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Positioning and pricing

A simplistic approach to setting prices is a common strategic mistake. Pricing consultant Andreas Hinterhuber explores the ways a business can be sure when the price is right.

Pricing decisions are not only made when bringing in new product lines. Even well-established products should have their prices reviewed to ensure that they align with the business. I have argued before that pricing has a dramatic, but frequently underappreciated, effect on profits (Value-based pricing, F&M, May 2014).

An increase in average selling prices of 5% raises earnings before interest and tax (EBIT) by an average of 22%, while other activities, such as revenue growth or cost reduction, tend to have a far smaller impact.

How does a business know if its prices are incorrect?

Pricing decisions are the result of a long chain of prior decisions, typically either horizontal chains – different departments within an organisation – or vertical ones– different hierarchical levels.

We cannot improve pricing just by changing prices. We have to work on the chain of effects to grasp which decisions, structural configurations and other elements influence pricing effectiveness.

This is an extract from the Finance & Management Magazine, Issue 235, September 2015.

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