What is pricing, really?

A few years ago, we were contacted by a large multilatina company in the construction and industrial supplies sector. They had a very specific need: they were reviving their industrial lime business and had to validate the price assumed in their business plan. Their expectation was to obtain the “magic number” that would tell them how much to charge per ton of product.

They were greatly surprised when, during the consulting process, we began by identifying the different needs a manufacturing company may have when using the product. Next, the relevant attributes for each segment were determined, and solutions were designed for each of them.

Finally, a mathematical function was found that allowed us to determine the price/perceived value relationship in the market, in order to assign a price to each of the solutions designed in the previous step. As a result of this analysis, not just one price was obtained, but the design of a portfolio of 16 industrial lime options, each with its own price.

More than a number
The previous case clearly illustrates how “pricing strategy,” better known as pricing, is not limited to simply finding the optimal price for products or services that the company already sells. On the contrary, this discipline includes designing solutions that the company should include in its portfolio to offer to end customers with different needs and levels of price sensitivity.

Additionally, it considers discount policies that should be offered to distributors or intermediaries, to ensure an adequate level of commercialization when the company does not reach the end customer directly. The main objective of pricing is to maximize business revenue, allowing the company to serve previously underserved customer segments and capture money that is being “left on the table.” By doing this, it is even possible to generate disruptive solutions in a mature market, as described in the following example.

An example
The real estate management market in Colombia has traditionally operated under a tacit agreement to charge a 10% commission on the monthly rent of a property. This means that, regardless of the owner’s needs or price sensitivity, most real estate agencies offer the same levels of service (same non-payment guarantee, same payment terms, etc.) at the same 10% fee. This situation created two problems in the industry. First, a large number of property owners who are unwilling to pay the usual commission for property management are left out of the market and decide to manage their properties themselves.

Finally, seeing this situation, real estate agencies start lowering their prices due to a bargaining dynamic to avoid losing these businesses, triggering a process of value destruction in the category. In 2013, a large real estate company with presence across almost the entire country developed a portfolio of options offering multiple service levels with differentiated fees. This way, price-sensitive owners who are unwilling to pay a 10% fee for a service level they do not value can find lower-priced options in the portfolio that match their needs and payment capacity.

In summary...
A proper pricing strategy is much more than just a number. It is the strategic design of the company’s product or service portfolio, both for the end customer and for intermediaries. But designing a price menu and a discount menu is not enough.

For success to be sustainable and transcend staff turnover, the pricing management process must be supported by an analytical technological tool that ensures any company employee can make structured, rigorous, and reliable pricing decisions. Increasingly, companies in Latin America are moving toward pricing excellence, proving that any effort in this area generates an impact nearly five times greater than an equivalent effort in reducing fixed costs.