The Definitive Guide to

Pricing Strategy

How to price your products and services

correctly and drive profits
Contents

03 Introduction

04 Competitive Strategy

05 Three Competitive Options

08 Bowman’s Strategy Clock

12 Product & Price Positioning

13 True Customer Alternatives

16 Price Sensitivity

19 Pricing Strategy? Or Revenue Model…?

21 The Dollar Shave Club Story

23 Benefits of Recurring vs Non-Recurring Revenues

24 Key Considerations

27 Pricing Strategies

29 Cost Plus Pricing

30 Competitive Based Pricing

31 Value Based Pricing

Introduction

Help with pricing strategy is the most frequent request we get from our customers and the
businesses we mentor. Getting your pricing ‘right’ can be one of the most powerful drivers
of profitability for your business, yet studies have shown that, on average, businesses spend
no more than six hours a year working on their pricing. There are many likely reasons for
this, but one common problem is that most businesses are unaware of the tools that can be
used to help methodically decide pricing and reach the best conclusion for a business.

This guide is the first of two, helping you get to some answers about your pricing. Here we
focus on Pricing Strategy and in the second guide we get down into what we consider to be
practical Pricing Tactics.

Let’s start by raising a couple of caveats at the beginning here:

F irstly, pricing is a bit like Organisational Design. You never get it completely right; you
just get it less wrong. So please take that as some comfort if you never feel quite sure
about your pricing. This is normal until you get to the point of having a lot of data on your
customers’ buying behaviour and you can much more accurately judge your pricing.

Secondly, pricing, like the markets in which you operate, doesn’t stay still for long. New
entrants, competitors’ product development, rising costs and customer expectations are
constantly changing. So, pricing needs to change over time too. Of course, you cannot
constantly change your pricing, but a quarterly review of your marketplace and pricing is
a good idea. Such an important and profit-generating task deserves more than six hours a
year! So put a regular slot in your diary for the rest of the year to make sure you do this.

We are going to walk through four sections:

Competitive Strategy – How to consider different competitive strategies and decide

which is right for you.

Product & Price Positioning – We’ll examine three high-level commercial options.

Pricing Strategy? Or Revenue Model…? – We’ll understand and look at the impact of a
recurring revenue model.

Pricing Strategies – We’ll finish with three ways to consider your price positioning relative
to other choices your customer has.

3
Competitive
Strategy
Three Competitive Options

Arguably the first major choice to make that impacts your pricing strategy and price, is your
competitive strategy. There are three options here:

C
 ost Advantage
Because of your cost base or your skill in running a low-cost operation, you have a cost
advantage over your competition. E.g. you are cheaper and can make more profit and
can maintain that position. You choose a competitive strategy based on cost leadership.

Differentiation
Because of your creative skill you can create products or services that are different
and unique. They are more attractive than the competitor products and services and
customers are willing to pay more for them. You choose a competitive strategy based
on differentiation.

Lastly, you can also choose to FOCUS.

F
 ocus
A focus strategy is when you choose to focus on particular customer types, segments
or niches. This allows you to build a more detailed and sophisticated understanding of
a smaller customer group and tailor your product or service to that group. Again, you
could seek to have a cost advantage in your area of focus, or you could differentiate
your product. Those two approaches can still be applied.

5
 C O M P E T I T I V E S T R AT E G Y : 3 C O M P E T I T I V E O P T I O N S

Let’s look at each strategy from a couple of different angles:

6
 C O M P E T I T I V E S T R AT E G Y : 3 C O M P E T I T I V E O P T I O N S

Practical Recommendation
To help you take some practical steps:

 onsider the three competitive strategies – write down the advantages and
C
disadvantages of each strategy for you and your business/product. These can be
objective things like the location of your business having particularly high or low
costs – which means, for example, you can or cannot have a Cost Leadership strategy.
Also, subjective things like the skills on your team that may help you compete in a
particular way.

 onsider also how you want to operate and run the business. Do you want to run
C
something lean and mean and focus on a cost based strategy? As that will affect the
culture of your business. Or do you want to run a business that’s specialised, cutting
edge, incredibly innovative? As that too will affect the skills of the business and the
people you want to hire and work with.

