
  • An ineffective pricing governance or a lack of policies to guide pricing in the field
    This is generally due to limited visibility as to what is the true price realised by the direct force or indirect sales channels. There is also a risk of having excessive or unnecessary discounting, jeopardising the integrity of prices charged to similar customers buying the same volumes.
  • Market misperception of the pricing related to the value delivered
    If your customers don’t understand the value of your products and services, there is a strong likelihood that they will push back on your prices.
  • Misaligned offer and related prices across the different customers or segments served
    Many companies fail to adapt their offering as they serve different customers who have varying value requirements. Some might want high value and will be willing to pay for this while some others want less value and seek for a different price. The “offering menu” concept enables companies to do it well but B2B companies generally don’t apply it consistently.
  • A new product or service innovation that is not appropriately priced
    Launching a new product or service presents many risks and companies have in general low chances of success. However when companies don’t properly understand the value of their innovation and don’t prepare the Pricing well, the failure rate of a new product rises sharply.
  • Gaps in capabilities and enablers in managing pricing 
    Companies have different levels of maturity when it comes to Pricing. We have observed that organisations that are building their own Pricing Capabilities and that have a senior management focused on pricing achieve better business performances.

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10 Ideas for International Price Differentiation in B2B

by Finn Helmo Hansen, Founder & CEO, Stratinis

1. Having different prices in different markets based on willingness-to-pay is solid pricing strategy, just like customer or product segmentation based on willingness-to-pay in a single country.

2. One single global price is leaving money on the table, except for very special cases where only selling to truly global clients.
3. Build a set of parameters to evaluate your pricing power and potential in each market. This can be market position, maturity, customers’ switching costs, levels of perceived competition, nature of customers (many/few vs local/global). Set international pricing guidelines based on these parameters.
4. Use a pricing corridor framework, with a floor price and a ceiling price, to guide local teams on minimum and maximum prices. This gives global control over price levels but allows markets to adapt to local practices as long as they stay within the corridor. Allow local pricing freedom and let local teams exploit pricing potential in their markets. Most pricing opportunity insights come from local teams, if provided with the amount of freedom to price.
5. Build a database with your price waterfalls around the world, in order to establish internal understanding of differences and opportunities. Make sure your database can reflect differences in local prices rather than using the database project to harmonize prices/discounts/rebates/terms.
6. Competitor-benchmarking is a local exercise. Talking from experience, most competitors are not consistent in their global pricing, so do not tie your global pricing approach to them. However, do consider competitor pricing locally, where relevant.
7. Value-pricing is theoretically superior to cost-based pricing, but remember that customers’ willingness-to-pay varies from country to country, so make sure to look at differentiating value drivers too.
8. If you are dealing with cross-border customers who buy your products or services in several countries then make a strategy for how to make price differentiation stick with them too. Some elements of the price waterfall can/should be adjusted to local specifics and thus resulting in a differentiated pocket price.
9. Parallel trade can be annoying but normally it makes up a small percentage of total sales. Financial benefits of a properly executed pricing strategy with higher prices in certain markets will outweigh the downsides. Parallel trade should never be a reason for harmonizing all prices around the globe. 
10. Always stay within the law. Typical topics to consider in international pricing practices are around not blocking free trade such as in the European Union or general pricing law.

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How To Raise Prices Without Losing Customers

How to increase your prices without increasing customer churn? Price is one of the ‘4 Ps of Marketing’, thus here are 4 Ps you should keep in mind when it comes to implementing a price increase. Here are four keys to raising your prices without losing customers:
  • Give plenty of notice
    It’s not fun to talk about raising prices; in fact, it practically invites customer complaints and requests that a planned price increase be abandoned. However, springing a price increase on customers as a “surprise” may be far more damaging to your business.
  • Put it in a positive light
    Often price increases are needed to maintain healthy profit margins that allow a business to continue to provide a better customer experience than that offered by competitors, or even to make improvements to facilities or the level of quality the business can provide. When you decide to raise prices, be sure that you tell customers about the positive benefits they will receive as a result.
  • Focus on percentages
    If the percentage of a planned price increase is less than the percentage that your business’s costs have increased, that’s a percentage you can point to when communicating with your customers. In fact, if the percentage of your price increase is a considerably smaller number than that of increased costs, your customers may even be appreciative as they perceive you are not passing on all of the cost increases to them.There are other percentages you can point to in order to avoid negative customer reactions when raising prices. For instance, you can point to VIP, member or bulk purchase options that result in percentage of savings for your customers, or the percentage of savings they could enjoy by visiting more often or increasing the amount they purchase.
  • Phase it in over time
    Phasing in price increases over time, rather than all at once, can keep more customers in the fold as they have the opportunity to gradually adjust their budgets rather than experiencing a dramatic increase in spending all at once.Maintaining adequate cash flow is important for every business, and nearly every business experiences an occasional cash flow challenge. Our business financing alternatives could help your organization maintain more consistent cash flow or provide money during cyclical or seasonal downturns.

