Packaged goods companies have long recognized that pricing is a key lever in managing brands for profitability. Even so, pricing is so underleveraged in practice that improving price management can raise margins by as much as 5 percent. Companies seeking to capture this potential must not only make efforts to understand the behavior of consumers but also find ways to apply this understanding to the thousands of front-line pricing decisions they make every year.

This opportunity exists because of a widespread assumption that marketing departments set prices and make them effective. Yet any consumer’s shopping experience will demonstrate that this is a misconception.

Not long ago, an acquaintance bought a box of cereal for $3.79. He was unhappy because he had paid $2.49 for the same brand in the same supermarket just two weeks earlier, when he had also used a 75¢ coupon to pay a net price of $1.74. To add insult to injury, he knew that a nearby supermarket always sold this brand for $2.99. These variations in price confused him. In fact, they are entirely normal, and centralized pricing decisions are responsible for very few of them.

In category after category, the end prices consumers pay...