The Nature of the Pricing Process

Abstract

Of all the decisions made by management, pricing is undoubtedly the most visible because of its direct impact on a firm’s performance in the marketplace and overall level of profitablity. Whatever the nature of the business, success is measured by the extent revenues from sales exceed the costs of committed resources. Ideally, the price or prices set for a product or service will ensure the highest margin consistent with volume considerations, recognize customer evaluations of products/services, be responsive to competitive threats, and forestall competitive inroads.

The fastest and most effective way for a company to realize its maximum profit is to get its pricing right. The right price can boost profit faster than increasing volume will; the wrong price can shrink it just as quickly. Without realizing it, however, many managers are leaving significant amounts of money — potential profit — on the table at the transaction level, the point where the product meets the consumer.

(Michael V. Marn and Robert L. Rosiello, ‘Managing Price, Gaining Profit’, The McKinsey Quarterly, 1992, pp. 18–37)