Our understanding of pricing has come a long way since 1890 when Alfred Marshall published his treatise on the economic scissors of supply and demand. Pricing is no longer a purely economic challenge to be addressed through studies of market elasticity. It can’t be solved by lowering prices until customers’ purchases improve factory utilization rates. And, it can’t be solved by allocating costs and adding markups. Rather, pricing today must be focused on value exchange.
While experts and executives agree that price should reflect value, the pricing to value mantra fails to clarify the decisions executives must make. That is, what is the value that price should reflect? Whose perception of value should determine price? And, how can value be modeled and quantified? In other words, pricing decisions today requires actionable insights.
These insights must derive from a marketing orientation of the firm with a clear economic understanding of value exchange. The marketing orientation focuses the purpose of the firm towards serving customer needs profitably – an orientation supported by the late greats Peter Drucker and Theodore Levitt. The economic understanding of value exchange reminds us that customers will purchase when the product delivers value in excess of its price after adjusting for alternatives, and the firm must deliver products at a price in excess of their cost. These are two very simple concepts.
Combined, the marketing orientation of the firm, and the economic understanding of value exchange, provides the foundation for developing insights required for executive decision making in pricing strategy.
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About the Author
Tim J. Smith is the founder and Managing Principal of Wiglaf Pricing and an Adjunct Professor of marketing and economics at DePaul University. Well-known in the industry as a thought leader in pricing, Dr. Smith has presented seminars on pricing to professional audiences around the globe. With hard-hitting, focused messages for executives, Tim encourages actions that lead to dynamic results. To read Tim’s complete biography, click here.