7
Bowman’s Strategy Clock

Bowman’s clock is another tool to help you understand and decide on your price strategy.
It’s a more nuanced competitive strategy tool that provides options for positioning within
a market based around price and perceived value.

There are eight positions around the clock, each highlighting a different strategy to
succeed within a marketplace.

8
 B O W M A N ’ S S T R AT E G Y C L O C K

Position 1: Low Price & Low Value Added

This strategy is about quantity selling. The products or services are low in value and the
price point is the lowest possible. The combination makes it the least competitive area on
the Strategy Clock.

For example:

Position 2: Low Price

Low Price, as the name suggests, is a strategy about becoming the lowest cost option for
buyers in the marketplace. It’s a strategy that can have low margins, so process efficiency
and cost reduction is key for it to be successful. With this strategy, you’re aiming for high
quantity levels, otherwise you can end up with low sales, low price – a fatal combination.

For example:

When they started

Position 3: Hybrid
The Hybrid position sits between low price and differentiation. It’s about ensuring the
price is competitive, ideally with a low perceived price from buyers, while promoting the
added value aspects of the product.

The success of the hybrid strategy comes down to the balance between cost and
differentiation, attempting to maximise each while maintaining good margins.

For example:

Cheap burgers and healthy food with higher margins

9
 B O W M A N ’ S S T R AT E G Y C L O C K

Position 4: Differentiation
The Differentiation strategy is where a business focuses on differentiating their products
or services from competitors by adding high perceived value. This strategy has a wide
spectrum from full product diversity through to unique features within a core product.

For example:

Position 5: Focused Differentiation

Focused Differentiation is about providing high value at a high price (not to be confused
with Porter’s Generic Strategy of the same name, which talks about going to a niche
market). When successfully done, this strategy provides high profits but can be difficult to
maintain – the iPhone launch and subsequent early growth is an example of this strategy.

For example:

Position 6: Risky High Margins

Any strategy that has the name Risky in it should mean you completely understand your
options before you embark on it, of course! The main thrust of this strategy is to go in with
a high price point without any perceived added value.

You’re banking on a good brand in order to pull this strategy off, as often buyers will pay
more for a known brand, one that has emotions associated to it, than one which
is cheaper.

For example:

10
 B O W M A N ’ S S T R AT E G Y C L O C K

Position 7: Monopoly Pricing

In monopoly markets a single company controls the product and pricing, so other factors
such as price points, value or competitors play less of a factor. Of course, all monopolies
can come to an end – so these companies still need to keep an eye on their external
factors.

For example:

Position 8: Loss of Market Share

This is generally the worst position to be in and suggests that the company is exiting the
market or is in decline. It may be that they have chosen this strategy as part of a move
to newer markets, or it may be forced upon you due to getting your price or market fit
incorrect.

For example:

This was Tesco’s attempt to move into the US. It’s a fascinating story. You can
hear more about it in our Diversification webinar

Practical Recommendation

To help you take some practical steps…

C onsider all the competitive strategies – some of them are more nuanced versions of
the three previous strategies. Does this confirm your previous thinking or challenge it?

11
Product & Price
Positioning
True Customer Alternatives

An important task, that’s often not carried out, is considering all the options that a user/
customer has. Most commonly, undertaking comparisons between your product/pricing
is focused on direct competitors e.g. businesses offering the ‘same’ product as you. But an
important step is to compare yourself against indirect competitors. This gives you a better
sense of your ‘value’ which we will come to later.

