For too long, most people who run companies have made a variety of unwarranted but detrimental assumptions about pricing. Changing prices, for example, has been looked upon as an easy, quick and reversible process, and new technologies have only reinforced this way of thinking. Similarly, extracting value from a product by pricing it correctly has been seen as relatively uncomplicated; the hard part is creating the valuable product in the first place. But these dismissive attitudes toward pricing miss the mark. As any executive of a company with thousands of products and hundreds of customers will tell you, price changes are not easy: Start tinkering in an ad hoc way and you end up with irrational prices and angry customers. And as any manager of an innovative organization will explain, it’s awfully difficult to set a price for a radically new product in an untested market. Set the wrong price in that case and you squander an opportunity that a competitor is sure to seize.
The problem with typical assumptions is that they reduce pricing decisions to mere tactics, and tactics aren’t enough. If pricing isn’t a strategic capability — a contributor to a company’s ability to devise and implement its strategy — it’s probably a strategic liability. Pricing is complex, and it’s only growing more so as new tools and techniques become available. In order to be able to set the right price at the right time, any time, companies need to invest in resources, infrastructure and processes. These investments allow a company to create a pricing strategy by building the capabilities it needs to routinely set prices for all its goods and services that fit with its positioning, with its customers, with its suppliers and with evolving market conditions.
For many companies, pricing capabilities are increasingly critical to their ability to implement their strategies. We interviewed one CEO in the computer business, in fact, who called pricing the essential capability for survival in that industry and has made investments in his organization that show that his comment isn’t just an idle remark.
In the course of working with dozens of companies in the past couple of years, we have spoken with several other executives who have a similar outlook.1 Their focus is on developing organization-wide capabilities by investing in three areas: human capital, systems capital and social capital.