Integrative Pricing via
the Pricing Wheel
David Shipley
David Jobber
Pricing is a critically important management activity with major
strategic and operational implications. However, pricing is a much-
neglected and ineptly administered marketing responsibility, and
numerous errors are made. A prime reason for this is that firms are
preoccupied with the use of convenient, often singularly cost-based,
pricing methods that fail to assimilate the impact of the full range of
effective pricing determinants. This article introduces the concept of
the pricing wheel that is a multistage process for effective price
management. It provides a systematic means for analyzing and in-
corporating into decision making the strategic role of price, pricing
objectives, the plethora of internal and external pricing determi-
nants, pricing strategy, the pricing technique, and the necessary im-
plementation and control procedures. As a key element of the pric-
ing process, the article advocates utilization of an integrative
pricing technique, and it proposes a logical sequence in which it
can be applied. © 2001 Elsevier Science Inc. All rights reserved.
INTRODUCTION
Price management is a critical element in marketing
and competitive strategy and a key determinant of perfor-
Address correspondence to Professor David Shipley at The Business
School, Trinity College, University of Dublin, Dublin 2, Ireland.
Industrial Marketing Management 30, 301–314 (2001)
© 2001 Elsevier Science Inc. All rights reserved.
655 Avenue of the Americas, New York, NY 10010
mance [1–3]. Price is the measure by which industrial
and commercial customers judge the value of an offering,
and it strongly impacts brand selection among competing
alternatives [e.g., 4, 5]. Furthermore, price affects a much
broader constituency including rivals, suppliers, distribu-
tors and government. From a company perspective, price
is a central element of competitive positioning, and as the
most flexible component of the marketing mix it can be
adapted the most rapidly to meet unexpected environ-
ment developments [6, 7]. Moreover, price is the only ele-
ment of the marketing mix that directly generates revenue.
However, pricing is highly complex [2], and many
firms truncate the process and apply standard operating
procedures, such as cost-plus formulae, to simplify the
tasks involved. Unfortunately, these practices ignore too
many relevant internal and external variables, and nu-
merous pricing errors are made [3]. Pricing is quite sim-
ply too important to forego deep analyses of the relevant
company and market influences. Pricing decisions should
be based on a comprehensive systematic multistage pro-
cess that examines and integrates the full range of forces
that impact pricing effectiveness. The purpose of this ar-
ticle is to introduce to the marketing literature an effec-
tive systematic sequential pricing process. It attempts this
0019-8501/01/$–see front matter
PII S0019-8501(99)00098-X
in a multistage process that describes the issues and vari-
ables within an effective pricing process. This includes a
description of an integrative pricing method and a logical
sequence in which it can be applied to provide for a full
consideration of all relevant pricing influences. It is
hoped that marketing practitioners might be motivated to
apply it to validate or enhance the quality of their pricing
decisions.
THE PRICING WHEEL
Pricing is not a one-off decision as are, for example,
some product development or channel selection deci-
sions. Rather, pricing is an activity that has to be repeated
when market and company conditions vary so that ongo-
ing assessment is necessary to recognize when prices
should be changed. Hence, the schematic illustrated in
Figure 1 presents the pricing process in the form of a
wheel of activities to underscore the fact that it is contin-
uous. The elements of the pricing wheel are discussed in
the following six sections in the sequence in which they can
be most effectively addressed during any single circuit.
DECIDING THE STRATEGY ROLE OF PRICE
The logical starting point is the initial determination or
reappraisal of the role that price is to occupy in the over-
all marketing strategy. That is, to decide whether price
should play a prominent role in the strategy or a minor,
supportive one. The latter approach is widely evident
among producers of extensively customized capital
equipment, such as robotic production line technology.
Here customers prioritize productivity and ownership
costs over initial purchase costs and thus are relatively
price insensitive. Moreover, suppliers are unable to quote
prices until the customers’ precise requirements have
been specified, analyzed, discussed, and amended. Fur-
thermore, initial technology purchase prices are often dif-
ficult to discern because suppliers typically provide a
complex bundle of pre- and post-sales services in the
package.
DAVID SHIPLEY is a Professor of Marketing at Trinity College in
the University of Dublin, Ireland.