To explain this approach, we will use ourselves – Lucidity – a software platform that helps
businesses plan and manage their strategy. Firstly, the tool we use to map this out is called a
Perceptual Map and normally looks like this:

Quality and price are standard labels when you are comparing against direct competitors.
But when you are considering all user options, then actually you need to think about the
axis from your particular perspective and that of your customer. As below, for ourselves we
think the two important measurements for our product and our customers are:

Y es – price/cost as that’s important to all businesses

E ase of use and time to complete - getting a strategy and then help to make it happen

13
 T R U E C U S T O M E R A LT E R N AT I V E S

As you can see below, when we look at all the options that someone running a business has
when trying to figure out their strategy and making it happen, it looks like this:

So, let’s examine this – our target customer is a leader or management team who needs to
sort out their strategy and make it happen:

Top left – A business owner could read a lot of books about strategy. That wouldn’t cost
much – very affordable - £100 for a few books? But it would take a lot of time and then the
customer would still need to make some decisions and make things happen. So not very
complete. They could pay a bit more and go on a training course; £1000? £2000? But again,
they leave the training course with a blank sheet of paper.

Bottom left – They could go and spend a lot of money and do an MBA; £20,000? Much more
expensive and possibly come out a bit closer to solving the problem, but still with lots of
work to do.

Bottom Right – So the customer could spend much, much more money by getting a local
consultant in £5,000? £10,000? Or if they have a LOT of money then McKinsey who will figure
the whole thing out and probably an element of helping to execute the strategy for a minimum
of $1m? So, much more of a complete solution to the problem. But much more expensive.

14
 T R U E C U S T O M E R A LT E R N AT I V E S

Top right – Then you come to Lucidity and where we wanted to position ourselves. We offer a
complete range of tools for a management team to use to get important strategic learning and
insight and turn that into a formal strategy for their business. We then provide more tools and
capabilities to run the task management – closing the gap between theory and execution. So,
we provide a more complete solution than all the other options, excluding McKinsey. Yet we’re
considerably cheaper than McKinsey (our prices start at just £50 a month!) and are a longer-
term solution (McKinsey will only work with a business for a certain, contracted time period).

So, going through that exercise helps you to:

T hink through how your customers see value (in our example it is cost & time to complete)

U
 nderstand all the options from your customer viewpoints (from books to McKinsey)

T he relative cost and value of each option

W
 here to position yourselves

U
 nderstand the value that you bring and what your marketing messages need to contain

A very useful exercise.

Practical Recommendation

Use a blank Brand Perception map…

• Label the axis. What is really important and valuable to your customer? Cost on one
axis? What’s on the other axis?

• Plot out ALL the options that your customer has to solve their problem on these axis

• Plot yourselves. Where do you fit? Why? Does this confirm your previous thinking and
positioning or actually does this put you in a new, better position? Or do you want to
occupy a certain position and need to do some product or commercial development to
achieve that new positioning? These are all great and classic strategic considerations
for you and your team to reflect on.

15
Price Positioning: Price Sensitivity
& The Haircut

Now, a quick and easy tool to play with. Price elasticity or price sensitivity – or the more fun
way to look at this is ‘The Haircut’.

Too cheap Not too cheap Not too e+pe(')&e Too e+pe(')&e

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

£1 £0 £32 £122

Too cheap A Haircut Too e+pe(')&e

The Price Sensitivity Meter (PSM) is a market technique for determining consumer price
preferences. It was introduced in 1976 by Dutch economist Peter van Westendorp.

16
 PRICE POSITIONING - PRICE SENSITIVITY & THE HAIRCUT

This helps to understand..

A t what price does a customer think the product is too expensive – they aren’t willing
to pay this

A t what price does the customer think something is TOO CHEAP – they don’t want
a product at that price either

W
 hat pricing the customer thinks is fair and reasonable for a particular product or
service

The best way to explain these dynamics is something we can all relate to – the price of
a haircut. Now we might have slightly different price sensitivities based on a number of
factors from where we live, to how much hair we have! And, in fact, we’ve had some debate
in the office about this… but you get the idea.

A t what price does a customer think the product is too expensive – they aren’t willing
to pay this or more than this = £30

A t what price does the customer think something is TOO CHEAP – they don’t want
a product at that price either = £5 would be too cheap for a haircut!

W
 hat pricing the customer thinks is fair and reasonable for a particular product or
service = £10-£25

17
 PRICE POSITIONING - PRICE SENSITIVITY & THE HAIRCUT

Practical Recommendation

This is a good task to go through at different levels of sophistication depending on your

time and resources

Y ou can go through this by yourself – take a look at your product or service. What do
you think are the boundaries of sensitivity?

