The neglected art of strategic pricing: too often, senior executives don't view pricing as a key responsibility. That leaves the decisions to lower-ranking managers who don't see the bigger picture, with the result that pricing loses potential effectiveness.

• Author: Richards, J.D.
• Position: Strategy

Every executive knows that price plays an essential role in determining the economics of a business. Yet many do not see pricing as a key responsibility of senior management. Viewing prices as largely beyond their control, they leave pricing decisions to mid-level technicians who make critical judgments without understanding the bigger picture. As a result, pricing, which should be a sculptor's chisel, more often resembles a workman's hammer.

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When you have multiple products across multiple segments and geographies, the question of what to charge different types of customers is never easy. Typically, senior managers respond to complex pricing challenges in one of three ways: They over-delegate decisions to individuals much lower in the organization; they under-analyze the situation by relying on simple default pricing models; or they employ technology as a "silver bullet" solution, supplanting executive judgment. All three responses can lead to misinformed decisions and, consequently, missed opportunities for sales and profit growth.

There is, however, an approach to building a strategic pricing capability that is grounded in collecting and integrating the right customer, competitor and cost information. This approach has yielded dramatic performance improvements at a number of global companies.

The Over-delegation Problem

Price is the variable that divides the value of a company's products and services between customers and shareholders. Nevertheless, most pricing decisions are made without reference to the company's broad strategic choices--whom to target, with what offer, through which channel, based on what competitive position. One reason for this is that pricing issues rarely make it onto executive committee agendas--rather, they are made three or four levels below a division or business unit leader by a data-crunching technician.

While executives spend a great deal of time discussing the design of products, services or product/service bundles, they do not see price as integral; it's decided later, by less senior people who at best may be given very general direction on the level at which prices should be set; "at a slight premium," for example.

Left with little guidance, the technicians' research often focuses on the appeal of different product attributes rather than on optimizing the trade-off between price and volume. Attributes do drive volume, but how and why are directly related to the product's price. Because everyone recognizes the trade-off is difficult to measure beforehand, most people either dispense with research or use simplistic approaches.

The Under-analysis Problem

Although a lot of analysis relatively low down in organizations precedes pricing decisions, the results are usually based on one of four simple default pricing models:

* competitors' pricing (usually the main factor);

* status quo, plus or minus a little nudge here or there;

* short-term earnings target ("What will it take to hit our numbers?"); and

* cost plus a premium.

There are two serious weaknesses in all of these models: First, the pricing decisions reached can fail to...