Continually rising prices at the gas pump since the mid-1970s has had us all asking, “How high can these get?!” As 2015 slipped into 2016, with oil by the barrel in free fall, we found ourselves asking, “How low can this go?”
The roller coaster of oil pricing per barrel and sticker surprise at the gas pump has a lot of people wondering, “How in the world do they set those prices?”
Companies set their prices according to their own pricing strategy, which “properly prices products or services so that the company can sustain profitability while maintaining or growing its market share,” according to SMstudy’s Marketing Strategy, book one in the SMstudy® Guide series. Even though it sometimes seems as though companies are grabbing for quick profits and letting the future take care of itself, sustained profitability and growth in market share are part of every sane strategy.
Coming up with that sane strategy isn’t as easy as a few fat cats sitting around in a smoky room saying, “Well, what do we want to charge for this?” That question is likely to be followed with another, “What CAN we get for this?” And now our fat cats are talking strategy. The SMstudy® Guide says, “In order to develop a comprehensive Pricing Strategy, a company must specifically evaluate and understand the trends and dynamics in many areas such as the following:
the features and pricing of competitive products in the market
the company’s desired positioning, mapped against that of the competition to identify pricing of similarly positioned products
the consumer mindset to understand the demand and spending capability for each product
the cost, projected unit sales, and targeted profitability levels of each product
the innovativeness of each product
the capability of the production and operations teams to create high-quality products at reasonable costs
the knowledge of the current and desired market shares for each product.”
The SMstudy® Guide details nine inputs and fourteen tools companies can use to understand these trends and dynamics to design a successful pricing strategy. One input is the company’s own positioning statement. This statement is important because “how a company markets a product impacts who buys it and how much consumers are willing to pay to purchase it.” The positioning statement identifies who the company wants to sell to and how much it would like those customers to pay. “A company that caters to a wealthier market segment with relatively high disposable incomes, aims to create a premier positioning for the product focusing on the quality of the goods or services, brand messaging, and packaging.” This market position allows for premium pricing, too. It is no wonder that there are at least three grades of gasoline at every pump.
Another input is “opportunities and threats.” As the SMstudy® Guide points out, “Identifying and analyzing opportunities and threats help the company consider the external factors that may influence the costs involved in manufacturing a product or service and subsequently impact its pricing.” This is why refinery fires, hostile take overs of oil fields, and sudden growth from emerging markets all over the world affect the price of gasoline at the station on the corner.
So, how in the world do they set those prices? By following a rather elaborate pricing strategy.
For more help understanding pricing and marketing strategies, visit SMstudy.com
The information in this article comes from chapter four of SMstudy’s Marketing Strategy, book one in the SMstudy® Guideseries of six books that also include Marketing Research, Digital Marketing, Corporate Sales, Retail Sales and Branding and Advertising.