MIT Sloan Management Review

Corporate Strategy, Marketing

 

Pricing as a Strategic Capability

By Shantanu Dutta, Mark Bergen, Daniel Levy, Mark Ritson and Mark Zbaracki

April 15, 2002

Companies that know how to set the right prices for their products and services understand that pricing isn’t simply a matter of good tactics. By investing in specific areas of organizational capital, they’ve made it a strategic weapon that competitors can only envy.

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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... To read the complete article, login or sign-up using the form below.

 
 

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