Price setting and price getting require discipline — not luck. Almost any business can improve its pricing performance, provided it approaches pricing in a structured way.
In many companies, pricing receives surprisingly little attention. Following work that included a study of pricing at 15 small and medium-sized companies, the authors conclude that most companies can improve their pricing capabilities – and thus their profitability – over time by taking a disciplined approach.
The authors identify two key elements of pricing – price orientation and price getting – and five levels of pricing capabilities. They observe that the companies they studied that achieved better pricing had top managers who championed the development of pricing skills. While competition, costs and price sensitivity within a market affect the parameters within which companies set prices, superior pricing is almost always based on skill, the authors maintain.
Companies differ substantially in their approach to price setting, but most fall into one of three buckets: cost-based pricing, competition-based pricing or customer value-based pricing. Customer value-based pricing uses data on the perceived customer value of the product as the main factor for determining the final selling price, and many scholars consider customer value-based pricing often to be a preferable approach to price setting for existing products. The authors argue that according to their research many companies can improve their pricing capabilities by cultivating their understanding of the value they bring their customers.
But implementing customer value-based pricing is not easy, the authors caution. They find that developing and implementing a sophisticated, customer value-based pricing program is a multiyear project that demands a high degree of executive attention and requires substantial changes in processes and thinking within the company.