The 3 Cs of Pricing Strategy and How To Price
The 3Cs is a business framework which was developed by strategist Kenichi Ohmae (the head of McKinsey Japan for a number of years). The framework offers an overview of the factors which have to be taken into account for successful pricing. It suggests that strategists, while developing a pricing strategy, should take three key factors into account: Customers, the Competition and internal factors relating to the Corporation. A successful strategy can evolve only if these three elements are integrated which is why Ohmae also referred to it as the strategic triangle.
When a company develops a product, customer needs and desires are at the heart of the new good. When it comes time to determine the price of the good, a company needs to examine its cost to produce the product on a per unit basis. Generally speaking, or at least in the long run, a company will set its price above its cost per unit. This is an important calculation to make. It is easy to generate revenue, it is generating profit that is harder. With time, customer expectations will change and likely various further iterations of the good will be developed. It is imperative that the corporation continually calculate its internal costs and ensure that the price it sets for each product is above that of the cost of making, distributing and selling the product. This is one aspect of a good pricing strategy.
The second element is customers. Corporations must take into account what customers believe a product to be worth when determining price. If a product is highly desired among potential customers in a focus group, then it is likely that the product can be set at a higher price when it is released into the marketplace. If a product isn't strongly valued by potential customers prior to release, then that is a good indication that the product will need to be priced low enough for customers to be enticed enough to make the purchase.
Companies can also use price discrimination here. If during a focus group study it is found that one customer segment values the product significantly more than the other segments do then the company could make two versions of the same product. One version could target the higher value segment by including features that specifically cater to that higher value segment's needs. Those same features could then be removed from the other version and that version could be targeted at the remaining segments. Doing this would allow for the version with the additional features to be sold at a premium to the higher value segment which clearly values the product more. Using this versioning strategy the company can generate additional profit by pricing similar products differently to different segments based on each segment's willingness to pay and perceived value of the product.
The competition is the third element that needs to factored into the pricing process. Monopolies are relatively rare today, meaning that there is competition for nearly every product in the marketplace. It is important to identify competing products and to observe their price. If a company's product has relatively more features or is of higher quality than its competitors, it may be priced higher than its competition. The opposite holds true as well.
Combined, the three Cs of pricing strategy help businesses establish a lower and upper bound for what the ideal price of their product should be. By continually gathering data and examining factors relating to the corporation, customers' perception of a good and the competition, businesses can minimize the amount of money left on the table by setting pricing intelligently and adjusting pricing as internal and market factors change.
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