DAVID JOBBER is a Professor of Marketing at the University of
Bradford, England.
302
Companies that promote price heavily within their
marketing strategies exist at both ends of the segmenta-
tion spectrum. For example, new entrants to the manage-
ment training market are often positioned on low relative
prices. Similarly Komatsu maintains a strong position in
Western markets for earth moving vehicles on this basis.
Conversely, other companies give prominence to high
prices in their positionings to create or reinforce an image
of exclusivity or superiority for their offerings. For ex-
ample, Glaxo utilized a high price strategy to establish
Zantac among medical practitioners as the premier treat-
ment for patients with stomach ulcer problems.
The importance of effectively deciding the role of
price in the overall strategy is key as well as obvious. As-
tute judgement is required because once an image has
been established it takes a very long time to change if it is
inappropriate.
PRIORITIZING PRICING OBJECTIVES
A critical task in the wheel of pricing activities in-
volves the specification of pricing objectives that are
consistent with the company’s broader objectives and
with the objectives and marketing strategy for the prod-
uct. However, these wider objectives and strategies
change over time as do markets and environment condi-
tions so that a flexible approach is required in the setting
of pricing objectives. For example, when a firm is pursu-
ing a growth strategy for a brand the pricing objective
could be to build market share or volume. Later in the
product life cycle, however, the marketing strategy may
shift to a hold strategy and the apposite pricing objective
could center on the generation of short-term profits.
A very wide range of up to 21 possible pricing objec-
tives has been proposed [8, 9]. However, research findings
have found that companies usually confine themselves to
some in a smaller set of pricing objectives [10–13]. An
important implication of this is that, because objectives
are not always wholly mutually supportive and can be at
least partially conflictual, it is necessary to prioritize
them into a flexible hierarchy of relative importance.
Then when pricing objectives conflict, priority can be as-
signed to the most important ones.
Among the most important and widely specified objec-
tives in the studies cited were those relating to profits,
survival, sales volume, sales revenue, market share, im-
age creation, competitive parity or advantage, barriers to
entry, and perceived fairness. The rationale for setting
sales volume and sales revenue objectives is self-evident.
 It is essential to decide a clear strategic role
for price.
However, some of the other widely specified pricing ob-
jectives deserve some discussion. Profit targets are the
most widely specified objectives. These typically reflect
short-term concerns as measured by margins, target re-
turns, and various financial ratios. Objectives relating to
survival often result in low prices to overcome short-term
environmental adversity. This emphasizes the high flexi-
bility of price and can be appropriate when firms face
chronic excess capacity due to depressed demand or in-
tense competition, for example.
Competitive-related objectives can be specified for
any of three reasons. First, a need to maintain price parity
with rivals to help to preserve price peace. Second, a
more aggressive requirement to undercut competitors’
prices to gain market share. Third, a concern to deter new
entrants by pricing low to constrain market profits.
Image-based objectives can be set to position the com-
pany’s brand as a bargain buy at economic prices or as a
FIGURE 1. The pricing wheel.
superior offering implicit in charging high prices. Fi-
nally, a widespread practice is to establish pricing objec-
tives that result in prices being perceived as fair to both
the firm and its customers. This objective may center on
image building or on long-term profit considerations.
Customers that believe the price is a fair one are more
likely to trial buy a product and repeat buy it than if they
consider it to be excessively priced. Indeed, all of the
types of pricing objectives referred to in this section are
related to profit requirements, either directly or indi-
rectly. Survival is not possible in a capitalist society
without short-term and long-term profits, and all of the
other objectives addressed are connected to the genera-
tion of either short-term or long-term profits.
The important point of this section should never be
overlooked. That is, because pricing objectives are multi-
ple and change over time with marketing conditions, it is
imperative that they are prioritized each time a price is set.
303
 Pricing objectives should be prioritized
and flexible.
ASSESSING ALL PRICING DETERMINANTS
Effective pricing is affected by a range of internal and
external factors. Prominent among these are the condi-
tions of customer demand and competition and the firm’s
own cost structures [7, 14–17].
