Pricing for profit.

• Author: Mohammed, Rafi
• Position: ECONOMIC OBSERVER

VIRTUALLY EVERY COMPANY in the world is facing the same pricing challenge: a gingerly recovering economy and consumers who have money to spend, but are being prudent in their purchase decisions. A key concern that is keeping managers up at night is how should prices be set to thrive in this environment, yet be well-positioned to profit in the impending recovery?

Pricing is one of the most powerful--yet underutilized--strategies available to businesses. A McKinsey & Company study of the Global 1200 found that, if companies increased prices by just one percent, and demand remained constant, operating profits, on average, would increase by 11%. Using a one percent increase in price, some companies would see even more growth in percentage of profit--for instance, Sears (155%), McKesson (100%), Tyson (81%), Land O'Lakes (58%), and Whirlpool (35%). Just as important, price is a key attribute that consumers consider before making a purchase.

Most managers are not comfortable setting prices. With few pricing "golden rules" and little practical guidance for improvement, it is understandable why times have continued with the status quo. How are companies setting prices today? Most react. Instead of a driver of new profits, prices are a mix of marking-up costs, maintaining margins, fly-by-the-seat analyses, and matching competitors. Most companies view pricing as a two-trick strategy: raise or lower. This limited view restricts the opportunities to capitalize on the value that consumers place on products and services. The key to setting prices successfully in every economic environment is to offer choices to consumers.

In virtually every facet of business (product development, marketing, distribution), companies develop strategies based on the truism that customers differ from each other. However, when it comes to pricing, many companies behave as though their customers are identical by setting just one price for each product. Developing a comprehensive pricing strategy involves embracing (and profiting from) the simple fact that customers' pricing needs differ. One of the biggest differences among customers is the price that they are willing to pay for a product or service: some will pay more than others.

In our current turbulent economy, some customers are more cautious than others in their spending. Many companies are offering drastic discounts to gain the attention of these price-conscious customers. Sure, this results in purchases, but at what...