Many otherwise rigorously run companies are disconcertingly lax about pricing. Although a 1 percent improvement in price yields bigger gains in operating profit than a similar improvement in variable costs, fixed costs, or volumes—almost 8 percent on average across the S&P 1000—companies often base prices on the anecdotal observations of a few vocal salespeople or product managers. A lot of companies therefore end up with pricing policies that leave money on the table by failing to differentiate markets on the basis of their competitive dynamics and supply-and-demand economics. But there is a straightforward way to gauge supply and demand in individual markets. Companies can use it to decide whether their prices are too low or too high and, if so, by how much. (See sidebar, "Pricing in the e-channel.")

Compare apples with apples

Consider a hypothetical company competing in many locations and market segments. Sales branches forced to discount heavily are making little or no profit, but those that can sell near or above list price are doing quite well. Perplexingly, the high and low performers are not concentrated in particular geographic areas and don't focus on particular product lines. The efforts of sales managers to explain the...