Plan for Profitable Pricing
If you've ever burned yourself by taking a "cost-plus" approach to pricing, here's your salve. In The Strategy and Tactics of Pricing (Prentice Hall, 1995, $42), Thomas Nagle and Reed Holden call cost-driven pricing a "delusion," saying it's antiquated to believe that costs and desired profit should determine prices.
What are the alternatives? Many companies allow competitors and customers to dictate prices. That's shortsighted, say Nagle and Holden. They argue for a "value-based" approach that starts by asking how a satisfied customer values new products. Value-based pricing dispenses with the archaic question, What prices do we need to cover our costs and earn a profit? The correct question, they maintain, should be, What costs can we afford to incur -- given the prices achievable in the market -- to earn a profit? To answer that, CEOs must understand, among other things, how unit costs change with volume.
Your homework assignment: read and discuss the book with your managers.