Let’s start with what most pricing texts call the 3 C’s.
Costs – We have written many times on how costs should influence pricing. Fixed costs have no effect. Variable costs have a direct effect when using TIOLI (take it or leave it) pricing and influence your price floor for negotiated pricing.
Customers – Can we ever say enough? Value based pricing is all about charging what our customers are willing to pay (WTP). They are the ones that decide how much they are willing to pay. Our pricing ability is completely dependent on their WTP.
Competitors – We wish we didn’t have them, but our pricing is dependent on the product offerings of our competition. If they offer identical products at very low prices, we won’t be able to win much business at high prices without doing something unique.
These 3 C’s are covered in detail in most pricing texts. The next two C’s are “new” but are added because pricing is dependent on them and pricing professionals have no real influence on them.
Corporate Strategy – The CEO gets to set the corporate strategy. Pricing must follow. If the CEO is after increased ASP, pricing has a big role. If the corporate strategy is market share, pricing has a different (and dangerous) role to play.
Constraints – Market constraints influence pricing. Try buying a ticket to a sold out concert. Airlines and hotels use yield management to price higher when it looks like they will sell out. They price lower when demand looks very low. When factories reach their capacity, pricing can influence that the company sells more of the most profitable products. Constraints in the marketplace offer opportunities for intelligent and strategic pricing.
So yes, pricing is dependent … on the 5 C’s. The better you understand these 5 C’s the more effective and profitable your pricing will be.
Mark Stiving, Ph.D. – Pricing Expert, Speaker, Author
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