What's the right 'Price'?

Pricing - Is it an art or a science? Is there a method to the process?

Product pricing is often misconstrued as a fancy and cosmetic layer in the overall business environment. However, it can be the most powerful lever in enhancing your business bottomline.


According to a recent McKinsey study, a 1% improvement in the realized price can yield upto 10% increase in operating profits!! Compare pricing with some of other typical levers for improving profits, and the numbers speak for themselves*:












If pricing is so powerful and effective then, why is it that most of us don't consider it as the first option for improvement? I believe the answer is two-fold, firstly -

Pricing is not an easy task to perform!!

and a close second -

Lack of appreciation for the power of effective pricing!

Let's start with the second reason - lack of appreciation for pricing. If I have to talk from my personal experience then, the first time that we were selling our CRM solution to a potential client, the pricing aspect took just 10 mins of internal discussion time. The method (if any) was simple, since our market was the SME sector, what would be an ideal number which the customer firms would be comfortable paying? Little bit of deliberation and we settled on a figure....just like that!! It's another story that the deal went through but we never realized what could have been the right price.

Coming back to the first reason - Pricing is not an easy task; because effective pricing can involve number of sciences starting from Economics, Marketing to Psychology.

In layman terms, the contribution of these participant sciences is:

• Economics - Helps in understanding / interpreting the product demand curve. In other words, with a simple plot between the product price vs. the corresponding sell quantity, we can arrive at a fair price estimation for profit maximization. Other considerations can be supply-side economics and other macro-economic parameters along with competition

• Marketing - Primarily two-fold, competition study and guidance in designing promotional activities

• Human Psychology - Very important since this helps in the product perception management.

Another representation for the above discussion for pricing parameters can be:







So, what are some of the typical pricing strategies used in everyday life:

• Cost-based Strategies - Simple pricing strategy where a % of the cost is added to the topof the cost to increase the profit

• Competition-focused Strategies - Strategy that revolves around prices set by the competitors within the industry segment

• Value-based Strategies – Customer Perception of the product / the product manufacturer via use of branding initiatives carries additional value, which gets added to the cost, irrespective of the basic qualities of the actual product

The above strategies can be mixed-n-matched in various permutations and combinations to meet specific requirements.

In practical scenarios, Pricing can become all the more complicated with increasing product lines with variants within each product line, multi-geographic presence and support conditions.

In effect, there is no one-correct answer for pricing. The key to effective pricing is to determine a pricing strategy which works best for the company, identify all the cost components associated with the product since inception to launch and pin down all parameters needed to arrive at an acceptable profit margin

In summary, Pricing is something which, requires extensive study and thorough analysis of the market players & segments, and can really determine the success of companies.

* References: The Price Advantage - Marn, Roegner and Zawada (McKinsey and Co.)