Bowman's Strategic Watch: Model for Choosing a Price Strategy

Bowman's Strategic Clock is a tool that empowers businesses to select the most profitable strategic position, based on two dimensions: price and the perceived value of the product, service, or brand as a whole.

In competitive markets, companies' primary task is to seek an optimal strategy that leverages competitive advantages and mitigates weaknesses.

To help companies determine which strategy would be most effective for them, several strategic concepts have been developed.

One of these concepts was a strategy proposed in 1980 by Michael Porter, as outlined in his book "Competitive Strategy: Techniques for Analyzing Industries and Competitors." He suggested two types of competitive advantages: low cost of goods (or high profitability of products) or product superiority.

Porter created a matrix grounded in two parameters: market size and type of competitive advantage. He divided market size into broad (a large segment, a single product category, an entire industry) and narrow (a small market niche that meets the needs of a very specific or targeted audience).

Splitting by types of competitive advantage, he assumed that companies could compete with each other either on price (due to low costs) or on the perceived value of the product itself.

Based on this matrix, he identified three basic competitive strategies:

● Cost leadership or price leadership denotes a company's ability to achieve the lowest level of costs, and here Porter does not differentiate between broad and narrow markets;

● Differentiation implies creating a unique product in the industry;

● Focus or niche strategy - leadership in a niche, where the company concentrates all its efforts on a specific narrow group of consumers;

While this concept held merit, it was overly generic for many businesses. The market demanded greater variations in combinations.

In 1996, economists Cliff Bowman and David Faulkner reimagined Porter's concept and developed their strategy. This model expanded Porter's three strategic positions to eight and thoroughly described how different combinations of costs and perceived value determine the likelihood of each strategy's success.

Since the model is presented in the form of eight strategic options distributed from bottom to top clockwise around a circle, it is called "Bowman's Strategic Clock."

The concepts included in this template demonstrate a broader range of possibilities through which a business, company, or brand can position a product based on two dimensions - price and perceived value.

Here are these eight strategies determined by various levels of price and value. Let's delve deeper into each one.

Companies seldom choose to compete in this category willingly. Rather, it's a position they're forced into because their products lack differentiated value. The only way to achieve success with this strategy is through high sales volumes and constantly attracting new customers. This situation arises when products are of lower quality than competitors, but still find many consumers due to very attractive prices. It's a strategy from which companies should escape at the first opportunity.

Companies competing in this sector are cost leaders. They are able to masterfully balance reducing the price to a minimum, offsetting low margins with very large volumes. The products sold by these firms are inexpensive, without clear differentiation, typically generic or private labels.

The low-price strategy favors low-cost segment leaders focusing on cost minimization, fast and cheap production, and leveraging economies of scale. Under this approach, such companies can become a powerful force in the market. Due to their drive to increase or maintain market share, these companies often engage in price wars, where the victor is the one who can skillfully manage costs and overhead.

This is the strategy of discount companies. In situations of high inflation, they can feel very confident and can occupy a significant market share.

Hybrids include stores and brands that have convinced the buyer of the reasonableness of prices while maintaining good product quality. This combination enhances customer loyalty.

The sales volume here is typically lower than in the previous segment. However, these companies strive to establish a reputation for offering fair prices for optimal product characteristics.

A representative of this segment could be Ikea, which has achieved high brand loyalty by offering higher perceived value at reasonable prices.

Another company with a hybrid strategy is Lush cosmetics. Its differentiator is the company's commitment to social and corporate responsibility and ethically manufactured products at reasonable prices.

A hybrid strategy is highly effective if the company can clearly articulate the added value and consistently offer high-quality products.

This category includes companies that offer their clients the maximum level of perceived value. By differentiating a product or service, the company creates unique value for the customer. Branding plays a big role in this strategy, as it allows the company to become synonymous with quality and price.

A characteristic representative of this strategy is Apple. This leading brand, having implemented a differentiation strategy, is a flagship for innovation, periodically introducing innovative products and technologies to the market, and maintaining an industry leader image.

To offer high-quality goods, companies either raise prices and sustain themselves through higher margins, or keep prices low but strive to increase market share. For example, Nike is known for its high quality and premium prices, while Reebok is also a strong brand but offers high value at a lower cost.

High-quality products and high brand recognition allow companies to maintain high prices due to added value. Customers are willing to pay more for these products because they are sensitive to high-quality products from a known brand in the market.

Here it's more important to appear rather than to be. Design products, which have high perceived value and high prices, are often sold using this strategy. The product doesn't necessarily need to have a significant objective value, but it should be perceived as valuable enough to be charged a very large premium.

