Most companies are in a constant state of debate over which improvement initiatives have the greatest potential to help them reach and maintain high performance levels. One such action, however, is nearly always viable: revising and upgrading the pricing structure of products, parts, and accessories. In fact, prices and pricing strategies should be (re)assessed whenever:

• a new product is introduced
• a similar competitive offering hits the market
• a new market, geography, or customer segment is identified
• a merger or acquisition occurs
• a competitor enters or leaves the market
• a major technology implementation or breakthrough occurs
• a key business process (including supply chain activities) is outsourced
• a recall or safety warning is issued.

Nowadays, two pricing "mantras" are increasingly central for business success. The first of these is to formulate pricing decisions based on what the market is willing to pay, rather than by simply calculating the relationship between incurred costs and desired profits (a "cost-plus" approach). The second is to develop an interlocking strategy with regular, promotional, and clearance prices that mirror the stages of each product's unique life cycle. The latter makes it easier to identify which pricing approaches are working and which are not, and to take the right path toward improving total financial return for the product involved. As shown in the graphic, five stages comprise this approach to an integrated "pricing life cycle":

Strategy. At the outset, companies must seek to create a single pricing strategy geared to maximizing profits. Primary considerations include:

Proactivity. Do we wish to lead the market in terms of pricing (first mover) or be reactive (wait and see what our competitors do)?

Competitiveness. How aggressive do we want to be about pricing? If we are not aggressive enough, margins suffer. But if we are too aggressive, new competitors will target our markets.

Inclusiveness. Does our price include everything—for example, a replacement tire whose cost covers mounting, balancing, warranty, etc.? Or is it better to price components individually?

Brand. Companies such as Harley-Davidson often charge more because the power of their brand permits them to do so.

Planning. Modern pricing programs require segmentation, such as "good-better-best" distinctions; "loss leaders" to draw in customers; or perhaps "variable pricing" based on geographical divisions or customer-value assessments. It's also important to make pricing decisions based on a product's role within or across categories. For example, a dealer may price tires low to drive floor traffic to its service department. Once a car is on the rack, the technician may deduce that new brakes or shocks are needed. And those items will likely be priced much differently.

Management. Companies must establish a "regular" price for each product—one that can be maintained over a reasonable period of time. To decide on a promotional price, they'll need to clarify each promotional program's objective: Increase profit? Relieve overstocks? Generate foot traffic? Then there are exit-price decisions. These could involve strategies for the end of a selling season or for the end of a product's market life. Dell is often cited for its ability to use price to drive demand; the computer maker cuts prices for overstocked inventories and raises prices to cool demand for products or components in short supply.

Execution. High-performing companies do several things well when it comes to optimizing price. Most maintain databases of competitors' prices, as well as databases that record their own pricing moves and the impact of pricing changes on sales volume. This information helps them assess the impact of pricing decisions on sales and demand. Leaders also know that pricing is driven first and foremost by what buyers are willing to pay, and that a so-called pocket price (the net revenue that ends up in their pocket) must be assigned to each product. Thus, they understand the full landed cost of each item: material costs plus fixed costs that have been broken down into activity-based components.

Assessment. The final action involves measuring the impact of pricing decisions. Pricing leaders usually compare expected financial impacts with real-life results, often using exception-based capabilities to flag problems or anomalies. These assessments become part of a feedback loop into the company's overall pricing strategy and plans. Assessment also means monitoring and maximizing compliance. Even companies that establish life cycle-based pricing structures can still be victims of renegade pricing caused by revenue-incented sales, pressure to meet end-of-quarter projections, and so forth.

At the end of the day, life cycle-focused pricing is about maximizing profit, not revenue. And companies that are committed to maximizing profit are using life cycle-based pricing approaches to help make it happen.