Game Changer

CHAPTER 2Four Economic Frameworks

Business leaders often confuse pricing methods with pricing strategies, so it is important for us to distinguish sharply between the two. Pricing methods yield a price number as a finite output. These outputs can vary significantly, depending on the information sources used, as the cupcake entrepreneur learned at the end of Chapter 1.

Pricing strategies demand that leaders look beyond prices – beyond the numbers – to take the entirety of their current and future market situations into consideration, rather than focusing narrowly on one input or one method to the exclusion of other information. Pricing strategies express intentions and offer guidance and direction. They are subjective and require astute judgment.

The next step in going beyond prices and developing a pricing strategy is to look at the combinations of the three information sources. Cost, competition, and value can generate important and more powerful insights in combination than in isolation. The intersections we show in Figure 2.1 show the four natural overlaps that result in practical frameworks backed by large bodies of economic theory.

FIGURE 2.1 Venn diagram of information sources forming four economic frameworks

The frameworks at the respective overlaps – elasticity, ...