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Price Strategy (Part 1): Calculating price based on our own image

Everyone has their own ideology about pricing. Even among strategists, there are huge differences of opinion on the subject, and when you think of managers themselves who are the decision-makers on pricing, there are even bigger differences. What I learned from my mentor as a strategic foundation was to calculate the cost price of a product, add a “fair profit”, and price it that way. Then, looking back on my strategy work over the last 15 years, I can now say with certainty that my conservative mentor was wrong. Indeed, the price of a product is what the market is willing to pay for it, no more and no less, and the final absolute figure has nothing to do with the cost to us of producing it. But it does mean that if potential customers are not willing to pay the price we consider acceptable, it becomes clear that our product is not viable.

We start with ourselves

Pricing has always been a topic of debate among managers when a company has decided to launch a new product or, for an existing product, has been “forced” to raise prices for some reason. As a multi-soldier myself, I have listened to hundreds of such discussions, and looking back now, I can clearly see that everyone was trying to impose their own dogma. Not because I worked with the wrong managers, and not because anyone wanted to do the company a disservice. Everybody wanted to make the best of the situation, so in fact, these strategic decisions often turned into real crisis situations, which I now know for a fact called into life the real personality and the real decision-making mechanisms of colleagues. And because I worked in very well, complexly assorted, colourful teams, it is natural that there were also significant differences of opinion. Even today, many people are still surprised when, in the first meetings of a business development meeting, the business developer reminds the decision-maker that “we should not generalise, as this could be very dangerous”. After all, the modern manager somehow believes that she can see her own business from the outside at any time, and more and more people are able to do so. They can look at processes, figures and people – although the latter, of course, carries serious dangers – but it is clear that even the most experienced strategists often “overlook” the decision-making mechanisms, causes, and consequences of critical situations. Well, this in turn, can have serious consequences. At the end of 2021, with the support of our consulting partners, we carried out a study on what pricing policies business owners and managers of different personalities believe and think in. It should be added that our partners have companies with a track record of above-market growth and results, and that innovation, expansion, and unique knowledge are present in all cases. In other words, we are talking about modern and forward-thinking managers. Yet a total of 8% of the managers in the survey can be said to have made their pricing policy decisions based on real market information, expectations, and objective strategic assessments at the right level, rather than on their own personality. In 92% of the firms surveyed, the primary personality of the decision-maker – or, in the case of a weaker personality, the colleague who directly influenced him or her – was the primary personality that determined the price strategy. One of the most basic examples is the decision of Supporter managers in this area.

The Supporter prices

For the Supporter personality, a “mass approach” is very important, so they prefer to buy cheaply and at a reasonable price in their private life. They are not willing to pay extra money just because it is a product of a well-known brand. For them, it is important that the product is not stand out in the market. It should be of good quality, but simple enough to be accessible and tangible for everyone. Perhaps more importantly, the product must have a good reference. Even for the simplest products, it is much better for them to have been bought by many people. Well, the pricing policies of Supporter-type makers are eerily similar. They take a cost-based approach and charge at most a tolerable cost price for their product, not inflated by excessive benefits. They are the ones who constantly utter the cliché phrases “you cannot move in this market with higher prices” or “our market is absolutely price sensitive”. There is no other reason for it; they just think it is safe, they make their own decisions in their own private lives, and they don’t understand, and in most cases are not willing to accept, other directions. If something is expensive, they are suspicious of it, because they are surely just trying to take advantage of customers, and that only works in the short term. Even they, the “smart” ones, build for the long term. And this pricing policy worked for a very long time, so they must have felt they were right. But unfortunately, they are confusing basic concepts on the subject. High prices are not always a reflection of greed. Very often, for example, they show that someone is not working with the “average quality” materials that the Supporter likes, and they are certainly being charged for it.