Y ou can summarise your product/service into a few bullet points – what it is, what
it does, the benefits of it. Then ask people you know for their opinion. This sort of
informal survey is quite quick and easy to do and you’ll get some good feedback from
it. It’s important to listen and not talk when doing this.

I f you want to do a thorough job, then of course you could do a larger survey of a high
number of target customers. The larger the sample the more accurate an answer you
will get.

18
Pricing Strategy? Or
Revenue Model…?
Recurring Revenues

It’s at this point, in a mentoring relationship, a workshop or a conversation, that we would

normally raise the question “well what about recurring revenues?”

This question is not about how much to charge. But how to charge. The vast majority of
our clients are all about growing their businesses. And in our own experiences of growing
many businesses and also turning distressed businesses around, recurring revenues are a
really powerful approach to make ongoing growth much, much easier. We love recurring
revenues (and so do investors)!

What do we mean by recurring revenues?

Just to check we are all on the same page, let’s look at a simple example.

Red Consulting has a day rate of £500. So, they go and get a client, do a day or two days’ work.
Send an invoice. Wait to get paid. Then go and find another customer.

In 2020 they had a record year with 100 days booked. Determined to make 2021 a growth year,
bigger than 2020, they started the year at… zero. They had to start all over again, from zero.
They were only ever going show any growth once they got to 101 days. Only then would they
be looking at growth and achieving their aspiration. REALLY hard work.

Green Consulting has a basic day rate of £500 too. But they operate differently, they have
a different commercial or pricing model. They go and find customers too, but they have
different packages for the customers to sign up to.

2 days a month = £990 a month

5 days a month = £2250 a month
10 days a month = £4000 a month

And customers sign up for at least 12 months, sometimes 24 months. This guarantees Green
Consulting revenue each month and at the start of the year, they already have revenues
coming in to build upon. Recurring revenues are predictable, generally stable and repeat on
regular intervals. MUCH easier to grow a business like this.

20
The Dollar Shave
Club Story

You may be thinking well I do X and I can’t see how we can charge for what we do on
an ongoing basis! OK let’s look at an infamous example of turning a traditionally non-
recurring product – men’s razors – into a very valuable recurring revenue business by
using a differentiation strategy and some smart marketing.

The Dollar Shave Club story starts with a guy called Mark Levine acquiring 250,000 boxes
of men’s razors in a warehouse. Hmmm, what to do with all these razors? Friend Michael
Dubin and Mark are bemoaning the experience of buying razors:

They are over engineered – do you really need 4 blades to have a shave?

They are expensive to buy

You have to go somewhere to buy them which is a hassle

Because they are expensive, they often have security tags on them which you have
to ask to be removed by the shop assistant which is a hassle

The major player in razors had a 70% market share so none of this was going to
change much

Overall, a poor experience to buy an overpriced product.

To summarise, the subsequent success story; to monetise their 250,000 boxes of razors
they created Dollar Shave Club which, from $1 a month, sent a razor to the home of the
‘member’ saving them time, money and hassle.

A simple website and some very clever marketing from a

video that took a day to make and cost $4500 took them
stratospheric. (They had an interest in comedy and video
production experience between them). Mix in some invest-
ment along the way (remember investors love recurring
revenues) and from a 2011 start they sold the business to
Watch video on YouTube
Unilever for $1bn in 2016. A great growth story.

21
A one-off example?

No. Of course we see recurring revenue models in our lives all the time. Consider the
different types of recurring revenues we pay out ourselves:

