Pricing models and pricing strategies are among the major factors impacting business performance. Prices and related strategies influence profits and competitive positioning in target markets. Effective pricing models match the business and its products to market conditions to meet market demand and reach revenue targets.
Pricing models and pricing strategies are coordinated with other business areas to satisfy the objectives of comprehensive strategic plans. Pricing models and strategies address business goals for profit margins, branding and marketing, positioning, and other variables. Companies typically consider internal and external business factors in deciding and implementing their pricing models.
How Pricing Models Impact Business Performance
Pricing models and strategies affect business operations in terms of profit margins and the applicability of cost targets, as well as sales revenues and positioning in the target market. A strong fit between the pricing model and the rest of the business and its strategies leads to high success rates, such as in penetrating markets for a product line. The inappropriateness of the pricing model can lead to lower business performance and other hurdles that come with business costs, sales, and marketing. Whether a company uses a single pricing model or multiple pricing models, the pricing model for a product or product line must remain consistent with the brand and market positioning.
Cost targets and profit margins are set to match business goals for profits and growth. Cost targets are usually minimized to maximize profit margins, and pricing models are implemented accordingly. The business goal is to implement a pricing model that maximizes profit margins, considering business costs. In foodservice companies, like McDonald’s, Starbucks, Subway, Burger King, and Wendy’s, pricing models are decided based on production costs (including cost of ingredients, labor, and inventory storage and transportation) and competitive factors (prices of competitors, etc.), among other variables. For example, a quick-service restaurant, such as Burger King, sets it prices to compete with other foodservice establishments, although some of the company’s products may be priced higher based on product differentiation or uniqueness in the target market. Thus, the appropriateness of a pricing model affects how the business achieves its profit margins while ensuring competitiveness.
Sales revenues depend on pricing models, which determine price points and price ranges and their appropriateness to market conditions. For example, in retail business, pricing models influence customers’ shopping behaviors and the amount they are likely to spend. Thus, pricing models are carefully selected to match branding and competitive strategies at retail and e-commerce companies, like Walmart, Amazon, Whole Foods, Aldi, Costco, and Home Depot. Even though big-box retailers use their bargaining power over suppliers and manufacturers to maximize profit margins, pricing models determine how stores or e-commerce platforms perform. Many shoppers are attracted to retailers that offer low-price goods. The case of low-price retailers, especially Walmart, exemplifies this effect of pricing models on business.
The effects of pricing models and pricing strategies on sales revenues is especially pronounced in businesses that have price-sensitive customers. For example, Southwest Airlines uses relatively low prices to present itself as a low-cost carrier to target price-sensitive travelers. On the other hand, content streaming service providers, like Netflix and Disney, optimize their subscription pricing to ensure that they effectively capture price-sensitive customers who might otherwise opt for competitors or substitutes. Moreover, price-sensitive consumers influence the business performance of consumer goods firms, such as PepsiCo, Coca-Cola, Unilever, and Procter & Gamble. These consumer goods manufacturers offer products at different price points, and many of these price points are selected to target price-sensitive consumers. The effectiveness and suitability of these companies’ pricing models and pricing strategies determine their ability to capture price-sensitive customers in their target markets or target market segments.
Positioning requires suitable prices that support the brand image and company image. Prices are a signal that affects target customers’ perception regarding the business and its product. This perception pertains to such variables as product features, quality, and exclusivity, among other factors. This role of the pricing model in business is observable among IT and consumer electronics companies, like Apple, Google (Alphabet), Microsoft, Amazon, Samsung, Sony, IBM, and Intel. For example, Apple positions itself and its products as high-value, high-quality, and exclusive. To achieve this position, the company uses premium prices that are typically higher than its competitors in the consumer electronics market.
Pricing models and pricing strategies also affect the positioning and business performance of automotive firms, including Tesla, Ford, General Motors, Nissan, Toyota, and BMW, as well as motorcycle manufacturers, like Harley-Davidson. For example, BMW positions itself as a premium automaker and, accordingly, uses higher price points and price ranges for its products. On the other hand, Toyota uses relatively lower price ranges to position its products as affordable automobiles.
Other Factors Affecting Business
Pricing models are just one of the many factors that impact business performance. Internal factors, such as staffing policy, IT management, and inventory management, influence organizational capabilities and, thus, business performance. External factors, like pandemics and workforce trends, also affect business performance, depending on the degree of exposure and risk of the firm relative to such trends. While the business organization may have management control on internal factors, it may have limited resources and capabilities for managing the effects of external factors. Nonetheless, prudent strategic management can ensure the long-term survival and success of the business despite the challenges related to pricing models and other internal and external factors.
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