How Do You Know When the Price is Right?

Dolan, Robert J.Harvard Business Review, September‐October 1995

Dolan suggests that the first question in pricing should be: “Have we addressed all the considerations that willdetermine the correct price?” Too often, managers focus on determining price in the absence of factors thateither directly or indirectly influence price, price sensitivity, and consumer perceptions.

Two Attributes of Successful Pricing EffortsPricing successfully complements marketing efforts and is coordinated. Pricing should flow “directly from the overall marketing strategy” and be synergistic.Coordination in pricing includes accounting (cost estimates), marketing (communication of the pricing strategy), sales (customer input), production (sets supply), and finance (sets company’s monetary policy). The key to coordination is to make sure that the pricing objectives are set and known by all participants that affect or influence the product/service price. Setting incentives so that the pricing objective is met, is also critical.

Dolan’s Eight Steps to Better Pricing1. Assess value that customers place on product/service. The cost plus margin mentality to pricing products and services generally leaves money on the table that could have been achieved with a higher price.

2. Look for variation in how customers value the product/service. This is the essence of price segmenting a market. The idea is to see how various segments of the market value a product or service, and then market to those segments to extract the greatest price paid.

3. Assess customers’ price sensitivity. Dolan recommends first analyzing customer economics. Dolan then recommends analyzing how consumers search and use the product or service.

4. Identify optimal pricing structure. Identifying structure means determining the quantity discount framework, whether or not to bundle products/services together, and the configuration of the product with regard to what’s offered and what is not.

5. Assess competitors’ reactions. Pricing actions nearly always elicit a response from competitors. The key to assessing competitors’ reactions is to systematically assess each of your major competitors and determine their

action based on their known methods of conducting business and responding to past price issues.6. Monitor prices realized at the transaction level. Monitoring prices requires that you know how the final priced is realized. What discounts are being offered? Are there rebates? How do returns and claims affect the transaction price?

7. Assess emotional response of customers. Realize that price changes have short‐term economic effects with long‐term consumer behavior consequences.

8. Are returns worth the cost to serve market(s). This step, or the eight, is very contextual. A strategic account that can make‐or‐break a company may be important if the price the account is willing to pay for products and services justifying serving the account. In some cases, high cost‐to‐serve market can be profitable since there are no alternative markets for consumers.