Are You Sure the Price is Right?

David G. Bakken
Marketing Inisghts
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Key Takeaways

Setting prices may be just about the most important thing a company does.

Firms have few options when it comes to determining the demand curve for an offering.

Google’s position auction is arguably the most successful implementation of the auction method for maximizing profitability.

Setting prices may be just about the most important thing a company does. Management guru Peter Drucker once identified six key mistakes that firms make—four of them involved pricing. Economist Paul Ormerod, author of Why Most Things Fail (John Wiley & Sons, 2005), puts it this way: “If a firm makes a big enough mistake on [pricing], or even persists with perhaps relatively minor mistakes for a sufficiently long period, it will fail.”
 
In principle, any firm that knows its costs and also knows the demand at each possible price can find the profit maximizing price. Although firms may, in fact, have only a rough idea of true costs, the main challenge in setting price is determining the level of demand at different price points. Firms have few options when it comes to determining the demand curve for an offering. In some cases, they may be able to conduct live test markets or other in-market experiments, or they can use temporary price promotions to estimate a demand curve of sorts. In the real world, auctions can be an effective tool for finding the “market clearing” price, and Internet-enabled auctions have changed pricing for some categories of goods and services. Google’s position auction is arguably the most successful implementation of the auction method for maximizing profitability.
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Author Bio:

 
 David G. Bakken
David G. Bakken is chief operating officer of KJT Group, Inc. His blog The Customer Knowledge Advantage, may be found at davidgbakken.wordpress.com. He may be reached at DavidB@kjtgroup.com.