Demand Assessment
Many companies forego a formal demand analysis be-
fore setting prices and compromise with a reliance on
managerial judgement [3]. This is highly risky and firms
should make every effort to assess demand at the level of
the individual market segment. Specifically, what is re-
quired is an evaluation of potential volumes at various
possible price levels. In turn, this requires an estimate of
the number of customers, the quantities they will pur-
chase, and a measure of their price sensitivities.
The slope of a demand curve is determined by various
factors including customer needs, budgets, buying behav-
ior, customer knowledge, perceived risk, and competitive
conditions. Downward-sloping demand curves, such as
that shown in Figure 2a, relate to markets where custom-
ers have substantial knowledge of brands and suppliers
and buy predominantly on economic motives reflecting
needs to obtain value for money and bargains. Examples
include competitive markets for organizational rebuy
items. Here, demand varies inversely with price, and if an
individual firm were to raise a price or fail to match a ri-
val’s price cut, the demand for its product would fall.
The curve in Figure 2b typifies markets where custom-
ers have imperfect knowledge and/or have different
needs and buying behavior. Here, if the firm sets the
price at zero, customers believe the product has no value
and resist buying it. As price begins to increase, demand
rises successively to the level where the curve begins to
bend backwards as customers either can no longer afford
the product or believe that it no longer represents value
for money. Customer motives for this kind of buying be-
havior stem from ostentation or ignorance. Customers
buy ostentatious products at high prices such as some ex-
ecutives who drive classy company-owned cars to en-
304
hance their own or their firm’s image. Alternatively, the
upward-sloping portion of the curve can reflect incom-
plete customer knowledge or ignorance. Where this is the
case, many customers interpret high prices as an indica-
tion of superior benefits [18–20] and are willing to buy
because “you get what you pay for.” For example, com-
mercial clients would be most unimpressed if a potential
marketing consultant quoted a day fee of $25, and indus-
trial buyers would be strongly suspicious of a new entrant
offering truck tires at 50% below prevailing prices.
The slope of a demand curve measures customer price
sensitivity or how much demand varies in response to a
change in price. The significance of this is illustrated in
Figure 3. The demand curve labeled S1 relates to a highly
price sensitive segment of customers who respond to
price changes by sharply adjusting the amounts of the
product that they buy. Alternatively, S2 relates to a much
less price-sensitive segment whose demand adjustments
to price changes are far less marked. In both segments,
the price is initially set at 15, and 10 units are demanded
so that total revenue per segment is 150. However, an
identical price rise in both segments leads to vastly dif-
ferent effects on demand. For example, if price is raised
to 17 in each segment, demand falls to two units in S1
yielding total revenue of 34 whereas in S2 demand only
falls to nine giving a revenue of 163. Hence, the same
price adjustment causes revenue to fall dramatically in S1
but to increase marginally in S2. The precise effects on
profitability of these changes cannot be measured with-
out cost data. However, it is notable that both total costs
and total revenue fall in S1, but in S2 it is likely that total
costs fall while revenue increases.
Hence, a clear understanding of price sensitivities is
key to effective pricing. Measuring price sensitivities is
by no means simple, and imperfect estimates are the
norm. Nevertheless, even these are better than no esti-
mates. Various measurement techniques are available [3,
21], and some of these are applied by some firms [22].
Among the more reliable methods are: buy-response
techniques [21], trade-off analysis [23], store experi-
ments and test marketing [24], and economic value to the
 Assessing market conditions is as important
as measuring costs.
customer analysis [15]. Each of these approaches can
provide useful estimates although all of them involve
limitations. As a general guideline, however, certain fac-
tors affect the degree of price sensitivity, and the more of
these that are associated with a brand the weaker the level
of price sensitivity becomes. Thus, price insensitivity
will tend to be high for brands that
• Customers need urgently.
• Are strongly differentiated.
• Compete against few alternative customer solutions.
• Are complex and so difficult to compare.
• Are complementary to other highly priced products.
• Involve high switching costs.
• Customers take price as a quality indicator.
• Customers buy for ostentatious motives.
• Account for a small proportion of the buyer’s total ex-
penditure.
• The price can be shared by multiple buyers.
