A client recently asked me to explain the difference between tactical and strategic pricing and I thought I would outline it here for you as well.
The objective of tactical pricing is to achieve the best price possible at the transaction level. This means combining information about the customer’s perception of the value of the product or service at this particular moment in time. Combine this with information about competitors, substitutes and our own cost information to arrive at a target price range for the sales team to use in combination with their experience and expertise to get a good price. Often a particular product or service may have thousands of potential starting price ranges, but only one will apply to any particular situation.
Strategic pricing however, has the objective of allocating resources (hence the strategic term) to business units, products, services etc. that are in a position to achieve the best return on those resources given the organization’s constraints at this point in time with an eye to improving pricing and even the constraints over the long term planning horizon. While some of the strategic activities are “on us” and only need internal agreement to proceed, many will require changes in the industry or market to bring to fruition. These include purchasing product and service lines, acquisitions, divestitures, etc.
At the tactical level, improvements are in line with what you would expect for a tactical level initiative; 4-5% of revenue converted to net income by identifying and plugging price leaks and shifting sales behaviors to focus on selling on value.
Strategic pricing can have a transformative impact on profitability and even on industry attractiveness. As such, the timeline for strategic initiatives is measured in years where tactical timelines are measured in months, normally producing sub-year payback periods.
The smart way to proceed is to launch strategic pricing initiatives immediately since they take time to pay out. In the meantime, by undertaking a tactical pricing project, pricing performance improvements can fund additional pricing efforts. Put another way, tactical pricing pays out quickly and can be used to fund strategic pricing initiatives.