icing is managers’ biggest marketing headache. It’s where they feel the most pressure to perform and the least certain that they are doing a good job. The pressure is intensified because, for the most part, managers believe that they don’t have control over price: It is dictated by the market. Moreover, pricing is often seen as a difficult area in which to set objectives and measure results. Ask managers to define the objective for the company’s manufacturing function, and they will cite a concrete goal, such as output and cost. Ask for a measure of productivity, and they will refer to cycle times. But pricing is difficult to pin down. High unit sales and increased market share sound promising but they may in fact mean that a price is too low. And forgone profits do not appear on anyone’s scorecard. Indeed, judging pricing quality from outcomes reported on financial statements is perilous business.
Yet getting closer to the “right” price can have a tremendous impact. Even slight improvements can yield significant results. For example, for a company with 8%profit margins, a 1% improvement in price realization—assuming a steady unit sales volume—would boost the company’s margin dollars by 12.5%.1 For that reason, even one step toward better pricing can be worth a lot.
To improve a company’s pricing capability, managers should begin by focusing on the process, not on the outcome. The first question to ask is not, What should the price be? but rather, Have we addressed all the considerations that will determine the correct price? Pricing is not simply a matter of getting one key thing right. Proper pricing comes from carefully and consistently managing a myriad of issues.
Based on observation and participation in setting prices in a wide variety of situations, I have identified two broad qualities of any effective pricing process and a “to do” list for improving that