In a new book called “The Price Advantage,” three McKinsey & Company consultants say that many companies have no understanding of what it means to establish a “price advantage.” Whereas those companies frequently boast of having a purchasing advantage, or cost advantage, or innovation advantage, or distribution advantage, or service advantage, “they never boast of having a price advantage—which simply means that they know how to price better than their competitors do.” Co-author Michael V. Marn asks:

“Why bother to work as hard to innovate if you’re just going to charge the same price for the old product that you’re replacing? Why bother working so hard to be a high-service provider if you’re going to match the price of a low-service provider in the marketplace?” He says the “price advantage” (i.e., the capability to come up with the right prices more consistently) “is something that allows companies to realize the benefits of the other advantages they work so hard to create.” He adds that “having the price advantage would let you know when you are indeed pricing too high and appropriately adjusting downward when that makes sense. It’s not about always being too high or too low. It’s about understanding the power of having the right price for as many transactions in the market as you can.”

Knowledge @ Wharton Jul 2004