How to choose a retail price: 5 rules according to Michael Porter

In the book «Competitive Strategy», Michael Porter explains a simple idea: price is not a “number in a price list”, but the result of your choice of how exactly you compete.

That is why it is not enough for an entrepreneur to simply “set a price”. First, you need to define your business strategy — to be cheaper than others, to be better/different, or to work for a specific niche. From this, the pricing policy is logically built: markups, discounts, promotions, and rules for different customer groups.

Below are practical recommendations based on Porter’s logic that will help you tie price to strategy rather than to intuition.

Choose one of the three basic strategies: do not try to be everything to everyone

Porter identifies three approaches that allow a business to earn steadily. The main mistake is trying to combine everything at once. The pricing level and the markup logic directly depend on which approach you choose.

1. Cost Leadership means that you build a business with the lowest costs in your category. You work on cost price every day: purchasing, logistics, warehouse, staff, operating processes — everything must be under control.

When costs are lower, you can afford a lower price than your competitors and still remain profitable. Or you can keep the market price and earn more from each unit sold.

This strategy requires discipline: strict control of overhead costs, rejection of small unprofitable orders, assortment optimization, and investment in equipment and systems that reduce the cost of sales processing and accounting.

2. Differentiation — this is a strategy where you make the product or service noticeably better for the customer than most competitors do. Not by offering a lower price, but by giving the customer specific additional value: consistent quality, speed, warranty, selection, consultation, convenience of purchase, after-sales service, or a strong brand.

In such a model, you have the right to set a higher price because the customer compares more than just the number on the price tag. They assess risks and their time: whether the right product will be recommended, whether there will be return issues, whether the warranty works, and whether problems can be solved quickly. If these things are reliably covered, the customer bargains less and is less likely to look for a cheaper option.

This strategy requires investment in what the customer actually feels: marketing, quality, staff training, service standards, and execution control. Costs still need to be calculated, but the main focus is not on the minimum cost price, but on making sure the customer understands what they are paying for.

3. Focus — this is a strategy where you deliberately work not for the entire market, but for a specific customer group, product category, or clearly defined territory.

You choose a niche and understand it deeply: needs, purchase frequency, income level, and service expectations. Because of this, you can either operate more efficiently in terms of costs within this niche, or better meet its specific needs.

In the first case, you earn through lower costs precisely in this narrow category. In the second — through depth of assortment, expertise, service, and trust. In both cases, the price is formed not for everyone, but for a specific group of customers who understand your specialization and compare you not with the entire market, but with alternatives in your niche.

Avoid the «Stuck in the Middle» trap

Porter considers this one of the key risks for a business: when a company has not chosen a clear path, but tries to appear both cheap and better than everyone else at the same time.

What it looks like in reality: you set low prices for part of the assortment so as not to lose to discounters, and at the same time try to apply a high markup to other items, explaining it by quality and service. The problem is that without strong advantages in both costs and uniqueness, this model almost always produces a weak financial result.

As a result, you lose customers who buy in volume and are sensitive to price because you are still not the cheapest. And you do not get a high margin from those who are ready to pay more for service and quality because they do not see enough difference. Then only one scenario remains: constantly lowering prices to maintain sales and gradually losing profit.

Analyze the five competitive forces when setting a price

Price is formed not only from costs and the desired margin. It is also influenced by the market structure: buyers, substitutes, level of competition, suppliers, and new entrants. If you do not take this into account, even a correctly calculated markup may not work.

Buyers.
If customers buy in large volumes or can easily switch to another seller, they put pressure on price reductions. This is especially noticeable in segments with standard products where the difference between sellers is minimal. In such a situation, it is worth working with segmentation: identifying customer groups for whom not only price matters, but also supply stability, service, speed, or warranty. It is easier to preserve margin with these customers.

Substitute products.
Any alternative way to satisfy the customer’s need limits your price. If the price difference becomes too large, the buyer switches to another product or purchase format. Therefore, raising the price without strengthening quality, service, or additional value is risky. The increase must be justified from the customer’s point of view.

Rivalry among competitors.
When there are many players in the market with a similar offer, there is a temptation to compete by lowering the price. The problem is that systematic price reduction decreases the profitability of all participants. If possible, it is better to differentiate through assortment, service, warranty terms, speed of service, or loyalty programs, rather than only through the number in the price list.

Take the stage of market development into account

Price cannot remain unchanged if the market itself changes. What works at the start of a category may stop working after several years, when there are more players and customers are already well oriented in the offers.

Market formation stage.
When a category is just emerging, there is a lot of uncertainty: customers are not yet used to the product, processes are not yet established, and costs are high. During this period, companies often set a higher price to compensate for investment in launch and development. Another approach is to deliberately set a lower price in order to attract customers faster and gain market share. Both options make sense if they match the overall business strategy.

Mature market.
When the market is saturated, growth rates fall, and buyers easily compare offers, competition moves into the area of price and service. At this point, it is especially dangerous to work with average markups. It is important to review the assortment regularly, remove products with low turnover and weak margin, calculate costs accurately for each item, and form markups based on real numbers rather than habit.

Use price as a signal

A price change is not only a financial decision. It is a message to the market. Competitors, suppliers, and customers perceive a price change as a signal about your intentions and the condition of your business.

If a competitor sharply lowers the price, it is important to understand the reason. It may be an attempt to quickly increase market share. Or it may be a clearance sale of remaining stock, a cash gap, or an exit from the category. The response should depend on the motive, not on the mere fact of the reduction.

A price increase or decrease on your side should also be planned. Informing customers in advance about changing conditions can help maintain trust and avoid a sharp reaction. In some cases, this also makes it possible to assess competitor behavior before the actual price change.

The main rule is not to react automatically. Every price change must match your strategy, not be an emotional response to the actions of others.

Porter’s conclusion is simple: price starts with strategy, not discounts.

Before changing price lists in the accounting system, define what your advantage is built on:

• either you win through lower costs and can keep a lower price without losing profit;

• or you win through value for the customer and have the right to a higher margin because you provide quality, service, reliability, and convenience.

An attempt to combine both approaches without a clear focus usually ends the same way: you have to keep lowering prices, margin falls, and customers still do not see reasons to choose you.