Companies today face a fierce and fast-changing pricing environment. The recent economic downturn has put many companies in a "pricing vise." One analyst sums it up this way: "They have virtually no pricing power. It's impossible to raise prices, and often, the pressure to slash them continues unabated. The pricing pinch is affecting business across the spectrum of manufacturing and services—everything from chemicals and autos to hoteliers and phone services." It seems that almost every company is slashing prices, and that is hurting their profits.

Yet, cutting prices is often not the best answer. Reducing prices unnecessarily can lead to lost profits and damaging price wars. It can signal to customers that price is more important than brand. Instead, companies should "sell value, not price." They should persuade customers that paying a higher price for the company's brand is justified by the greater value it delivers. Most customers will gladly pay a fair price in exchange for real value. The challenge is to find the price that will let the company make a fair profit by harvesting the customer value it creates.

In this chapter and the next, we focus on the process of setting prices. This chapter defines prices, looks at the factors marketers must consider when setting prices, and examines general pricing approaches. In the next chapter, we look at pricing strategies for new-product pricing, product mix pricing, price adjustments for buyer and situational factors, and price changes.

All profit organizations and many not-for-profit organizations must set prices on their products or services. Price goes by many names:

In the narrowest sense, price is the amount of money charged for a product or service. More broadly, price is the sum of all the values that consumers exchange for the benefits of having or using the product or service. Historically, price has been the major factor affecting buyer choice. This is still true in poorer nations, among poorer groups, and with commodity products. However, nonprice factors have become more important in buyer-choice behavior in recent decades.

Throughout most of history, prices were set by negotiation between buyers and sellers. Fixed price policies—setting one price for all buyers—is a relatively modern idea that arose with the development of large-scale retailing at the end of the nineteenth century. Now, some one hundred years later, the Internet promises to reverse the fixed pricing trend and take us back to an era of dynamic pricing—charging different prices depending on individual customers and situations. The Internet, corporate networks, and wireless communications are connecting sellers and buyers as never before. Web sites such as Compare.Net and PriceSCAN.com allow buyers to compare products and prices quickly and easily. Online auction sites such as eBay.com and Amazon.com Auctions make it easy for buyers and sellers to negotiate prices on thousands of items—from refurbished computers to antique tin trains. Sites like Priceline even let customers set their own prices. At the same time, new technologies allow sellers to collect detailed data about customers' buying habits, preferences, and even spending limits, so they can tailor their products and prices.

Price is the only element in the marketing mix that produces revenue; all other elements represent costs. Price is also one of the most flexible elements of the marketing mix. Unlike product features and channel commitments, price can be changed quickly. At the same time, pricing and price competition is the number one problem facing many marketing executives. Yet, many companies do not handle pricing well. One frequent problem is that companies are too quick to reduce prices in order to get a sale rather than convincing buyers that their products are worth a higher price. Other common mistakes include pricing that is too cost oriented rather than customer-value oriented, prices that are not revised often enough to reflect market changes, pricing that does not take the rest of the marketing mix into account, and prices that are not varied enough for different products, market segments, and purchase occasions.