Pricing decisions can be complex and difficult, but they're also some of the most important marketing decision variables a manager faces. Companies that make profitable pricing decisions take what may be called a proactive pricing approach. By considering how pricing decisions affect the way buyers perceive prices and develop perceptions of value, these companies manage to leave less money on the table and successfully raise or reduce prices.
Eight Pricing Fallacies
Many companies continue to develop their pricing strategies and tactics naively and, consequently, don't get the results they expect. Tradition-bound solutions and outdated practices have helped perpetuate a number of pricing misconceptions that can cause problems for companies. We outline eight of the most common ones here.
1. Most companies have a serious pricing strategy based on serious pricing research. On the contrary. A recent study found that only about 8% of the companies surveyed could be classified as conducting serious pricing research to support developing an effective pricing strategy. In fact, 88% of them did little or no serious pricing research. McKinsey & Company's Pricing Benchmark Survey estimated that only about 15% of companies do serious pricing research. A 1997 Coopers & Lybrand study found that, in the previous year, 87% of the surveyed companies had changed prices. However, only 13% of the price changes came after a scheduled review of pricing strategy.
These numbers indicate that strategic pricing decisions tend to be made without an understanding of the likely buyer or competitive response. Further, it shows that managers often make tactical pricing decisions without reviewing how the...
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... or service is its price. Finally, understand that tactical pricing decisions concern the day-to-day management of the pricing process and must be made within the firm's overall pricing strategy. By mastering these three principles, management can leave behind reactive or stagnant pricing practices and fully embrace a new era of proactive pricing.
Some companies are starting to embrace a proactive pricing strategy, but many still cling to old misconceptions about markets and the entire pricing process. Understanding and overcoming the pricing fallacies that continually plague managers, the pricing process, and price perceptions among buyers requires a truly proactive pricing approach. Once managers understand these problems, they can better develop and implement a product and market strategy for the current economic and competitive environment.
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