Published online by Cambridge University Press: 05 June 2012
Many businesses focus on driving volume or reducing costs, rather than increasing price, under the mistaken belief that they have greater control over volume and costs than price. Yet, a 1 percent increase in price (holding volume fixed) has a greater impact on operating profit than a 1 percent increase in volume or a 1 percent decrease in cost. By not seizing the initiative on price, businesses abrogate decisions about price to competitors, customers, and the channel. A careful analysis and understanding of those same actors could help them price in a more profitable manner – hence, this book, which is designed to communicate the fundamental principles of pricing.
There is a science to pricing rooted in economic theory. Under a set of assumptions about consumer and market behavior, we can derive prescriptive pricing rules. These rules provide guidelines and help in understanding how prices will and should change when the underlying environment changes. As nothing straight ever came from the crooked timber of humanity, there is also an art to pricing as well. How products and services are positioned and communicated to consumers can affect their price perception. Even objectively identical products are able to command different prices.
The first step in formulating a pricing strategy is to understand the behavior of buyers. We start with the assumption that buyers are rational, suggesting that mad dogs and Englishmen are not the only ones who go out into the noonday sun.