Another dimension of demand measurement involves
recognition that the quantities demanded of a product at
various prices change over time. Demand curves do not
remain stationary. Rather, they shift outwards from and
inward to the origin as a result of changes in either the
firm’s marketing activities or changes in market environ-
FIGURE 2. Alternative demand curves.
ment conditions. For example, for any given price along
S1 or S2 in Figure 3, the quantity demanded would fall if
the demand curve shifted leftwards as a result of say a
cutback in the firm’s service standards or an economic
recession. Alternatively, a higher demand per price
would result from a rightward shift in the curve caused
for example by an improvement in the firm’s credit gen-
erosity or the withdrawal of a rival from the market.
Whereas adaptations of the company’s marketing
strategy may be relatively infrequent, changes in the mar-
ket environment occur often. Hence, it is essential to con-
tinually monitor market conditions and attempt to predict
future market developments and to adapt prices accord-
ingly. Techniques for doing this are widely discussed in
the appropriate literature [e.g., 25, 26].
Competitor Analysis
Most firms face competitors at the segment level, the
market level, and/or the generic level, and this has major
implications concerning the prices they set and for their
own and their rivals’ reactions to each others’ price initi-
atives. For example, Nokia and Motorola compete di-
rectly in the segments for portable telephones. However,
they both compete at the market level against traditional
305
 Pricing strategy balances the
price-benefits mix.
stationary telephone suppliers like AT&T or Bell. Fi-
nally, all four of these firms compete at the generic level
against suppliers of other communications technology,
such as DHL or e-mail. Thus, a major price change by a
firm at any of these three levels of competition could
have an impact on the sales of the firms at other levels,
although the impact is likely to be greater among direct
segment rivals.
Most firms operate in oligopolistic market structures in
which a small number of firms offering highly substitut-
able products supply all or most of the output into their
target segments defined locally, nationally, or globally.
Examples include the U.S. bulldozer industry, the U.K.
machine tools industry, and the global mainframes mar-
ket. The fundamental problem in oligopoly is that firms
are closely interdependent so that the competitive actions
of one company impact on rivals and therefore can be ex-
pected to induce a reaction. Thus, if, for example, IBM
was to cut prices deeply in the small business market for
personal computers, Compaq, Toshiba, and the other ma-
jor players would be forced to react.
FIGURE 3. Contrasting the effects of different price elasticities.
306
Pricing patterns in oligopoly are usually of two types.
In the first, one or more firms become established as
price leaders, and their price changes are followed by
competitors to preserve relative price balance and/or to
avoid being price disadvantaged [27, 28]. The second oli-
gopoly pricing pattern is less synchronized and more ag-
gressive. It occurs when there is no established price
leader and the interdependence problem has established
higher levels of competitive uncertainty. Here, firms fol-
low the price cuts of competitors but not their price in-
creases [28–30]. This ensures that the individual oligopo-
lists are not competitively disadvantaged by their rivals’
price cuts and that competitors are punished if they raise
prices. The outcome can be long periods of price stability
or a downward ratchet effect on market price. In either
event, margins are threatened as costs increase over time.
Hence, it is clear that regardless of the competitive
structure, firms can only ignore their rivals’ prices at
their own peril. It is equally clear that firms need to con-
tinually monitor their rivals’ prices and price adjustments
and react appropriately to them. Moreover, before taking
 Cost-plus pricing methods are insufficient
and ineffective.
a price initiative themselves, firms need to predict how
their competitors are likely to respond and plan counter-
reactions of their own. To facilitate this, firms can examine
several sources of competitor price information. These
include rivals’ customers, distributors, advertisements,
press releases, and trade show exhibits. Particularly
strong insights into rivals plans sometimes can be ob-
tained by talking to their salespeople and other marketing
specialists who can be surprisingly frank in conversations
at informal events, such as trade shows and elsewhere.
Cost Analysis
For many companies, average cost is the initial, para-
mount, or only determinant in price setting. From a
purely internal perspective this is perhaps understandable
as managers want to ensure that all costs are covered by
the price. However, there are, as noted, other key pricing
influences to assess, and in the market-focused company
the role of cost analysis is to determine whether the com-
pany can achieve a profit at the price that the market will
accept.
