Pricing Process

Capsule: The process of setting the price considers the amount of change in product availability compared to customer demand, the amount by which price should change, the potential for cost savings to the Company and the trade-offs between administrative cost and revenue maximization.

For helpful context on this step:



Symptoms and Implications:

In diagnosing the pricing in the industry, the Company would also consider the organizational process it uses to reach its price. The Company's pricing process has dual objectives: to achieve an optimal return on sales and to administer the pricing process efficiently. The emphasis the Company might place on each of these objectives changes according to the pricing guidelines the Company is following. In a market where the Company is using defensive tactics, the Company's concern is to reduce price leakage, which occurs when the price declines further or faster than is absolutely necessary. It is willing to sacrifice somewhat higher administrative costs for pricing margin. In a market where the Company is using more offensive pricing tactics, the Company is concerned about reducing the administrative cost of the pricing process.

The organizational process the Company uses to reach its price asks four questions:

  • First, with what frequency will the Company attempt to change prices? Frequency increases as available capacity changes rapidly.

  • Second, by what amounts will the price move? Some industries move in "traditional" amounts. These traditions are likely to break down as markets become more Hostile.

  • Third, are there opportunities to improve the Company's cost of servicing the customer at no cost to the customer? These are non-price benefits that increase the Company's profitability on the customer relationship. They are like "hidden" price increases.

  • Fourth, at what level will the Company seek to establish its price? By "level", we mean the combination of specific product, customer and transaction that is the subject of the price. The price level falls in declining price environments and rises as prices climb again.

We address these questions in the following sections:

Frequency of Price Changes

Capsule: The industry changes prices more frequently as the industry's product availability changes rapidly relative to changes in customer demand.

Amount of Movement

Capsule: No traditional movement in price is sacrosanct. Price should move in the increment that suits the Company's objectives.

Non-Price Benefits to the Company

Capsule: While the Company may not be able to command a price premium, there are two major types of non-price benefits that customers may grant to improve the Company's profits.

Level of Application

Capsule: Apply the price at a low level in a falling price market and at a high level when prices rise.

This section of the development of pricing tactics begins with an evaluation of the frequency with which the Company plans to make price changes.

Basic Strategy Guide Users Return To: Step 22

Summary Points Next: Frequency of Price Changes