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How Do You Know When the Price Is Right?
Robert J. Dolan, HBR


Pricing is managers’ biggest marketing headache.
It’s where they feel the most pressure to perform
and the least certain that they are doing a good
job.
The pressure is intensified because, for the most
part, managers believe that they don’t have control
over price: It is dictated by the market.
Moreover, pricing is often seen as a difficult area in
which to set objectives and measure results.
Ask managers to define the objective for the
company’s manufacturing function, and they will
cite a concrete goal, such as output and cost.
Ask for a measure of productivity, and they will
refer to cycle times.

Proper pricing comes from carefully and
consistently managing a myriad of issues.
Based on observation and participation in setting
prices in a wide variety of situations, I have
identified two broad qualities of any effective
pricing process and a “to do” list for improving that
process.
Not every point will apply to every business, and
some managers will need to supplement the
checklist with other actions that pertain to their
specific situation.
But in general, by using these criteria as a guide,
managers will begin to set prices that earn the
company measurably greater returns, and they will
gain control over the pricing function.
Strategy and Coordination

But pricing is difficult to pin down. High unit sales
and increased market share sound promising but
they may in fact mean that a price is too low.
And forgone profits do not appear on anyone’s
scorecard. Indeed, judging pricing quality from
outcomes reported on financial statements is
perilous business.
Yet getting closer to the “right” price can have a
tremendous impact.
Even slight improvements can yield significant
results.
For example, for a company with 8% profit
margins, a 1% improvement in price realization –
assuming a steady unit sales volume – would
boost the company’s margin dollars by 12.5%.
For that reason, even one step toward better
pricing can be worth a lot.
To improve a company’s pricing capability,
managers should begin by focusing on the
process, not on the outcome.
Pricing is not simply a matter of getting one key
thing right.

All successful pricing efforts share two qualities:
The policy complements the company’s overall
marketing strategy, and the process is coordinated
and holistic.
Marketing Strategy.
A company’s pricing policy sends a message to the
market – it gives customers an important sense of
a company’s philosophy.
Consider Swatch watches.
The company’s overall message is that a watch
can be more than just functional; it can be fun as
well – so much fun, in fact, that a customer ought
to own several.
The company’s price, $40 for a basic model, has
not changed in ten years.
As Franco Bosisio, the head of the Swatch design
lab, noted “Price has become a mirror for the other
attributes we try to communicate.… A Swatch is
not just affordable, it’s approachable.
Buying a Swatch is an easy decision to make, an
easy decision to live with. It’s provocative, but it
doesn’t make you think too much.”
For Swatch, the pricing policy flows directly from
the over- all marketing strategy.



This is an abridged and updated version of the original HBS
article. It is intended for personal use as an accompanying
study guide to the original.

This consistency, or even synergy, of price and the
rest of the marketing mix is a critical requirement
for success.

How Do You Know When the Price Is Right?

Coordination.
There are typically many participants in the pricing
process:
Accounting provides cost estimates; marketing
communicates the pricing strategy; sales provides
specific customer input; production sets supply
boundaries; and finance establishes the
requirements for the entire company’s monetary
health.
Input from diverse sources is necessary. However,
problems arise when the...
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