To understand a pricing matrix, let’s do a quick arts and crafts project. Take a black sheet of paper. Draw a large square on the page. Now divide that square in half with a vertical line down the middle of the square. Now divide that square in half with a horizontal line down the middle of the square. You should now have four squares on your page. Label the x-axis (horizontal line) as quality. Label the y-axis (vertical line) as price. Label the square in the upper right corner “Penetration”. Label the square in the bottom right corner “Premium.” Label the top left corner “Economy.” Label the bottom left corner “Skimmed”. You have now created your own price matrix.
Low prices: Low quality and low price. This would be no-frills pricing, think Wal-Mart or Southwest Airlines. Compare this to Nordstrom and first class on Virgin Airlines.
Penetration prices: high quality and low price. This strategy involves initially setting a price lower than the market price in order to enter the market. Think back to when the Japanese first introduced cars to the American market. They were cheaper cars, but with equal or better equality. Now Toyota is poised to become the number one selling automaker in the US.
Price skimming: Low quality and high price. With this strategy, a company will set a relatively high price initially and then lower it over time. Over time, they can get consumers at all price points. The perfect example of this is the Apple iPhone, originally priced at $499 when it was introduced. Apple is now introducing the second version on July 11 at a price of $199.
Premium prices: high quality and high price. All luxury brands follow this pricing strategy, which is to keep the price of a product or service high so that it is favorably perceived as superior or exclusive by buyers. Think Coach or Bentley or even the Ritz Carlton.
How to use the array:
Step One: Determine where you are on the grid. You may have products or services that fall into one or more categories.
Step Two – Determine Which Quadrants Your Competitors Are In
Step Three: Determine the holes in the market. Are you and your competitors in the penetration and premium quadrant? So there could be opportunities in the economy and in the skimming quadrants. What products or services could you introduce to take advantage of these “holes” in the market?
Step Four – Determine if you can have products or services that fall into each quadrant. For example, Toyota has a Toyota Corolla (Economy), a Prius (Skimming), and a Lexus (Premium).
How do you know if a change in pricing strategy will be successful?
Well, you don’t know what will succeed. It’s best to do your research up front before investing heavily in a new pricing strategy, product, or service. The three most important questions are:
1. Is there a market for it?
2. How can I reach that market?
3. Do you have the talent and resources to reach that market?
So give some thought to your pricing strategy. What is the cost of increased market share, more customers, higher revenue, and higher profits? Priceless.