Service Subscriptions Product subscriptions Content subscriptions

Property leasing Asset Leasing Infrastructure as a service

22
Benefits of Recurring vs
Non-Recurring Revenues
There are very strong benefits to implementing a recurring revenue model:
Recurring revenue benefits
Predictability With money coming in on a regular
basis you can plan.
Growth If you can provide and sign 2 or 3
year contracts with customers then
you already have some of ne6t year%s
growth target done as the revenue is
already contracted.
Cost / Effort / Go and sign a monthly deal for a
Economics of Scale year or two years. Ôhat%s like doing
12 or 24 sales in one go.
C­stomer ©ntimacy You have regular contact with your
customers to build a relationship
and understand their needs more
(and see other opportunities).
Affordability O ffering customers a reasonable
monthly fee can make you much
more attractive or allow you to go
after new types of customer.
Block the If you%ve signed a 12, 24 or 36 month
Com¾etition contract with someone, they won%t
be working with a competitor during
that period.
23
non-Recurring revenue downsides
Unpredictable cash flow makes
planning and sometimes even
covering costs difficult.
You have to start each financial
year at _ero and you haven%t shown
growth until you reach last year%s
numbers.
H aving to spend the
time/energy/money to acquire
customers one by one. And repeat.
It%s difficult to form relationships
with customers on one off,
transactional sales .
One off costs can look e6pensive
and put customers off.
A transactional, one off cost means
the customer will just shop around
ne6t time.
Key considerations

So, there are huge, obvious upsides to moving to a recurring revenue model. But also there are
a number of things to consider and to get into place to enable all of this. A non-exhaustive list is:

Sales Skills
You need to take a different approach to selling to sign longer term deals with
customers. Customers will ask you very different questions and have different
concerns – more about the company than just the product, for example.

Contract
You need a different set of legal terms to offer customers that both you
and they will be signing up to. This needs to cover what you are providing,
service level agreements, payment terms, protections or responsibilities for
both of you.

Service & Client Management

You are entering a longer-term relationship with your clients. You can’t just
have 24 months of money and disappear! So, you need to resource this
properly, and profitably.

Systems
You’ll need some systems in place to, at a minimum, take monthly payments
automatically. A top tip here is always to think ahead – don’t think about
what payment and service systems you need for 1 or 10 customers. Think
about how you will handle things for 100, 1000 or 10,000 customers.

KPIs
You will enter a world where you need to measure and monitor things
like MRR (monthly recurring revenue), LTV (the value of a customer over
time), Customer Churn (how many customers do not renew at the end of
their contract). All of these and more will become the KPIs with which you
monitor and manage the business.

24
A last example

We recently worked with an innovative, early stage training business that used technology as a
key part of their offering.

Some of the problems they observed in their market research lead to going for a recurring
revenue model – which was a very innovative approach at the time, in that particular niche.
Very similar to Dollar Shave Club but much smaller, the team observed problems and
frustrations to help you understand what a recurring model could look like.

Take a look at the training example:

Market research showed… A recurring revenue approach…

Most training was forgettable Supported an ongoing monthly

reminder service

Most training is inconvenient An ongoing service and recurring fee

allowed people to access the service
whenever they wanted to

Training can appear expensive A lower monthly fee over 12 or 24

months seemed really affordable

The competition charged one-off Monthly service fees for two

fees years were seen as an innovative
differentiator and blocked the
competition out for two years

25
 REVENUE MODEL

Practical Recommendation

Consider the question – how could you apply a recurring revenue model to your
product or services?

Consider the other question – how could you amend your product or service to
support a recurring revenue approach?

Have a think about the benefits this would bring to you – would it work? How would
it help?

If you moved to a recurring revenue model, what wider or operational considerations

would you need to think through and action?

What planning do you need to do transition to this new approach? How would you
manage that change?

26
Pricing
Strategies
Three Pricing Options

Great. So now we are a step closer to deciding how to price the product/service. We’ve got
three choices here:

28
 Cost Plus Pricing

Profit with Cost Plus Pricing

This is really straightforward – you add up all your costs and put a profit margin on top.
So, Cost + 10%.

29
 Competitive Based Pricing

Profit with Competitive Based Pricing

This is a very common method that businesses use (not saying it’s the right one). You look at
and research all your competitors and their offerings and then base your pricing on
their pricing.

30
 Value Based Pricing

Value Based Pricing requires you to really, REALLY understand your customers – rather
than understanding your costs (Cost Plus Pricing) or understanding your competitors
(Competitive Based Pricing). Value Based Pricing is more difficult to get right, but when you
do, it’s extremely effective at driving up your profits. Value Based Pricing is all about what
your customers really want, what they value and therefore what they are really willing to
pay. Creating value-based pricing also requires you to get your positioning and messaging
correct to support what you are trying to do. The two must work in tandem.

