Research - 17.02.2023 - 08:30 

How does active price management increase company profits?

"Price" is the unloved stepchild in the marketing family. Its leverage for corporate success is underestimated, argue Sven Reinecke and Laura Johanna Noll in a newly published paper on active price management.
"Price" in marketing: Its leverage for corporate success is underestimated, argue Sven Reinecke and Laura Johanna Noll in a newly published paper on active price management.

How can the "stepchild" in marketing, pricing, be turned into the marketing instrument that can have the most sustainable positive influence on a company's profit? The two marketing researchers at HSG, Prof. Dr. Sven Reinecke and Dr. Laura Johanna Noll, have investigated this question. In a compact booklet titled “Aktives Preismanagement”, they present the most important framework conditions and basic principles of price management. In doing so, they pick out those aspects that have proven to be essential for corporate practice in the context of further education at the University of St.Gallen.

Price as consideration for function, availability, and emotional value of an offer

In economics textbooks, the price (P) is always shown on the Y-axis – it is therefore a dependent variable that results from the quantity offered in the market (Q). "Even though this may make sense for the market as a whole, it is nonsense for individual companies," emphasises Sven Reinecke. Price should rather be an active variable that the offering company can and should set itself. "Based on this decision and the value of the overall offer as perceived by customers, price is the quantity that a company can sell on the market," explains Laura Noll. Price is the customer's return for the other three value-creating marketing instruments: the product (functional value), communication (emotional value) and distribution (availability). 

Five recommendations for active price management

Sven Reinecke and Laura Noll recommend in their freely available online handbook "Active Price Management", Sven Reinecke and Laura Noll recommend five principles for successful pricing:

  1. Information advantage: Always know more than your customers
    A central prerequisite for active price management is price knowledge. Therefore, price managers must gain an information advantage over their customers and competitors. They must always have more price knowledge than others to successfully implement appropriate prices. 
  2. Consideration management
    Prices capture the value of an offering. The focus is on the individual benefit to the customer. In order to be able to enforce appropriate prices, companies must create a special benefit for their customers (value creation). Therefore, price management always means consistent counter-performance management.
  3. Fair price differentiation 
    Price differentiation can be used to exploit different willingness to pay in different customer segments. In this way, additional contribution margins can be generated. Price differentiation is important because it opens room for manoeuvre in price management. However, it also has limitations, such as internal complexity and customer confusion. Some forms of price differentiation are not recommended for ethical reasons.
  4. Strategic marketing
    Following the traditional St.Gallen management definition, price management is understood as the active shaping, steering and development (Bleicher, 2011, p. 46) of prices. Price is not a purely tactical, but a central, strategic marketing instrument: price changes, however, have an immediate effect and are immediately reflected in the demand and profit of a company.
  5. Price image 
    Whether a price is perceived as fair and accepted depends on the subjective perception of customers. Justified motives and transparent prices are decisive for perceived price fairness and (re-)purchasing behaviour. Therefore, it is not the actual but the perceived price that ultimately decides – and thus the price image. 

"Be a price maker, not a price taker"

"Responsible managers should not lower the price just to gain market share or an image-important customer," emphasises Sven Reinecke. Benson P. Shapiro, for example, formulated a clear call to action for professional management a long time ago at Harvard Business School: "Be a price maker, not a price taker”.

Prof. Dr. Sven Reinecke is Managing Director of the Institute for Marketing & Customer Insight and Titular Professor of Business Administration at the University of St.Gallen.

Dr. Laura Johanna Noll (1990) is a postdoctoral researcher at the Institute for Marketing & Customer Insight as well as Head of the Competence Center for Art+ at the University of St.Gallen.

Image: Unsplash / Campaign Creators 

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