One of the key issues in to­day’s marketing world is that of pricing. Especially when Chinese competitors are attacking even the small and medium sectors. Of course there are challenger brands, such as Cavi­nKare, Emami and Marico that ha­ve succeeded in the pricing game.

Pricing is often understudied, but overused. It is because most people assume that when they face a prici­ng problem, there must be a problem with the price. They are wrong. We have seen in our consulting practice that a price change is often the wro­ng response to price resistance. Pric­ing problems can be caused by any aspect of the marketing mix. So why spend more time on pricing? It is ne­cessary because problems with other aspects of marketing are rarely obvious until you understand how they affect the customers' willingness to pay the price.

For example, at our firm, we often see clients who have great products but nevertheless are facing price res­istance. There is no obvious problem with the quality of the product, or with the impact and recall of advertising, or with distribution margins. Yet sales and profits are inadequate, so everyone assumes that the price must be wrong. However, by studying what is behind the customer's reaction to price, you can understand what needs to be fixed.

First, the product may be great but over-engineered. One of our cli­ents made a product that had an ei­ght-year life, but we learned that most purchasers used it as a part in other products with three- to four-year lives. No customer complained about the product's quality being too high — they complained about price.

Second, communication of the product's value may be inadequate or ineffective. Marketing communic­ation usually focuses on features and benefits, and assumes that custome­rs can convert the information to va­lue. Often, this is not enough. Even sophisticated purchasers often cannot quantify the value of the benefits they seek. Pharmaceuticals and me­dical device companies, for example, usually must quantify the value of complications avoided with products or buyers will undervalue the benefi­ts. Similarly, advertisers often cannot quantify the value of the media they purchase, so they tend to undervalue publications or broadcast stations that offer superior value.

Third, customers who know the value of a product often do not think they must pay for it. They have been educated to push for a deal by a sales force that negotiates prices to maximise sales volume rather than profitability. Customers do not complain about since they benefit from it.

The key to correcting the pricing problem is not to change the price. It is to establish policies that create an expectation of price integrity and to pay the sales force to sell value ra­ther than volume. Part of the reason that pricing is misused and poorly understood is the common practice of making it the last marketing decision. We think that we must design products, communication plans and a method of distribution before we have something to price. We then use pricing tactically to capture wh­atever value we can. We are currently working with a chemicals company that practises this philosophy.

Pricing strategically, however, re­quires that we put pricing at the be­ginning of the process. For example, a multipart marketing strategy usually is required in value-based pricing. Airlines' complicated service pa­ckages with arcane restrictions, and their multiple channels of distributi­on must support pricing that reflects different values of the service to different segments. Without such a str­ategy, airlines would capture a much smaller portion of the value they ha­ve the potential to create. One of the lifestyle stores proved this when they unwisely adopted "everyday low pricing." The strategy reduced profits be­cause it undermined the firm's ability to segment customers for pricing. This store’s pricing problem was not with the structure of its pricing but with its inability to create value.

Strategic pricing is about much more than capturing value; it is ab­out orchestrating the marketing fra­ction to create value that can be captured profitably. We recently recommended that a client design, positi­on and distribute its new product for only a segment of a larger market.

The client found this recommendat­ion counter-intuitive since at curre­nt prices the product could be more profitably positioned for the larger market. However, going head-to-head with the established competitors would have forced this client to cut prices to defend share, undermi­ning the value of the market. By fo­cusing on only a segment that could benefit disproportionately from the firm's technology, the chance for co­mpetitive reaction was minimised. As a result, more of the value created could be captured in the price.

One of the brands created by Ca­vinKare’s Chik, succeeded not beca­use it was one of the cheapest shampoos. There certainly were numero­us other shampoos at the same or lower price points. They succeeded because they were able to communicate the value proposition. The same company failed with their Nyle brand extensions into moisturisers and high-end shampoos. The reason? Failure to find the value equation and communicating the same!

We all know that profitable pricing follows good marketing. What many among us do not realise is that good marketing begins by determining what marketing efforts are necessary to support good pricing.

The writer is CEO and MD of CustomerLab Solutions