The Science or Art of Price Setting
April 28th, 2007 by 
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Setting prices have always been a breeze for us ever sinc we started the business. I never could recall us working on executive committee meetings and discussing how we set prices. For most items, we had a standard cost plus some markup which was set by people not even in the managerial level. Most of the time, if mention were made on prices, it was generally on feedback that either some models were hitting end of life ( new models coming out) or our competitors were aggressively pricing certain products, and in response we would approve some markdowns.
However, as we expanded the business especially unto retail, we have started to understand more about pricing as a competitive strategy, and I found myself recounting a favorite comics strip I saw about 25 years ago during my high school day which I believe highlighted much of what price setting is all about.
The main character in the strip had just procured a lot of great artwork for $25, and he proceeded to display his wares at the marketplace and selling it for $35 apiece. After a few days he was hardly moving the merchandise, and in desperation, he decided to try a different tack. He put the price up to $80, and then scratch it out, and marked it down to $55. After doing so, the artwork started selling briskly. He not only increased his profit per piece, but he was able to sell them much faster!
Here is another piece which talks about how to set prices using a new breed of price optimization software, but generally, I would like to recount also their example on price setting.
The store was selling three different power drills: an entry level one for $90, a mid range one for $120, and a top tier one at $130. The price conscious people went a lot for the $90 model, while the customers who wanted the best got the $130 one. The $120 one was hardly moving.
After much debate, they decided that the middle drill be sliced down to $110.
By pricing the mid range at $110, they were concerned that it made the top drill seem more expensive, but it was not affected. The drill aficionados were fine shelling out $130 and continued to get the top model. However, by pric ing down the mid range, it did made the entry level drill seemed less of a bargain, and more and more people were fine putting out an extra $20 for the slightly better model. As a result, the store purportedly sold 4 percent fewer entry level drills, but 11 percent more of the mid-range, and thus profits overall rose.
Is price setting an art or a science? The article recommended buying price optimization software to maximize that. Of course, we all know that when you buy airline tickets and/or hotel nights, you are endlessly bombarded and seduced by variable pricing optimization software that seemingly crank out bargains and changes every minute. But maybe we always thought it did not apply to our business, but maybe it does. In almost all industries, effective pricing strategies is certainly turning out to be one of the most important competitive weapons a business should wield! Maybe if you have not, high level meetings should more frequently discuss and review with how you price your products and services.
Related Posts:
- Profits Straight to the Bottom Line
- Necessity never Made a Good Bargain
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Posted in FrontPage, on Business | 
April 30th, 2007 at 10:40 am
As it is always said- the customer is the king.
Like quality, it is the customer who make decision on issue like price. There’s no hard science to this. What business need is to listen to the customer, know what they want, make a connection and make things happened.
It’s easier said than done because many still believe that customers are dumb and do not know anything about the product or services. That’s why they’re still in search of the holy grail of a successful business.
I always enjoy reading your blog. Keep writing!
May 4th, 2007 at 9:16 pm
Just in case you don’t know yet, pricing has been one of the major topics covered by the Marketing discipline for over five decades now. You might recall the four tools of marketing: product, place, price, and promotion (aka 4Ps). There have been a plethora of findings about pricing. Kotler’s books provide a good introduction to it. Or if you want a quick (albeit very academic) rundown of all the theories developed for pricing, there’s “Handbook of Marketing” by Weitz and Wensley.
May 5th, 2007 at 10:21 am
Hi mark,
Yes, there are many books covering the topic. However, after being in business in a while, it does seem like price setting is hardly a science, and still can be considered an art.
At the end, it is about understanding the perceived and actual value the product brings to the customer that is important.
May 5th, 2007 at 10:40 am
I’d agree with you that the majority of pricing is still an art. But then again, I’m not a marketing guy so I can’t be sure. For all I know, the best marketers out there might have turned pricing into a science. This is just my speculation, of course.
I also agree that, at the end of the day, what businessmen really need is to know the value that a customer places on a product. Knowing that gives them enough information to play with a product’s price. Now, we can probably do that through trial and error. But I would prefer to re-visit established pricing theories so as to reduce the trials and errors that I have to make. But hey, that’s just my preference, of course. It may or may not work for everyone.