Pricing and Profitability Management: A Practical Guide for Business Leaders

Chapter 3

Developing an Effective Pricing Strategy

What is a cynic? A man who knows the price of everything and the value of nothing.

—Oscar Wilde

Many organizations run into trouble when they try to develop a pricing strategy. An effective strategy should, of course, project the fair value of a company's products or services. However, it should also serve, among other functions, as a competitive signaling mechanism, a tool for managing capacity, an indicator of quality, and a means to drive customer behavior.

Unfortunately, many organizations fail to understand the importance and utility of a comprehensive, well-designed strategy. Instead, they allow pricing to proceed as a series of decisions, some reactionary (such as matching existing competitors' prices) and some overly simplistic (such as adding a margin to the variable cost of production). These tactical rather than strategic actions rarely extract the true market value of a product or service. In following this approach, companies unnecessarily limit their profit potential.

A consumer durable goods manufacturer had grown significantly over the years, largely through acquisitions. Though it had absorbed different businesses, it had never developed a unified pricing strategy or a centralized pricing organization. Now, however, the company found itself facing fierce competition and considerable external pricing pressures (e.g., declines in the housing market and volatile oil costs). The sales force did not trust the outdated ...