Mastering portfolio pricing: strategies for sustainable growth

Portfolio pricing considers the entire product lineup rather than individual items. It ensures consistency, alignment, and optimal pricing across the entire range. Effective portfolio pricing can lead to higher overall profits by balancing margins, volume, and market share. Also, it helps position products relative to competitors and customer expectations. Strategic portfolio pricing requires efficient allocation of resources (like marketing spend or production capacity) based on portfolio priorities.

Pricing strategies, from conventional to less so

Cost-based pricing is one of the most straightforward methods. It involves calculating the total cost of producing a product (including production, manufacturing, and distribution) and adding a markup to ensure a profit. Markup is often set as a fixed percentage (cost-plus pricing) or nullified (break-even pricing).?

Cost-based pricing works best for manufacturing organizations with standard products and stable demand. It is usually not recommended for dynamic markets with intensive price changes or high promo pressure, or for industries with high capital and low margins (for instance, Telco or HoReCa). Basic commodities like bulk grains or raw materials are both a good example of cost-based pricing.

This approach requires accurate cost data (material, labour, overhead) and scenario modeling to optimize margins.

Value-based pricing focuses on the perceived value of a product to the customer rather than the cost of production. This approach requires a deep understanding of customer needs and preferences . By aligning the price with the value perceived by the customer, businesses can often charge a premium. This method is particularly effective for innovative products or services that offer unique benefits.

In other words, product attributes are selected on request and priced according to the customers’ willingness to pay for each. Price premium for an attribute above cost is to reflect its perceived value, and must be justified with features, benefits, or brand reputation.

Value-based pricing is a good choice for easily customized products or services, or B2B service. It works for high perceived value of certain product attributes or unique products, or emotional purchasing decisions. Some examples of value-based pricing – designer apparel, luxury goods, innovative tech products.

The downside of this approach is sales impact prediction. Application of value-based pricing requires not only deep understanding of consumer insights (preferences, behavior) and always-on competitive analysis , but also unrestricted test & learn cycle.

Competition-based pricing involves setting prices based on what competitors are charging. This approach is useful in markets with many similar products, where price competition is fierce. While it helps in staying competitive, it can lead to price wars and reduced profit margins if not managed carefully.

Competitor selection is an individual choice, but usually market average (market-based pricing) or industry leader are used for a benchmark. Competitor price in this case is topped with a markup (premium positioning) or a markdown (low-cost leader), or none (differentiation), depending on price positioning.?

Competition-based pricing is used in competitive markets with many similar products, or when a business focuses on market share expansion. It’s a good option for markets with clear price leadership by some dominant competitor with transparent pricing and clear premium offer (this situation is typical for ‘price follower’ companies, usually smaller ones). Walmart’s price-matching guarantee is a good example of competition-based pricing.

Competitor pricing data and consumer switching behavior are basic requirements for this approach and may be complemented with elements of other pricing methods that we would discuss further (e.g. psychological price points). Without these insights, or with no consistent magnitude of markup, no understanding of value perception or effect on sales, or no consideration of constraints – competition-based pricing is not the best choice.

Dynamic pricing adjusts prices in real-time based on demand, supply, and other external factors. This approach is commonly used in industries like airlines, hospitality, and e-commerce. It maximizes revenue by capitalizing on fluctuations in demand but requires sophisticated algorithms and data analysis capabilities.

In reality, pricing strategies are seldom used in isolation. From my experience, companies usually apply a ‘mixed’ approach – either using a combination of pricing approaches at product level or using differentiated pricing at product line level according to their positioning.

Behavioral pricing leverages insights from behavioral economics to set prices. It considers how psychological factors influence purchasing decisions which are not always rational. Shoppers’ perceptions of prices are influenced by many factors, from cognitive biases to contextual cues. For example, pricing a product at $9.99 instead of $10 can make it appear significantly cheaper to consumers (‘psychological pricing’), just as well as odd numbers add to perceived value (‘odd-even pricing’). ‘Decoy pricing’ means introducing a third, less attractive option to influence choices.