At least two cost measures are relevant in the pricing
process. First, firms need to estimate the average costs of
servicing a particular segment. These comprise an appro-
priate proportion of fixed costs plus the unit direct costs
of producing, marketing, and transporting the product. In
the long-term, the prices gained by the firm must exceed
the average costs incurred or the firm cannot generate a
profit or replace its fixed assets. Second, however, in any
short-term contingency it may be apposite, given market
conditions, objectives, and the strategy, to accept contin-
gency prices below the average cost level but above the
direct cost level. This could be necessary, for instance, to
launch a new product, win a new key account, or to dis-
pose of obsolete stock. Any price above direct costs pro-
vides a contribution to fixed costs and to overall com-
pany profits.
Unfortunately, gaining accurate estimates of either av-
erage or direct costs is difficult, and errors often occur [3,
14]. Hence, caution and attention to detail are required to
enhance reliability.
DECIDING PRICE STRATEGY
Pricing strategy involves many dimensions [2, 3].
However, this section addresses just two of the more im-
portant issues: price positioning and new product pricing.
Price Positioning Strategy
Price positioning cannot be established effectively
without consideration of the value of customer benefits
included in the product offering. Price is the cost that
customers incur to obtain the benefits bundle. If the price
exceeds the perceived value of the benefits, a rational
customer will desist the purchase. Conversely, if the per-
ceived value substantially exceeds the price, the supplier
is foregoing an opportunity to obtain a higher price.
However, the price-benefits positioning must also be
determined relative to competitors’ positionings. Figure
4 illustrates the positionings of nine firms competing in a
market segment. The firm in the top right cell offers the
strongest price-benefits bundle, and if this is perceived as
such by customers, it would be the clear market leader.
However, this positioning does involve three potential
problems. First, it is extremely difficult to achieve be-
cause usually, building the benefits bundle involves costs
that could either drive the price up or cause the firm to in-
cur a loss. Second, if the brand was new or customers
lacked knowledge or experience of it they may suspect
that the level of benefit was not genuine. In this case, the
firm’s challenge would be to communicate the genuine-
ness of its offerings. Third, if the brand was the estab-
lished leader in an established segment and was not pur-
suing long-term objectives such as share growth, entry
deterrence, or goodwill growth, it could be sacrificing the
achievement of higher prices. This would be the more
valid, the closer the brand’s positioning is to the extreme
top right corner of the cell.
307
 The integrative pricing method is
systematic and exhaustive.
In the absence of a firm in the market ruler cell, both of
the thriver positionings would be tenable in different sub-
segments. However, whereas both would be strong, the
midright positioning is more sustainable than the top-
center one because it is generally more difficult for rivals
to increase the level of benefits than to cut price and ac-
cept smaller margins.
Both of the chancer positions could be viable in the ab-
sence of the thrivers and the market ruler. However, the
top-left chancer is vulnerable to attack by brands that are
similar but offer lower prices or superior benefits. The
bottom right chancer faces obverse risks. Finally, brands
in the four remaining cells have little prospect of success.
Relative to chancers, thrivers, and rulers, they offer no
differential advantage.
New Product Pricing Strategy
Pricing new products is particularly difficult because
firms face even greater uncertainty about customer price
sensitivity and rival’s reactions. Three broad strategy op-
tions are possible, as shown in Figure 5.
FIGURE 4. Alternative price-benefit positioning strategies.
308
The long-term real price (LTRP) strategy involves
holding the price at the product launch level for sustained
periods. Here prices are not adjusted as a predetermined
part of the strategy but are changed when necessary to
meet long-term variations in input prices, price sensitivi-
ties, rivals’ prices, and other market conditions.
Motives for and appropriate conditions for the LTRP
strategy include
• The market is stable over long periods.
• Customers value price stability.
• Customers will not pay a higher price.
• It lowers risks of price warfare.
• The firm has high relative prices but sustainable differ-
ential advantage.
• There are high barriers to entry.
The main risk of this strategy is that long periods without
any need for price adjustments could encourage the firm
to become complacent. Danger then could arise if the
firm ignored or failed to perceive major market develop-
ments. Hence, continuing market vigilance and a will to
 FIGURE 5. Alternative new product pricing strategies.
act flexibly are key to success with this pricing strategy,
as with any other [6, 7, 31].
