(1) Even slight improvements in pricing can yield signiﬁcant results. For example, for a company with
8% proﬁt margins, a 1% improvement in price realization, assuming a steady unit sales volume, would
boost the companys proﬁts by 12.5%. By contrast, decreasing ﬁxed costs by 1% would only lead to an
increase in proﬁts of 4%.
• Continental Airlines had 44 million passengers in 2001, at an average ticket price of $193.
Charging $2, or 1.04%, more per ticket would have transformed a loss into a proﬁt.
(2) 80% of managers know how much it costs to produce their product. 23%say they know their
customers’ willingness to pay for the product.
(3) 41% of ﬁrms have identiﬁed their inability to recruit employees with the right pricing tool sets as
their major barrier to implementing pricing practice overhauls.
Three Cs and Pricing
Typically an introductory marketing class teaches that any pricing strategy should reﬂect the ‘3 Cs’ of
Advanced pricing analysis, however, views the 3 Cs as describing a set of constraints that pricing
strategies must overcome to succeed. The 3 Cs also describe three bad pricing strategies.
PRICING BEYOND THE 3 CS
• Cost-Based Pricing. Or, pricing on the basis of what it costs you to make the product.
• Customer-Based Pricing. Or, allowing your customers to dictate your pricing policy.
• Competition-Based Pricing. Or, choosing your pricing strategy exclusively on the basis of what your
Cost-Based Pricing. Cost-Based Pricing involves setting a price such that
Price = (1+percentmarkup)(UnitVariableCost + AverageFixedCost)
Practical implementation problems: (1) You have to know costs.
• A baby sleep suit company made a loss despite engaging in cost-plus pricing, because
they did not realize how much their packaging cost.
• For example, Diamond Deliveries in Philadelphia. The bicycle division, which
management thought of as Diamond’s core business, generated just 10% of total
revenues and barely covered its own direct labor and insurance costs. Diamond was