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The Pricing – Quality Model

By Annmarie Hanlon 25 Nov, 2013
Essential
Marketing models

Using Kotler's Pricing model to review positioning

This model relating pricing for a product or service to the quality delivered may not be as familiar as some other marketing models we have covered in our classic marketing model series, although it was created by author Philip Kotler. He called it the Nine quality-pricing strategy since it is a matrix covering nine options. The aim is to help companies position their products or services relative to competitors as perceived by the market, and consider their pricing strategy accordingly.

You can use the Price - Quality Strategy Model to review competitors’ products and services and review their strategies. Why do they charge more? Why do they charge less? Sometimes if aspects of a service are removed, this can contribute to lower prices.

What are the 9 Pricing strategies?

The nine pricing strategies are shown below, relating price against quality.

pricequalitystrategymodel

Our summary below reviews the most frequently used strategies based on the different objectives:

  • 1. Maximum current profit objective

A Premium strategy (top-left) is used for this objective. Typically, there are few competitors and a strong brand driving demand, so a higher price can be set.

  • 2. Product Quality Leadership objective

This is the High value strategy, where a higher quality product is provided and more expensive components are used.

  • 3. Survival objective

This is 'Buying work’ or dropping the price to gain market share. It is a Good Value or Economy strategy. Often used when customers’ needs change or when competitors move into a market.

  • 4. Maximum sales growth objective

This is a similar low price strategy involving setting a low initial price to capture market share initially, then when the market grows and costs decrease, costs are reduced further.

How can I apply this Pricing model?

When developing new products think of the price strategy before the product is completed.

Ask yourself, what are you trying to achieve? The cost-plus pricing model has long gone as we expect goods and services to be appropriately priced. One marquee hire company I worked with offered high quality service and a very low price which was a superb-value strategy. It didn’t work. Research showed that potential customers were suspicious and didn’t place orders with them as they thought the product quality was low because the price was low. They raised their prices adopting a high value strategy and increased sales by 40%.

Developing new products means creating pricing strategies. These might follow the company’s standard strategies, or take a different approach.

When they introduce a new product, such as fans and heaters, these follow the same premium pricing strategy. Be realistic and research perceptions. ' If it sounds too good to be true then it usually is'.  It's essential to fit our price to the product's perceived quality.

Examples of pricing strategies using the model

  • Premium Strategy

The objective was for maximum profit, so when Apple iPhones were the first smartphone in the marketplace they could set high prices before other players entered. Once others gained entry including Android and Samsung, they have reduced their prices.

  • High Value Pricing Strategy

The objective was product-quality leadership which was followed by Dyson Vacuum cleaners, They design and manufacture quality products, based on years of research, testing and significant investment into patents. As their website states: 'New ideas are the lifeblood of Dyson. Every year, we invest half our profits back into harnessing them at our research and development laboratory in Wiltshire. There are 650 engineers and scientists based there.' They share their story and ‘behind the scenes’ details, such as the hammer test (below), to justify their premium pricing strategy.

  • Superb value pricing Strategy

Waitrose's objective was more than survival but to recapture customers, or stop them switching. Their Essential range was launched as the UK hit the recession to re-capture shoppers buying from discount stores, so they reduced the prices of their basic food.

  • Good value pricing Strategy

For maximum sales growth, Subway sandwiches offer a lower price lunchtime snack and now have more outlets across the UK than MacDonald.

What to watch for

If you’re developing products and changing the quality, perhaps saving money and reducing one element of the process, review the price too, or you could fall into False Economy or Rip-Off strategies.

Original Sources

Kotler, P. (1988). Marketing Management: Analysis, Planning, Implementation and Control. 6th Ed. Englewood Cliffs, New Jersey. Prentice-Hall Inc.

By Annmarie Hanlon

Annmarie Hanlon is the Smart Insights expert commentator on online and offline marketing strategies for business. Annmarie is the MD of Evonomie and author of Quick Win Marketing, and co-author of Quick Win Digital Marketing. She runs social media workshops in the UK and Ireland and shares marketing tips and news in her blog, B2B Marketing. You can follow Annmarie on Twitter or connect on LinkedIn.

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