Risk-Aversive Pricing Policies: Problems and Alternatives

Abstract

T HE marketing manager for a heavyequipment manufacturing concern in northern Ohio recently suggested that before 1973 he spent no more than three days a year on pricing policy but that currently pricing dominates all marketing policy-making activities in his firm. This experience is not unusual. Decision makers are becoming increasingly aware that pricing policy changes must be made with consideration for possible major shifts in economic conditions such as the prices and availability of raw materials, aggregate demand, interest and exchange rates, and liquidity. Uncertainty regarding these economic forces leads to uncertain and fluctuating gross margins, creates difficulties in planning working capital needs, and impedes budgeting. Since price can influence cash flow and margins more quickly than other marketing variables, the development of policy regarding price levels, changes, and discounts has become of paramount concern in current marketing practice. This article reviews some current pricing responses to economic uncertainties and identifies key problems associated with the implementation of these responses. In particular, responses that reflect risk-aversive, defensive perspectives are of primary concern. While it is often appropriate for managers to adopt policies that seek to minimize risk, this article contends that such responses may have unanticipated consequences that entail a good deal of risk. Alternative courses of action for developing pricing policies under economic uncertainty are also presented. The analysis is based on concepts, practices, and theories gleaned from marketing theory, general business periodicals, and a series of executive development pricing seminars in which the author has participated with senior pricing executives.