344 The Marketing Book
reactions, and calculations of marginal costs
(to name but a few) before prices are set. It is
quite another thing to actually do this effect-
ively if you do not have access to the relevant
information and/or lack the capability to ana-
lyse whatever information you might be able
to get hold of. In fact, there is evidence
suggesting that firms knowinglyoperate sub-
optimal pricing systems because they are con-
venient and inexpensive (Seymour, 1989) or
because they are consistent with previous
practice and thus easier to defend (Krishna et
al., 2000). However, recent developments in
information technology in terms of better and
cheaper applications software, decision sup-
port systems and web-based platforms should
enhance the capability of firms to engage in
more sophisticated analyses of pricing para-
meters. Even such basic applications as
spreadsheets can make the life of a price
decision maker mucheasier (see, for example,
Laric, 1989). The point is that pricing approa-
ches/systems, formerly seen as being ‘eso-
teric’, ‘slow’ or ‘expensive’ (or all three), are
increasingly becoming much more manage-
able and within the reach of most firms.
Against this background, the rest of this
chapter focuses on some key issues relating to
the pricing decisions that have direct implica-
tions for practitioners. Specifically, insights
gained from the theoretical and empirical pric-
ing literature are used to develop a better
understandingof the price variable, focusing in
particular on the role of the customer(i.e. the
‘demand’ side). The intention is notto provide
an ‘off the shelf’ recipe for better pricing
because ‘no known body of doctrine or proven
procedures would lead an executive to the best
price for his offering’ (Oxenfeldt, 1975, p. viii).
Rather, the aim of this chapter is to help the
reader develop his/her ownperspective about
customer-oriented pricing and, hopefully,
apply the insights gained to the specific pricing
situation he/she may be facing. Accordingly,
no attempt is made to focus the discussion on a
particular industry, type of product or set of
competitive conditions.
In the next section, the critical importance
of price as a decision variable is highlighted
and the need to manage it effectively empha-
sized. This is followed by an examination of the
linkages between price, volume, cost and profit,
distinguishing between accounting relation-
ships and cause–effect relationships. Finally,
specific attention is drawn to the most impor-
tant ‘pillar’ of price: customer demand. Due to
space restrictions, the other two pillars of price- competition and costs – are only considered to
the extent necessary to put demand considera-
tions in context. The reader is urged to follow
up on the issues raised here (and many more)
by consulting the pricing texts included in the
reference list at the end of the chapter. The
works of Monroe (1990), Nagle and Holden
(1995), and Dolan and Simon (1996) are highly
recommended in this respect.
Is price reallythat important?
The most common – and obvious – rationale
given for the importance of price is that price is
the only element in the marketing mix that
generates revenue; all other elements are asso-
ciated with costs. Such costs are necessarily
incurred in creatingvalue via product develop-
ment, promotion and distribution. In contrast,
pricing can be seen as a value extractionactivity
(Dolan and Simon, 1996), since it is through
pricing that the ‘level of reward is set for all the
planning, financing designing, productive effi-
ciency, skill, and quality that have gone into the
product’ (Marshall, 1979, p. 1). However, the
unique role of price as a revenue-generating
marketing mix element is by no means the only
characteristic that makes price so important.
Consider the following: Price has a very strong impact on sales volume
and market share; empirical studies (reviewed
in Tellis, 1988; and Sethuraman and Tellis, 1991)
have shown that, for most products, price
elasticity is substantiallyhigher than advertising
elasticity – up to 20 times higher!