"Pricing is the art of finding the optimum price for products."
H. Klein, CEO Passenger Division of Lufthansa Airlines
Introduction
Practices
Techniques
Lemonade StandPricing is the art of converting a company's success in the marketplace into success at the bottom line. It is the harvest of a firm's efforts to create value for its customers. Successful pricing must coordinate the activities of production, finance, sales and marketing to realize fully the firms potential for long-term profitability, so say Thomas Nagle and Reed Holden.
Unfortunately, pricing at most companies never even comes close to achieving that objective. While it is rarely possible to find the perfect or optimal price, a manager who understands the forces that determine success in pricing can make more profitable decisions than one who does not. In practice, managers often avoid the responsibility to make such decisions. They resort to simple procedures for marking up costs, closing sales, or reacting to competition that free them from the complexity of balancing all of these inputs and from the need to think about pricing strategically. Pricing becomes merely a series of short-term decisions without a guiding principle or vision. As a result, the company never realizes the profit potential that its efforts at product development, promotion and distribution could justify. Dr. Ken Evoy, CEO of SiteSell.com is quoted as saying:
"Correct pricing is the single most important
marketing decision that any company will ever make."
Small enterprises often determine price by mixing cost of production, overhead, benefits, competition, business model, and other factors into the "magic pricing pot" and then picking a number. This "gut feel" is the inexact technique of default. As a result, marketers are never sure if they have chosen the absolute best, profit-maximizing price.
Many marketers spend a lot of time and money trying to find the perfect price and still can't be scientifically sure that their first answer is correct. That's true even with many large companies, and certainly the vast majority of smaller ones.
Some common pricing techniques(Holden):
Evaluating product features and customer benefitsMarking up your cost of production
Undercutting competitors' prices
Asking key customers
Getting feedback from salespeople
Soliciting advice from consultants or business associates
The boy working in "Open for Business" is painting the price for a glass of the groups lemonade. There probably was not many scientific pricing techniques involved in deciding on a price. If he were to find an optimum price he would incorporate some of the pricing techniques listed above. He could calculate production costs and put a mark-up on top of that figure or simply ask frequent customers. If the entrepreneurs truly want to make a profit they need to calculate the right price for their product.