To price effectively, one must account for the specifics of the industry, such as regulation and supply and demand; specific aspects of the product market, such as competition, customer value, costs and channel issues; and, finally transaction-specific elements, such as discounts, allowances, payment terms, rebates, and the like. In other words, one needs sound industry knowledge, sound product market knowledge, and sound transaction specific knowledge to price effectively. As Sherlock Holmes notes: “Data, data, data. I cannot make bricks without clay.”
Each chapter in this book provides key information that helps in pricing effectively. Two important principles underlie effective pricing. First, one must have some knowledge of price response or the demand curve for the product (or service). From the demand curve, one can obtain an estimate of price elasticity. Chapter 3 discusses several ways of getting at price response, ranging from managerial judgment to use of analogous products, benchmarking, focus groups, surveys, experimentation, using regression analysis on historical data, and EVC to conjoint analysis. The bottom line is that you cannot price with confidence if you do not know how your customers will respond to price.
The second important principle is to understand the value that customers place on your product. Value is connected implicitly to price elasticity because the demand curve is a representation of customer willingness to pay. However, you should be trying to influence customer valuation and, thus, customer response to price.