Pricing Strategy Essay Example | Topics and Well Written Essays - 2250 words

Pricing Strategy - Essay Example As economic cycles decline, however, management teams cannot drive volume improvements. Pricing improvements, however, are an important route to increasing profitability. The key to improving profitability through pricing lies in moving from a tactical to a strategic approach to pricing. Pricing strategy involves much more than merely setting price points. In order to achieve profitable pricing, managers must consider both their price structure and their pricing process. Pricing structure is built around target customer segments and culminates in constructing the Product-Service-Price menu. The menu then becomes the basis for constructing and positioning offerings for the customer targets. Pricing processes focus on communicating value delivery to the target customers while minimizing negotiation driven price discounting in the selling process.1 "We begin with the most fundamental of economic constructs, price, because much of the analytic power of economic theory stems from the abstract image of markets that generate prices.On the surface, price adjustment might seem like an odd place to understand a process of social construction. Few economic precepts are more taken for granted than the notion that markets determine prices. Moreover, few economic concepts offer so little social content as price. Neoclassical price theory is a highly stylized theory of market behavior. It presumes that social content is unimportant to market outcomes. It offers no theory of how prices work in a firm; simply a notion that they do work. In neoclassical economic theory, firms readily react to changes in market conditions by adjusting prices. A wide variety of changes may take place: changes in costs, supply, or demand, competitive entry or actions, change in technology, and so on. Firms incorporate those changes and adjust prices upward or downward. Classical economics assumes that because organizations are endowed with this ability to adjust prices, industries, markets and economies can function efficiently. Much of the existing literature in economics takes this ability for granted, assuming this as a kind of innate organizational capability. To a student of organizations, this seems like an unrealistic belief, and indeed, some economists acknowledge this. In economics the literature on the costs of price adjustment argues that price adjustment can be a complex and costly organizational problem. For example, Caplin and Leahy (1991) argue that price adjustment is a "very difficult, costly and time-consuming process," Levy, et al. (1997) suggest that changing prices "is a complex process, requiring dozens of steps and a non-trivial amount of resources," and Ball and Mankiw (1994, p.142) "suspect that the most important costs of price adjustment are the time and attention required of managers to gather the relevant information and to make and implement decisions." According to Blinder, et al. (1998, p. 21) these costs have become "one of the main strands of New Keynesian theorizing." Yet it remains a problem about which, Blinder, et al. (1998: 4) argue, economists know "next to nothing," even though "a small mountain of