Price skimming is the second new product pricing
strategy. This is appropriate in markets where customer
segments have different time-based price sensitivities. It
involves setting high launch prices and targeting the seg-
ments where needs for the product are the most urgently
pressing. Then price is lowered in stages to attract suc-
cessively more price sensitive segments. A well-known
example of this occurred in the hand calculator markets.
Skimming is sometimes practiced on a product version
basis whereby the product is adapted over time for differ-
ent segments. This occurred, for example, in the market
for personal computers where products and prices were
adapted to meet different demand conditions as produc-
ers successively targeted customers in the large business,
science, education, small business, and home office seg-
ments.
The benefits of a successful skimming strategy include
• Large initial margins.
• Rapid recovery of investment.
• Time to expand capacity.
• Time to build channel variety.
• High initial prices can establish a strong image.
• Price cuts attract customers.
• A built-in hedge against over-pricing.
Problems with skimming are that:
• Initial customers may be antagonized when price is
lowered.
• Large initial margins may attract new entrants.
• Market penetration is slowed.
• It delays the exploitation of economies of scale and ex-
perience.
Penetration pricing is the remaining new product pric-
ing strategy in Figure 5. This can be appropriate for new-
to-the-world products, and it is particularly suitable for a
firm launching a new brand into an established market
where rivals are already present. The logic is to set low
prices initially to attract large numbers of price sensitive
customers and then raise price over time as customer loy-
alty deepens. Often, only a basic version of the product is
marketed initially and as this is improved and aug-
mented, the price is lifted in stages to the LTRP level.
This approach has been utilized repeatedly by manufac-
turers of industrial packaging materials and chemicals
companies whose products otherwise are not strongly
differentiated.
A major potential problem in using penetration pricing
is that customers may resist price increases. In this case,
309
the price remains very low as illustrated by the discontin-
uous line in Figure 5. When this occurs, the firm be-
comes heavily dependent on the attainment of large econ-
omies of scale and experience to facilitate margins at the
low prices obtained.
Benefits of the penetration pricing strategy are that it can
• Facilitate rapid market growth.
• Build market share rapidly.
• Deter new entrants.
• Rapidly generate scale and experience economies.
• Generate high long-term profits.
However, the pitfalls of the strategy are that
• Customers may resist rising prices.
• The scope for cost economies may be limited.
• It needs large initial capacity investment.
• It delays investment recovery.
• It may generate excess demand that rivals can exploit.
THE INTEGRATIVE
PRICING TECHNIQUE
As described earlier, many factors affect pricing effec-
tiveness. Prominent among these are costs, demand, and
competitor prices. Erroneously, many companies focus
on only one of these three factors when setting prices,
sometimes to the exclusion of all or most other relevant
variables. The following describes the methods and dan-
gers involved when firms adopt a pricing method based
exclusively on one of the three prime pricing determi-
nants.
Cost-Based Pricing Methods
Research in various countries has established that cost-
plus pricing is the (or one of the) most widely used pric-
ing method [7, 10, 32]. Sometimes, a more refined, but
equally flawed, adaptation of the technique links the
price to a target return on investment [2, 32, 33]. Never-
theless, both approaches apply the same fundamental
logic. This involves a forecast of sales volume and the
calculation of fixed and direct costs to derive an average
cost estimate to which is added a predetermined percent-
age profit markup to produce the selling price. Strict ad-
herents to the approach then hold unwaveringly to this
price regardless of other considerations.
Various explanations for the use of this method have
been given by managers [7]. These are that it
310
• Enhances customer relations.
• Is simple.
• Is a standard operating procedure.
• Provides price stability in stable markets.
• Is fair to customers.
• Competitors use it.
• Is the most profitable method.
However, these explanations do not validate cost-plus
pricing, and they are strongly outweighed by the disad-
vantages involved. There is some merit in the view that it
helps customer relations because customers are more
likely to accept price increases caused by cost increases
than to facilitate higher supplier margins. However, this
holds regardless of the pricing method used. The other
explanations given are at best only partially valid, and
some of them are simply wrong. For example, cost-plus
is not the most profitable method; it is not necessarily fair
to customers because this depends on the price-benefits
balance and the size of the margin; that it is simple is ir-
relevant if its use results in pricing errors and using cost-
plus merely because rivals do is myopic.
