Businesses have undergone tremendous change due to information revolution. Pricing, which was in the hands of producers has shifted into the hands of customers. Today, marking up profit by simply jacking up prices is no longer possible. Transparency, customer awareness and easy modes to compare have changed the whole mechanism of pricing. In older days, margins were decided whimsically by different decision makers leading to various pricing techniques.
I feel that pricing techniques were all depended upon who were deciding them. Cost-Plus Pricing was a long-time favorite to Finance Managers. Likewise, Customer – Driven technique was a favorite of Sales Professionals and Market-Share Pricing Technique was liked by Marketing Managers.
Let’s look at, Cost Plus Pricing Technique. It was decided keeping in view primarily Unit Cost. The notion was that if ‘fixed’ cost is allocated to each unit and a margin is added to it that will give a price for a product; without realizing the fact fixed cost allocations depend on volume and volume changes with the change in price, thereby making it apparent that unit cost is a moving target. It means prices were decided as if they won’t affect volume and vice versa. Here, is the catch - any price increase to cover-up fixed costs can reduce sales and can raise average unit costs further, leading to further price escalation, resulting into a spiral effect of increase in price, decrease in volume; eventually lowering profitability. Inherently, it was a faulty presumption based pricing methodology adopted my finance managers wherein overpricing was done in weak markets and under-pricing in strong markets. The premise that sales volume can be determined well in advance and thereupon unit costs and profits. It has been well accepted thumb rule that if the change in revenue minus the change in variable costs is positive, company will earn more revenue to cover it fixed costs.
Sales Mangers on the other hand preferred Customer Driven Pricing Technique. Prices were determined to achieve short term sales objectives. It was more like sell the product at whatever price to close the deal without giving importance to the fact, the organisation is into a business to make profit and that too more & more, as some CEOs says. If we reflect back here, sales people job is to raise customers’ willingness-to-pay according to the true value of the product and not otherwise. As rightly being said “low pricing is never a substitute for an adequate marketing & sales effort”.
Coming to the third one, the Market-Share pricing technique as preferred by the Marketing Managers who always prefer to increase market share without realizing the fact market share may not make a company profitable. Constructively, prices have no linkage to market share but to value as being offered to customers who can willingly pay right price for a product.
It means a different Pricing Technique need to be developed wherein all stakeholders are involved in evolving a Strategic Pricing Technique that help in achieving profitability. I say that a CEO should be instrumental in bringing in a conceptual backing to pricing in a company.