computer generations
How Do You Know When the Price Is Right?
Robert J. Dolan, HBR
Pricing 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.
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 process. Not every point will apply to every business, and some managers will need to supplement the checklist with other actions that pertain to their specific situation.
But in general, by using these criteria as a guide, managers will begin to set prices that earn the company measurably greater returns, and they will gain control over the pricing function.
Strategy and Coordination
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
Robert J. Dolan, HBR
Pricing 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.
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 process. Not every point will apply to every business, and some managers will need to supplement the checklist with other actions that pertain to their specific situation.
But in general, by using these criteria as a guide, managers will begin to set prices that earn the company measurably greater returns, and they will gain control over the pricing function.
Strategy and Coordination
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