Price Management

Analysis, planning, determination, enforcement and monitoring of prices and conditions (conditions system). Price management should contribute to the achievement of marketing and ultimately corporate goals (e.g. profit maximization) by setting (profit) optimal prices and conditions. The tasks of the price management are either taken over by special price managers or are partial tasks of the marketing managers. The central component is the price process.

Definition of Price Management

Under the pressure of increasing cut-throat competition, increasing quality harmonisation of products and services and aggressive market challengers, price is becoming increasingly important as a management and marketing instrument, while at the same time price decisions are often made in practice on an intuitive basis and without exact knowledge of the complex structural relationships. Within the framework of the contracting mix as one of the four submix areas of the marketing mix, a commercial enterprise sets the sales prices for its goods and services. Price management is “one of the numerous strategic instruments available to company management for the realization of the company’s highest goals. It follows from this that, from the point of view of corporate policy, it is not a matter of somehow objectively correct prices, but of determining prices that are adequate for the purpose.
“Price policy therefore includes goal-oriented decisions about the price situation within which the company wants to operate and about the price fixing for new products or about price changes for goods contained in the range of services. (Johannes Bidlingmaier)
A well-founded price decision requires both a structural analysis and the most precise possible measurement or estimation of the quantitative price effect.
According to a study conducted by Hermann Simon in 1985 with 166 managers, problems of pricing policy are the most important in their view. This outstanding, albeit largely undesirable, role of price has resulted from a number of long-lasting developments:

  • Price awareness has risen steadily in the face of years of inflation.
  • Consumers are trying to compensate for stagnating real incomes by switching to cheaper products.
  • In industrial procurement, intensified competition is forcing purchasers to negotiate the best prices.
  • The phenomena of saturation and overcapacity which occur in many markets inevitably lead to a price war.
  • Many products have undergone qualitative adjustment. If there is a qualitative similarity, the price comes to the fore as a selection criterion.

These changed competitive conditions inevitably force a fine-tuning of price management. This is made more difficult by the fact that, in addition to short-term effects, the long-term strategic consequences of price management must also be taken into account. The company’s price policy objectives result directly from the marketing objectives, which in turn can be derived from the company’s objectives.
The main determinants of price management are – market forms and price elasticity. A distinction must be made between price structure policy and price development policy.
Product benefit and price form the core components of every economic transaction. Price influences sales much more than any other instrument. Every wrong decision in the price area results in a serious loss of profits.
The price can be used particularly quickly as an instrument because price changes can be implemented within a few hours or days. However, the competition can react just as quickly. The effect of price measures occurs very quickly. With stronger price differences radical shifts of – market shares can be determined within short time. The price can thus be described as the hardest and fastest acting competitive instrument.
The most widespread methods of price determination in practice are the cost-plus method and the adjustment method. In the case of cost-plus pricing, the costs are first determined and an absolute or relative profit or contribution margin rate is added to them. The adjustment strategy, on the other hand, is essentially based on the competitive prices and sets your own price in relation to these.
Both methods neglect the complex structure of aer h\’ rels-Newlnn-√∂ezlehung. Knowledge of this relationship is a prerequisite for any rational price decision. The most critical component is the effect of price on sales.
Without the knowledge of the price-sales-function, an optimal price comes about only by chance. Although the contribution margin per unit increases with increasing price, the quantity decreases at the same time. At some point, a point is reached at which the decline in volume has a greater effect in percentage terms than the increase in the contribution margin. As a result, the profit decreases with a further price increase. A price that is too high is just as dangerous as a price that is too low. The widespread preference in practice for a calculation of higher prices ignores the realities of the price effect.
Today there are a number of tried and tested methods for determining the price-sales relationship. These include

  • Expert surveys
  • customer surveys

the analysis of market data, i.e. real price and sales data, which allow a reliable estimation of the price-sales relationship.
In dynamic markets, aspects such as the product life cycle, changes in price elasticity and costs as well as competitive dynamics also play a role in price management. Most companies do not maximize short-term period profit, but strive for long-term profit protection and maximization.
The current sales position of a product also depends on the company’s past activities; conversely, current measures influence sales opportunities in the future. Price management should be strategic in its approach, aiming to maximize long-term profits and anticipating the impact of current prices on future market share and cost positions. The necessary balancing between short-term profit strategies and long-term profit protection inevitably leads to increased decision-making complexity. Ideal options, especially in the early phase of the life cycle, are the skimming strategy and the penetration strategy.
In skimming, the product is introduced at a comparatively high price, which usually falls over the course of the life cycle. The penetration strategy is conversely the introduction at a low price. The skimming strategy is particularly recommended for products with a high degree of novelty and low short-term price elasticity. Conversely, the most important argument for the penetration strategy is high short-term price elasticity.
In essence, the decision between the two strategy alternatives is based on the classic problem of balancing (relatively secure) short-term earnings against (relatively uncertain) long-term earnings opportunities. It goes without saying that expectations about the future cost and competitive situation, technological risks and time preference play a decisive role in this weighing.