This approach can be highly effective but requires a deep understanding of consumer psychology, or at least unconstrained text & learn opportunities. Behavioural pricing can complement any other pricing approach; in case of competitor-based pricing it often happens that many companies aim for the same price points, which makes it easier to predict where the next price move would land.?

Subscription pricing involves charging customers a recurring fee to access a product or service. This model is increasingly popular in industries like software, media, and consumer goods. It provides a steady revenue stream and can enhance customer loyalty. However, it requires continuous value delivery to retain subscribers.

Freemium pricing offers a basic version of a product for free while charging for premium features. This approach is widely used in the software industry. It allows businesses to attract a large user base and convert a portion of them into paying customers. The challenge lies in balancing the free and premium offerings to ensure profitability.

Some less common approaches include ‘pay what you want’ (letting customers decide the price), ‘bundling’ (combining products for a package deal), and ‘price skimming’ (starting high and gradually lower prices).

This range of pricing approaches includes various strategies that are characteristic for services or subscriptions rather than goods. Some of them can potentially be used in combination with traditional approaches, but at an earlier maturity stage (e.g. ‘pay what you want’ or ‘price skimming’).

Strategic pricing is part of the whole

Strategic portfolio pricing is not just about setting the right price for individual products; it’s about aligning pricing strategies with the overall business strategy. Here are some key considerations:

• Market positioning: Your pricing strategy should reflect your market positioning. Are you a premium brand or a cost leader? Premium brands can leverage value-based pricing to justify higher prices, while cost leaders might focus on cost-based or competition-based pricing to maintain their competitive edge.
• Customer segmentation: Different customer segments may perceive value differently. Tailoring your pricing strategy to different segments can maximize revenue. For example, offering premium pricing for high-value customers and competitive pricing for price-sensitive segments.
• Product lifecycle: Pricing strategies should evolve with the product lifecycle. For new products, penetration pricing can help gain market share, while skimming pricing can maximize profits for innovative products. As products mature, competitive pricing may become more relevant.
• Revenue goals: Aligning pricing strategies with revenue goals is crucial. If the goal is to maximize short-term revenue, dynamic pricing or promotional pricing might be effective. For long-term revenue growth, subscription pricing or value-based pricing could be more suitable.

Strategic pricing involves aligning pricing strategies with consumer behavior, competitive dynamics, and market trends. It aims to set price points that resonate with consumers and considers not only the actual price but also how consumers perceive it. Effective pricing communicates value and aligns with consumer expectations. Strategic pricing is, therefore, interconnected with other elements of RGM such as promotions and price/pack architecture (PPA), all being facets of perceived price points to consumers.

From another perspective, portfolio pricing looks beyond individual products, considering synergies and trade-offs. It shows that in fact portfolio pricing is a long-term strategic approach. Ultimately, portfolio pricing should not be a short-term fix for margin challenges as it risks undervaluing premium products or overpricing low-demand items. Tactical approach carries many other risks; let’s highlight a few major ones:

• Long-term planning & risks mitigation: Tactical margin fixes address immediate profit gaps but may harm long-term growth. Strategic pricing decisions balance risk exposure across different products or services.
• Cannibalization & inconsistency: Isolating individual products for margin adjustments risks cannibalizing other products or confusing customers. Tactical fixes ignore the interconnectedness of the portfolio and may lead to inconsistent pricing.?
• Holistic view: Focusing solely on margins overlooks opportunities to optimize the entire portfolio for sustained success.

Common mistakes in portfolio pricing

Pricing decisions can be tricky. Here are some common mistakes that companies — both large and small — often make when it comes to portfolio pricing.

What does it mean?

Portfolio pricing is a strategic tool that considers the big picture and aligns with business goals. Strategic portfolio pricing integrates pricing, promotions, and PPA within the RGM landscape. Successful pricing strategies require a blend of data-driven insights, adaptability, and a deep understanding of customer behavior. By taking a holistic approach to price management, CPG companies can drive category growth, enhance profitability, and create sustainable value for both shoppers and shareholders. It’s not just about adjusting prices — it’s about shaping the future of the brand.