Pricing: Introduction

In grade school history class, most of us heard the story that native Americans sold the Isle of Manhattan to the European settlers for $24 worth of trinkets. The natives surely thought they got a good deal because their view of the world said you couldn't own anything anyway. They might have changed their worldview and their price had they foreseen the run up in New York real estate values on that now-crowded little island.

You do not face such a momentous decision. You must deal in a much more mundane world of day-to-day pricing decisions. These decisions demand that you examine your industry, your corner of the industry and your approaches to pricing in some detail.

You start by developing an outlook for the industry's prices and margins in the next few years. This outlook is the result of your assessments of likely changes in product capacity and customer demand and their respective impacts on the market price. This assessment produces a forecast for the direction of prices and margins for the next three to five years.

You follow this set of analyses by examining the Company's price environment. The particular focus here is on the next twelve to eighteen months. You set specific pricing objectives and guidelines after considering price sensitivity among customers and competitor motivations in pricing.

With these guidelines in hand, you begin to look for opportunities to change the Company's prices in order to improve the Company's market share and profits. The market may offer both price discount and price increase opportunities. These tend to follow patterns which, when understood, help the Company reap more profit from its competitive position.

Having surveyed the opportunities the market might offer the Company, you develop a pricing process to take advantage of those opportunities. This pricing process examines the frequency and amount of price changes that the Company might make. It looks for non-price benefits the Company might request of its important customers in order to improve its profitability. It then determines the level at which the Company should price in order to take the most advantage of its pricing opportunities.

The Company implements its pricing process, especially the level at which it plans to price, by employing one or several of the major components that might make up the price. Each of these components change the effective cash payment the customer makes to the Company for its products and services.

Is the market likely to get tougher for us? We begin the diagnostic of pricing by developing a good view of the future for the industry's margins.

Summary Points Next: Part 1: Industry Price Outlook