What price is right?

Minimizing costs is only one part of the economic equation for profitability.

By Mark Rosenzweig

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Okay, I admit it — I spend far too much time on eBay, the online auction site. I buy loads of stuff, some of which I actually need, and occasionally even sell things on eBay. My routine each morning as I am beginning to function coherently is to search that site using a few particular keywords. I justify my avid interest in eBay by saying that I can find esoteric or rare items there that would be hard to locate otherwise. After all, my daily dalliance includes searches for parts and ephemera for Studebaker cars and for manual typewriters, both of which are not that common anymore. Through eBay, a recently got a “new old stock” owner’s manual for a 1964 Studebaker Gran Turismo Hawk and a rare Rooy typewriter. (I lusted after this French portable because of its clever engineering — it is only about 1½-inch thick including its case, thanks to a clever, pivoting arrangement for the typewriter on its case lid.) You never can anticipate what will appear and, sometimes, when a seller offers a “buy it now” option, if you don’t get to the listing early you can miss out on the item.

Setting a price for “buy it now” can be tricky. Too low a price may cost you money, while too high a price may defeat the whole point of offering that option and even scare off potential bidders. This came home to me recently when I listed a computer peripheral that I no longer needed after I got a new laser printer (bought via eBay, of course). I did some research to see what similar items recently had sold for on eBay and then opted for a “buy it now” price that was a few dollars more. Someone agreed to pay that price within three hours after I had listed the item. So, now I am second-guessing myself as to what price I should have set.

Pricing, be it for eBay items or chemicals, raises a host of issues that aren’t always fully appreciated. Yet, as Jeff Kabin explains in his article on p. 28, effective price management can play a crucial role in optimizing profits and building a competitive advantage. Price management includes five elements: pricing analytics, deal management, price execution, forecasting and optimization. Pricing analytics looks at factors such as how much each particular customer really is willing to pay and how to sensibly differentiate prices among customers. Deal management gets into how a pricing strategy is implemented such as whether volume discounts are applied rationally and enforced. Adequately addressing all five elements is a must, notes Kabin. His discussion provides a perspective on product economics that differs dramatically from the cost-centered one drilled into many technical professionals in the chemical industry.

I certainly don’t argue against a focus on reducing costs. Indeed, chemical companies have good reason in today’s competitive global marketplace to devote much effort toward squeezing dollars or at least cents out of procurement, production, distribution and any other area where money can be saved. This is an ongoing and unrelenting condition for survival. Yet, poor pricing decisions and strategy can undermine, if not negate, all the work done to cut costs.

The bottom line: a company really needs to know what price is right if it wants to optimize its bottom line.
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