Pricing a product is one of the most complex issues that marketing managers may confront nowadays. The problem is that many still believe it is market forces that decide what the price should be and thus, there is no way companies can get control over it. Furthermore, pricing is an area where effective metrics had hardly matured: if sales are growing, how to assess that the price is optimal - not too low and profit is maximized? According to estimates by Michael Marn and Robert Rosiello of McKinsey (HBR, 1992) a 1% improvement in price, holding volume constant, boosts operating profit by 11,1%. In other words, even a slight price increase may have a tremendous impact on profitability and thus pricing policy and its potential to impact returns should receive more attention from decision-makers. Apparently, question is not whether an organization should approach pricing with more enthusiasm but which strategies and tactics it should use to get the price right and maximize shareholder value.
Profeesor R. Dolan (HBR, 1995) argues that there are two requirements for successful implementation of pricing policy: it should be consisted with company’s marketing strategy and properly coordinated among stakeholders. The first requirement is an indication that pricing often reflects philosophy and core values of an organization. An example of Saturn – automobile manufacturer – validates this argument: it is engaging with customers in friendly manner by bringing them to a factory where cars are built, sponsoring dealership social events etc giving thus no intention to fleece him. By establishing one price – no negotiations policy Saturn remains consistent with its marketing strategy and values. The second requirement – coordination – emphasizes the necessity to align actions of marketing, finance, legal and manufacturing departments with company’s price policy. In case of one truck manufacturer, list prices were set by marketing department; later, sales department adjusted it to take advantage of discounts that would result in higher volume, whereas finance and accounting were mainly concerned with covering variable costs. As a result, prices initially set by marketing department were meaningless. The thing is that even if each department acts in its own best interests the contradictions will inevitably arise. Sales departments are motivated to drive volume and thus will heavily rely on discounts, but both do not pay attention to supply boundaries set by manufacturing department. Without considering constraints, objectives and motivations of all parties, the whole process may not lead to the desired result.
Strategies and tactics
Price customization. In contrast to single price policy that Saturn resorts to, some products are often sold at different prices across sale points – a strategy used by many firms to maximize profits. It is possible because product value for an ideal customer will be much higher than for an average one. But how companies are able to target those high value customers and not lose regular ones? One way is to charge higher initial price during product introduction phase because product fans will most likely be willing to pay a premium. …