So, what sort of questions do you need to ask/answer to get to a price based on the value
you actually offer?

To start to understand the value you offer:

What’s going to push and pull your customer towards your product or services?
What exactly?

Why is your product desirable to them?

How does it reduce their problems and therefore look valuable?

To give you and example, here are those answers for a fictional safety product:

V isibility of risks (hugely valuable)

P eace of mind (so you can focus on other things!)

E asier cost management (lower costs)

C ost reduction (great)

B
 etter team communication (money saved, other benefits)

U
 p-to-date product (likely lower maintenance costs than older products)

R educed time and better efficiencies (direct cost/resource savings)

E ase of ongoing management (lower costs)

E asier & quicker admin (lower costs)

31
 P R I C I N G S T R AT E G I E S : 3 P R I C I N G O P T I O N S

From these answers, if you can attach some monetary values to them (money saved, money
generated), you can start to get an understanding of the value you offer. Those numbers may
start to look great, but this is only the upside and unfortunately you also have to consider
the downside of how a customer will also look at your product. You must also take into
consideration with Value Based Pricing…

What uncertainty is there around your product as a new choice for customers?

What are the migration costs to move?

What sort of historical resistance (and cost to overcome) is there to a product such as
your own?

Possible answers to these questions could be:

Y ou are a small business – that’s a risk

C redibility of the team is lower as you are unknown

S cale/capability of the business

V ariable hourly costs rather than fixed (and therefore possible cost)

N
 eed to retraining staff to use (and therefore cost)

H
 aving existing contracts for other products that can’t be stopped straight away (and
therefore cost)

C ost to change

T ime to change (and therefore cost)

R esource to change (and therefore cost)

Again – attach some numbers to the answers you come up with – these are the costs to
move to you, real and perceived.

So quite simply: Upside – Downside = Value

32
 P R I C I N G S T R AT E G I E S : 3 P R I C I N G O P T I O N S

Now you are starting to get a better idea of the value you offer and also what your key
messaging needs to be to pull or push your potential customers towards your product and
away from the competition. So, Value Based Pricing is not just about the pricing but also the
packaging – how you are packing your product up and messaging that effectively.

Because this is all about your customer and what they think, the best way to start to figure
this out is to survey them and find out what they think. And also, whilst you are at it – ask
them the key question – what are they willing to pay?

33
 P R I C I N G S T R AT E G I E S : 3 P R I C I N G O P T I O N S

Practical Recommendation

We’ve covered a lot there, so here are the important steps to take… You need to do some
calculations and thinking around all three options to get a full picture of each option.

Y ou should know what your costs are and you should therefore calculate what the
absolute minimum you should be charging

Y ou should know what your competitors are charging. That should be a basic part of
your business or market research. Doing the research is a good thing. It doesn’t mean
you have to copy them

W
 ork out your value. Really, this is the option that you should be going for if you want
to maximise your profit.

34
Summary

Pricing is one of the most important influences on the profit you will make and therefore
it is definitely worth spending time to think this through carefully. Clearly there are a few
strategic considerations and decisions to make that will influence your pricing – even before
you start to get into the detail of the pricing itself.

• Consider how you intend to compete – cost/differentiation/focus

• Consider ALL of the options that your customer has and therefore also start to
understand your own value

• Consider in a practical way (The Haircut!) what customers will pay

• Consider what your commercial model is and whether you can operate on a
recurring revenue basis

• And consider which pricing strategy (Cost+, Competitive, Value Based) is most
appropriate to your business and your marketplace

Once you’ve considered these strategic aspects of pricing, then you are ready to get into
more detailed Pricing Tactics. Look out for our Pricing Tactics ebook for those answers.

35
The smartest strategy
platform, for the smartest
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Lucidity we would be persevering with
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helps us pull our strategy all together in
one coherent space.”

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Strategy Director, Caburn Group

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