The disadvantages of using cost-plus methods are
powerful. They include the following:
• Because it is simple to use, its adherents often leave the
pricing role in the hands of junior managers who may
lack a deep understanding of the market.
• It is very difficult, if not impossible, to accurately allo-
cate fixed costs among a firm’s multiple products each
serving multiple markets. Hence, even if the method
was logical, it computes inaccurate fixed cost esti-
mates.
• Pricing rigidly on the basis of a markup on average
costs precludes firms from taking short-term opportu-
nities that require prices at levels between average and
direct costs as discussed earlier. Hence, direct cost is
often a more logical base for pricing decisions as any
price above that level contributes to meeting fixed
costs or to profit.
• It ignores competitors’ prices and price reactions.
• It ignores customer price sensitivity.
• It ignores objectives other than markup achievement.
• Most damaging, however, cost-plus pricing is based on
perverse logic. It begins with a volume estimate and
ends with a price. However, in reality, price determines
volume and not vice versa. If a cost-plus determined
price was too high for customers, the volume would
fall and given the mechanics of the method this would
 raise the average cost estimate leading to an even
higher price. This process then would continue until
volume fell to zero, at which point average cost and
price would equal infinity.
Competitor-Based Pricing Methods
Firms that use this approach either match rivals’ prices
and price changes exactly or, more usually, match their
price adjustments proportionately to preserve the nest of
price differentials.
Arguments for this approach are that it
• Is very simple to administer.
• Allows the follower to benefit from common price in-
creases and to avoid being disadvantaged by competi-
tors’ price cuts.
• May forestall price wars as rivals know that cuts will
be copied.
The second and third of these motives may be valid aims
for many firms, particularly small ones with large rivals.
However, they are insufficient determinants of success.
Moreover, the same aims are not precluded by the use of
a more effective method.
The administrative problems and the pitfalls of com-
petitor-based pricing are the following:
• It ignores opportunities for using price initiatives for
the firm’s gain.
• It ignores the firm’s own costs and cost differentials
vis-à-vis rivals. In the worst case, following a rival
could result in pricing below cost.
• Firms cannot be sure of what rivals prices are now,
only what they were earlier in the day.
• It cannot account for rivals’ discounts because they are
often negotiated secretly.
• It may ignore customer demand.
• It may ignore objectives other than those concerned
with competitiveness.
• Price equality does not ensure equal competitiveness
because this is also affected by nonprice benefits.
Demand-Based Pricing Methods
These methods involve forming estimates of how
highly customers value the offering and customer price
sensitivities and then setting prices according to what the
traffic will bear. The prime benefits of this are that it
• Results in prices that customers are able and willing to pay.
• Recognizes that differences in customer value percep-
tions and spending power can allow disparate prices to
be set in different segments to enhance overall profit-
ability.
Differential pricing across segments is facilitated by dif-
ferences in customer needs and buying behavior. Skim-
ming and penetration pricing strategies are based on time
utility, urgency of need, and buyer loyalty. Other bases
include differences in buying power, purchase or use lo-
cation preferences, channel preferences and product aug-
mentation.
However, demand-based pricing also involves disad-
vantages becasue it
• Ignores costs, rivals’ prices, and other relevant influ-
ences if it is applied too rigidly.
• Involves major difficulties of information collection as
discussed earlier, resulting in imperfect demand esti-
mates.
Applying The Integrative Pricing Method
It is clear that reliance exclusively on cost, competitor,
or demand-based pricing methods is erroneous. How-
ever, none of these variables should be ignored in pricing
so that a method is required that incorporates all of them
as well as any other relevant factors. The integrative pric-
ing technique illustrated in Figure 6 exploits the benefits
of all the other methods.
Integrative pricing must be conducted at the level of
the individual market segment. It involves a sequential
process that cannot be applied unless the firm has com-
pleted an analysis of the issues discussed in all of the pre-
ceding sections of this article.
Because the logical starting point for marketing deci-
sion making generally is with customer needs analysis
[34], this is the prescribed point of commencement for
the integrative pricing method. Hence, the first task is to
assess customers’ valuations of the offering and the
prices they are able and willing to pay for the firm’s tar-
get volume. This sets the price ceiling or the maximum
that can be charged in the segment.
