I had a post back in December about pricing with imperfect information. This will also be the subject of two upcoming talks, one at the PROS Pricing Conference in March, and one at the Professional Pricing Society Conference in May.

Here’s the short version: pricing theory gives us equations and tools to estimate demand, and combine that with price and cost information to derive overall profit. It’s very slick and very important. However, in our daily activities, we spend perhaps 10% of our time working in this realm. More likley, it’s around 0.1-1% of the time. This is because pricing theory assumes perfect information, or at least nearly perfect, a reasonably aligned orgnaization, and a set of tools and systems that allow us to implement the theory without imposing their own limitations. Unfortunately, pricing theory and pricing reality are very different places. Information tends to be missing, wrong, spotty, or questionable. This is not just information about demand (value), but also costs and even pricing. In addition, different parts of the organization have different goals and incentives, guided by different versions of this imperfect information. The tools and system we use to manage these situations constraint our range of thought and action, like a language with only 100 words.

If this sounds depressing, that’s not my intent. There are powerful structural forces at work which drive you and your competitors into this context. Competitive advantage comes not from the best pricing theory, but the best pricing practice, which means operating in an environment of imperfect information.

For those of you who will be attending either or both conferences, I look forward to seeing you there. For everyone else who’s interested in this subject and would like to discuss it further, send me an email. This is where the fun is.

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