Luxury brands, across all industries, use this strategy through targeted segmentation and distribution. For example, Rolex watches are a luxury item. High quality and brand image are key distinguishing features. Rolex targets a small market segment, willing to pay a premium for the status that wearing this watch brand brings.

Consumers buy products of this category based purely on perceived value. For brands like "Christian Dior," "Gucci," "Louis Vuitton," and "Rolls-Royce," the way to survive is through targeted markets and high margins. Focused differentiation aims at positioning a product or service at maximum prices. Due to the high perceived value, target customers are willing to pay from 10 to 25 times more for a specific brand product than for its more economical analogs.

High-profit rates are achieved through targeted advertising and PR campaigns, distribution, and segmentation. Here, price competition is constructed in reverse, with the brand's task being to make product prices higher than others. If this strategy is successfully implemented, it can lead to maximum profits. However, only the strongest brands and products can withstand the strategy of focused segmentation in the long term.

For a number of reasons, companies sometimes take a risk and increase their prices without increasing the perceived value.

If consumers continue to buy services or products at such high prices, the profit can be high. However, if consumers do not accept unjustified price increases, the market share of such a company may sharply decrease. To rectify the situation, it will have to either lower the price or increase the value of the product in the eyes of the consumer.

This short-term strategy is aimed at exploiting a temporary imbalance of supply in the market. As soon as the competition recovers, an unjustified price mark-up will be quickly detected by buyers, and they will prefer to shop elsewhere. Customers will switch to a better-quality product in a similar price range or a similar type of product at a lower price to optimize their expenses.

Furthermore, this strategy can provoke competitors or substitute products to also raise prices, which will quickly offset the benefits of price increases.

This strategy works only if the company has a monopoly position in the market, where it alone offers a product or service. The monopolist does not need to think about increasing value or regulating the price. If customers need this company's product, they will pay any price the monopolist asks.

In the 1990s, Microsoft Windows was the only viable option for personal computers. Microsoft charged software developers an unjustifiable cost for a license. Subsequently, the European Union fined Microsoft $1.3 billion, citing antitrust legislation.

However, achieving a monopoly position in a market economy is difficult. Besides the market balancing of monopoly positions of individual companies, many countries have antitrust bodies that regulate monopolies and stimulate fair competition.

The market share loss strategy involves products with low perceived value but disproportionately high prices. Any company that adheres to such a strategy will inevitably lose market share.

If your product has low value, the only way to sell it is to lower prices. Yesterday's bread is sold at a discount, as are ready-made salads in the evenings in supermarkets. Only in this case can they find a buyer and not be written off.

This is the strategy that Blackberry, the then leader in the mobile phone market, tried to pursue in 2007. However, it failed to consider that Apple had released the iPhone at the same time, which drastically changed the perceived value of Blackberry devices. And when Google joined the fray in 2008, offering Android to the market, Blackberry lost its value and subsequently its market share.

The strategy of selling a lower-quality product or value proposition at the price of products superior in these parameters can only be effective in the short term. For example, such a tactic may briefly work when introducing a product to a new market, until the consumer figures out the discrepancy between the price and the stated quality or value properties. However, over time, this tactic will repel customers, and the company will either lose market share or be forced to adjust its pricing strategy.

When choosing a strategy for your company, understand that options 6, 7, and 8 are not viable strategies on truly competitive markets. If your price exceeds perceived value, you will face stiff competition from those companies that can offer customers higher-quality goods or services at more favorable prices. That's why it's so important to balance your value and price.

When choosing a competitive strategy, several questions should be answered.

If you plan to compete on price:
• Can you be the price leader?
• Does your company's economics allow you to maintain the position of the cost leader?
• Do you have the resources to keep costs low and maintain a high margin in the long term?
• Can you balance a low price with the perception of the value received for that money?
• Does your pricing advantage extend to one or several market segments? Can these segments keep your business afloat, considering the volumes and margin that the position of the price leader gives?

If you plan to compete on perceived value:
• Do you have a clearly defined target market?
• Do you understand what your target audience really values?
• Do you know the value of your competitors' products and how this value is perceived by your target audience?
• Do your products possess meaningful differentiation that other companies cannot easily copy and that you can use to distinguish yourself from competitors?
• Do you have alternative methods and resources for differentiation from competitors? If they can offer the market a similar value, will your competitive advantage in this area be lost?

When choosing a pricing strategy, align it with your corporate strategy and competencies, as well as with the resources you have and the environment in which you operate. And once chosen, constantly adjust your strategy according to changing market expectations. Because there will always be competitors on the market trying to offer higher perceived value at a lower price.

The Priceva service helps companies navigate clearly on one of the axes of the Bowman's clock model, namely price. Automated price monitoring in real-time provides a complete understanding of the prices of the competitive environment and your company's position relative to any of the competitors.