See how Stratinis can endeavour to optimize and manage your prices through our pricing software

Getting More Than Pretty PowerPoint Slides out of Pricing Analytics

by Finn Helmo Hansen, Founder & CEO, Stratinis

Pricing teams, when first established, will often spend time on getting a series of pricing analytics in place, as transparency and understanding of internal prices, discounts, rebates and profitabilities is the first step in establishing a good pricing function. This is sometimes accompanied by investments in various reporting tools. What is important to keep in mind however, is that pricing analytics is not the end goal but rather a stepping stone towards true best-in-class pricing performance. Analytics should support other pricing processes, not just end up on the quarterly PowerPoint presentation to the board.

One area to consider is how pricing analytics insights can be communicated to the sales team and used in helping them do better pricing at the sharp end of pricing. Good examples here are pocket price tracking, profitability performance per sales area and similar aggregate analytics, but much more actionable than these are exception reporting about customers and/or products below target prices.

Another area is how pricing analytics can be used to challenge current pricing strategy. Are we really pricing optimally? Can we achieve higher prices in some segments? Should we segment our pricing policy per customer segment or product group? Pricing Analytics Insights can help identify new segmentation criteria such as velocity-based pricing opportunities.

How are we pricing against competition? Do we lose bids against competition and at what price? In other words, do we need to improve our value offering?

A very useful tool can be to establish a strategic pricing scorecard and use pricing analytics to measure performance against action KPIs. This technique ties strategy with action and uses KPIs to measure how well various organizational units perform.

Stratinis is offering a webinar on March 3rd, on the topic of how to get more out of pricing analytics. For more information on this webinar and to find out how to register, please visit our website.

Pricing To Create Shared Value

HBR notice how traditional pricing strategy is by definition antagonistic, but it needs to become a more socially conscious, collaborative exercise. Businesses should look beyond the dry mechanics of “running the numbers”—still relevant but no longer sufficient—and recognize that humanizing the way they generate revenue can open up opportunities to create additional value. That means viewing customers as partners in value creation—a collaboration that increases customers’ engagement and taps their insights about the value they seek and how firms could deliver it. The result is a bigger pie, which benefits firms and customers alike. The following tips can ensure you are pricing efficiently:

  • Focus on relationships, not on transactions 
  • Be proactive 
  • Put a premium on flexibility 
  • Promote transparency
  • Manage the markets standards for fairness

It is crucial to understand and be able to influence consumers’ perceptions of pricing fairness. When prices seem fair, consumers often buy more and are more willing to pay a premium. Conversely, when prices seem unfair, consumers may punish companies. Critically, perceptions of fairness relate not only to final prices but also to the process by which they are set.

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Top 10 Pricing Mistakes Companies Are Making

Price strategy is emerging as a critical path for companies to increase their competitive advantage and bottom line. Many companies have spent years achieving gains through cost cutting, outsourcing, process re-engineering and adoption of innovative technologies. However, the incremental benefits from these important activities are diminishing, and companies need to look at other areas to improve their business results.

Today, companies are looking to serve well-defined market segments with specialized products, messages, product variants and services, and to earn superior profit margins while doing so. All too many companies, however, use simplistic pricing processes and cannot even identify their most profitable customers or customer segments. The following is a list of 10 of the most common mistakes companies make when pricing their products and services.

