Price and Position are Intimately Related

A company's pricing strategy and its market position are inextricably linked. The position a company holds in the market creates expectations and constraints that limit its pricing flexibility.

How Position Constrains Price:

• Customer Perception: A brand positioned as a premium supplier (e.g., Hewlett-Packard, Rolex) cannot suddenly compete on price without undermining its existing brand image and market for high-priced models. Conversely, a brand positioned as a low-cost leader (e.g., Timex) cannot support a premium price.
• Internal Culture and Cost Structure: A company's culture and cost structure often evolve to support its price position. A company used to commanding 55% gross margins will have a high overhead and a culture that is intellectually incapable of accepting the 40% margins required to compete in a different business.

The Strategic Imperative:

• Align Price and Position: Before entering a new market, a company must ensure that the pricing structure of that market is compatible with its corporate position and internal margin goals.
• Convince Management First: If a new business requires a dramatically different pricing model, top management must be convinced to accept the necessary sacrifices before the product is developed.

If there is a fundamental mismatch between the price a market requires and the position a company holds, the result is usually disastrous. The company will often sacrifice market share to maintain its historical margins and will shortly be driven out of the business.