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Is It Time to Rethink Your Pricing Strategy?

Is It Time to Rethink Your Pricing Strategy?
Andreas Hinterhuber and Stephan Liozu

MIT Sloan Management Review: Summer 2012
Research Feature June 19, 2012

Price setting and price getting require discipline — not luck. Almost any business can improve its pricing performance, provided it approaches pricing in a structured way.

Renowned investor Warren Buffett has said, “The single most important decision in evaluating a business is pricing power. If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. And if you have to have a prayer session before raising the price by 10%, then you’ve got a terrible business.”

Yet pricing receives scant attention in most companies. Fewer than 5% of Fortune 500 companies have a full-time function dedicated to pricing, according to data from the Professional Pricing Society, the world’s largest organization dedicated to pricing. McKinsey & Company has estimated that fewer than 15% of companies do systematic research on this subject. And only about 9% of business schools teach pricing, according to the Association to Advance Collegiate Schools of Business. This neglect is puzzling, as numerous studies have confirmed that pricing has a substantial and immediate effect on company profitability. Studies have shown that small variations in price can raise or lower profitability by as much as 20% or 50%.

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