The next logical step is to assess the average and direct
cost levels involved in supplying the relevant output
level. These set respectively, the long-term viable aver-
age price floor and the short-term contingency price (dis-
cussed above) floor. Pricing below these levels results in
respectively long-term or short-term losses.
311
 FIGURE 6. The integrative pricing technique.
Viability requires that a gap exists between the price
ceiling and the operative price floor. If there does not and
if nothing can be done to lower the floors or raise the
ceiling, the firm should exit the segment. Where a viable
gap does exist, however, the company’s next task is to
determine whether the preferred role for price in the com-
pany strategy is tenable within the gap and whether it
permits the company to achieve its marketing and pricing
objectives. If these cannot be achieved, either the role
and objectives can be adapted or the segment can be ex-
ited. Assuming that the latter is unwarranted, the next
step is to establish whether the ceiling-floor limits pro-
vide sufficient scope to implement the preferred generic
strategy and price-benefits positioning. Assuming affirma-
tive answers, the firm can then proceed to a full assessment
of all other relevant internal and external factors to ascer-
tain whether all constraints can be met and opportunities
exploited within the confines of the gap. Some of the market
opportunities, such as withdrawal from the segment by a
major rival, will push the price toward its ceiling level.
Alternatively, other factors, such as strong downward
pressure on price by a powerful distributor, will drive the
price toward the floor level. After all these influences
have been considered, a balanced management decision
can be taken to derive the final selling price.
312
IMPLEMENTING AND CONTROLLING
THE PRICE
The last stage of a single rotation of the pricing wheel
is the market application, assessment, and control of the
price. Implementation of the price involves the publica-
tion of the price list and effective communication of it to
the various relevant audiences. The latter include, for ex-
ample, customers, the sales force and distributors, and
relevant internal personnel, such as those responsible for
sales quotations and invoices.
Controlling the price requires careful analysis of how
customers, dealers, and rivals respond to it. If any of
these react differently and adversely to what was expected,
control steps need to be taken. This involves identifying
precisely why the price is ineffective and deciding what
needs to be done to correct the problem. Finally, detailed
analysis of all the internal and external pricing determi-
nants should be maintained. When any of these changes
significantly the firm’s task is to revisit the pricing wheel.
SUMMARY AND MANAGERIAL IMPLICATIONS
Many firms do not fully exploit pricing opportunities,
and many make major pricing errors. This is due to a pre-
occupation with cost-based or other pricing methods that
fail to take account of the full range of company and situ-
ational factors that are relevant to price decision making.
This article has argued that pricing effectiveness can be
substantially improved by the adoption and application of
the multistage integrative and flexible pricing approach
comprising the pricing wheel. Usage of this approach can
result in practical and important benefits. Applying the
pricing wheel involves a set of key tasks and principles.
These include the following:
• Specification of a well-defined role for price in the
overall company and marketing strategy.
• Determination of a set of prioritized and flexible pric-
ing objectives that are consistent with conditions in the
market environment and with the general marketing
objectives and strategy of the company
• Evaluation of all relevant external and internal pricing
determinants before making decisions.
• Formulation of price strategies that are consistent with
the value of the benefits offering and that establish ef-
fective competitive positioning in the market.
• Abandonment of simplistic and risky pricing methods,
such as the mechanical application of cost-based for-
mulae.
• Acceptance of the wisdom and benefits of sometimes
setting prices between average and direct costs to meet
short-term contingencies or as a temporary element of
a long-term strategy.
• Adoption of the integrative pricing technique that iden-
tifies the levels of the price ceiling and the relevant
price floor and sets a price between them after a full
consideration of all pricing determinants.
• Application of professionalism in price–setting, imple-
mentation, evaluation, and control.
Overall, utilization of the pricing wheel process and the
integrative pricing technique discourage a range of
flawed pricing practices and pricing errors. By providing
a systematic framework for pricing it enhances the qual-
ity of price decision making. Moreover, it has the built-in
advantage of encouraging price flexibility to ensure that
the prices set continue to be relevant despite changing
marketing conditions.
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