  • Mistake No. 1: Basing prices on costs, not customers’ perceptions of value
    Prices based on costs invariably lead to one of the following two scenarios: 1) if the price is higher than the customers’ perceived value the cost of sales goes up, discounting increases, sales cycles are prolonged and profits suffer; 2) if the price is lower than the customers’ perceived value, sales are brisk, but companies are leaving money on the table, and therefore are not maximizing their profit.
  • Mistake No. 2: Companies base their prices on “the marketplace.”
    By resorting to “marketplace pricing,” companies accept the commoditization of their product or service. Marketplace pricing is a resting place for companies that have given up, and where profits end up being razor thin. Instead of giving up, these management teams must find ways to differentiate their products or services so as to create additional value for specific market segments.
  • Mistake No. 3: Same profit margin across different product lines
    Some financial strategies support a drive for uniformity, and companies try to achieve identical profit margins for disparate product lines. The iron law of pricing is that different customers will assign different values to identical products. For any single product, profit is optimized when the price reflects each customer’s willingness to pay. This willingness to pay is a reflection of his or her perception of value of that product, and the profit margin in another product line is completely irrelevant.
  • Mistake No. 4: Companies fail to segment their customers
    Customer segments are differentiated by the customers’ different requirements for your product. The value proposition for any product or service is different in different market segments, and the price strategy must reflect that difference. Your price realization strategy should include options that tailor your product, packaging, delivery options, marketing message and your pricing structure to specific customer segments, in order to capture the additional value created for these segments.
  • Mistake No. 5: Companies hold prices at the same level for too long
    Most companies fear the uproar of a price change and put it off as long as possible. Savvy companies accustom their customers and their sales forces to frequent price changes. Marketplaces change radically in a short period of time. It’s important to recognize that the value proposition of your products changes along with changes in the marketplace, and you must adjust your pricing to reflect these changes.
  • Mistake No. 6: Salespeople incentivized strictly on revenue
    Volume-based sales incentives create a drain on profits when salespeople are compensated to push volume, even at the lowest possible price. This mistake is especially costly when salespeople have the authority to negotiate discounts. They will almost always leave money on the table by: selling lower priced products and dropping prices to “clinch the deal.”
  • Mistake No. 7: Changing prices without forecasting competitors’ reactions
    Pricing strategy cannot exist in a vacuum and must take into account anticipated competitive moves. When making price changes, it’s important to take into account not only likely competitive pricing changes but to also make an objective assessment of competitive product or service quality.
  • Mistake No. 8: Companies spend insufficient resources managing their pricing practices
    There are three basic variables in a company’s profit calculation: cost, sales volume and average price. Most management teams are comfortable working on cost-reduction initiatives, and they have some level of confidence in growing their sales volume. But a good price-setting practice is seen as a “black art.” Consequently, many companies resort to simplistic price procedures, while the same companies use highly sophisticated procedures and technologies to track and control their costs in minute detail and in real time.
  • Mistake No. 9: Companies fail to establish internal procedures to optimize prices
    The hastily called “price meeting” has become a regular occurrence — a last-minute meeting to set the final price for a new product or service. The attendees are often unprepared, and research is limited to a few salespeople’s anecdotes, perhaps a competitor’s last year’s price list, and a financial officer’s careful calculation of the product’s cost structure across a variety of assumptions.
  • Mistake No. 10: Companies rely on salespeople and other customer-facing staff for pricing intelligence
    Such people are an uncertain source, because their information-gathering methodology is often haphazard, and the information obtained thereby can be purely anecdotal. A customer will rarely tell the “complete truth” to a salesperson. Savvy companies employ trained professionals to collect and analyze the data to identify and evaluate the value perceptions of their marketplace.

Pricing offers many companies the most direct route to higher profits, yet particularly in North America, the pricing function often fails to get sufficient attention. We believe a combination of greater management commitment to the art of pricing along with powerful analytical software tools like the Stratinis Pricing Suite, can make a significant difference.

See how Stratinis can endeavour to optimize and manage your prices through our pricing software

Retailers’ New Tactics To Take On E-commerce

Deccan Chronicle reveal how offline retailers have come up with personalized tactics to draw new and old customers. Chennai: 2014 may well have been the year of e-tailers. But concerned about their eroding bottomline, offline retailers have come up with personalized tactics to draw new and old customers. With white good products also taking the online route, brick and mortar firms have taken a heavy beating this year. “It’s never a fight between online and offline. But the disruptive pricing strategy of e-tailers is the most worrisome trend,” said B.A. Kothandaraman, chairman and MD of southern retail giant Viveks Ltd. “When online folks offer huge discounts below cost price, how can offline retailers sustain,” he asked.

Though online is only 10 per cent of the total $500 billion retail market in India, the new stream has had a free run in 2014 and pegged to touch $16 billion by 2018. Unfazed by the onslaught, retailers are trying to encash their biggest asset – human resource. “The biggest advantage and disadvantage of e-commerce is its impersonal experience. We are trying encash this by investing on sales force training and Big data,” said D. Sathish Babu, MD of Univercell.

Adopting the FMCG retail strategy, as Spencers, Reliance Fresh and More, white good retailers too are looking to garner a share of the market with own labels. “We have launched flat panel televisions this year and hoping to get into air conditioners next year. This way we want to hold a section of customers who go for durability than brand name,” said B.A. Srinivasa, CEO of Viveks Ltd. Further, retailers are also trying to value-add services apart from offering products to engage with customers. For example, while most apparel retailers already have their customized tailoring services, retailer Viveks has come up with a plan to offer servicing solution across all product brands.

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