While pricing a product or service may seem to be a simple process, it is not. As an illustration of the typical pricing process, consider the following quote: "Pricing is guesswork. It is usually assumed that marketers use scientific methods to determine the price of their products. Nothing could be further from the truth. In almost every case, the process of decision is one of guesswork."2
Good pricing strategy is usually based on sound assumptions made by marketers. It is also based on an understanding of two other perspectives discussed earlier. Clearly, sale pricing may prove unsuccessful unless the marketer adopts the consumer's perspective toward price. Similarly, a company should not charge high prices if it hurts society's health. Hertz illustrates how this can be done in the "Integrated marketing" below.
How to select the best price
The Hertz Corporation knows when its rental cars will be gone and it knows when the lots will be full. How? By tracking demand throughout past six years. "We know, based on past performance and seasonal changes, what times of year there is a weak demand, and when there is too much demand for our supply of cars," says Wayne Meserue, director of pricing and yield management at Hertz. To help strike a balance, the company uses a pricing strategy called "yield management" that keeps supply and demand in check. The strategy looks at two aspects of Hertz's pricing: the rate that is charged and the length of the rental.
"Price is a legitimate rationing device,"says Meserue. "What we're really talking about is efficient distribution, pricing, and response in the marketplace." For example, there are times when cars are in great demand. "It's always a gamble, but it's definitely a calculated gamble. With yield management, we monitor demand day by day, and adjust (prices as necessary)," Meserue says.
Hertz also uses length of rental as a yield management device. For instance, in the US they established a three-night minimum for car rentals during President's Day weekend in February. "We didn't want to be turning away business for someone who wanted the car for five nights just because we had given our cars to people who came in first for one night," says Meserue, who adds that it is often better for Hertz to mandate a minimum number of days for a rental, because it ensures that cars will be rented for more days.
A smart pricing strategy is essential for increasing profit margins and reducing supply. Yet at last count, only 15 per cent of large corporations were conducting any sort of pricing research, reports Robert Dolan, professor at Harvard Business School. "People don't realize that if you can raise your prices by just 1 percent, that's a big increase in your profit margin," he says. For example, if a supermarket is operating with a 2 per cent net margin, raising the prices by 1 per cent will increase profitability by 33 per cent. "The key is not taking one percent across the board, but raising it 10 per cent for 10 per cent of your customers," says Dolan, "Find those segments of the market that are willing to take the increase." That doesn't mean that companies can automatically pass their cost increases on the customer, notes Dolan. If the costs are affecting an entire industry, then those costs can be passed through easily to the consumer, because competitors will likely follow the lead.
A fundamental point in smart pricing, according to Dolan: base prices on the value to the customer. As much as people talk about customer focus, they often price according to their own costs. Companies can profit from customizing prices to different customers. The value of a product can vary widely depending on factors such as age and location. 1
A pricing decision that must be made by all organizations concerns their competitive position within their industry. This concern manifests itself in either a competitive pricing strategy or a nonprice competitive strategy. Let us look at the latter first.