Power Pricing

Citation

Butaney, G. (2000), "Power Pricing", Journal of Consumer Marketing, Vol. 17 No. 2, pp. 172-185. https://doi.org/10.1108/jcm.2000.17.2.172.5

This book is about the pricing modus operandi of companies which are labeled as the power pricers. These companies have learnt how to actualize the leverage effects of price on their bottom lines. Therefore, how to become a power pricer is the focus of this book. It is written at the practitioner level and is extremely useful and even fascinating.

The authors of the book, Robert J. Dolan and Herman Simon, are two well respected professors from Harvard Business School and MIT. They combine their extensive consulting experience with firms around the world and tell us how the power pricers stand out in their pricing attitudes, thought processes and actions. They recommend certain pricing plans as well as how to implement them. Their prescription takes us from the conventional wisdom of making pricing decisions in terms of costs, industry markups, and competition. They identify several other variables that influence pricing decisions and superior processes that enable firms to achieve pricing excellence. The authors have provided a wealth of information, know‐how and practical insights for making appropriate pricing decisions and for tapping pricing leverage and profitable opportunities.

The material is distinctively organized into three parts. The seven chapters in Part 1 provide the profile of power pricer, and establish the necessary foundation for understanding basic pricing economics. Part 2, entitled “Breakthrough pricing concepts”, has seven chapters. Each chapter is devoted to a fundamental pricing concept, showing its relevance and implementation in the pricing decision process. Each chapter progressively moves the manager from a traditional pricing orientation to the one that realizes profit maximization through the power pricing process.

Part 3’s two chapters deal with pricing management issues. They focus on effective organization for pricing, responsibilities, and implementing pricing decisions. Cumulatively, the 13 chapters provide an excellent guide to become a power pricer. Highlights of the each chapter are noted as follows.

Chapter One lays down a solid orientation on how to become a power pricer. Specific tips are provided on developing the “pricing view point”, along with fact files, analytical tools, and the implementation process. A very useful schematic of the value/pricing process is developed and presented.

Chapter Two covers the fundamental economics of price, costs and profit and their role in the price optimization process in an easy‐to‐understand and very practical way. Similarly, in Chapter Three the authors show us how to estimate customer response to various price options and uniquely capture the profit potential available from each major customer segment. They discuss appropriate tools and processes as well as the marketing strategy for tapping that potential. Chapter Four, the final chapter of Part 1, deals with competitive aspects of the pricing strategies, including building a power price information database and ways to influence the competitors’ pricing behavior.

Chapters Five through 12 introduce several breakthrough pricing concepts that would revolutionize the manager’s pricing attitude and, hence, his/her pricing modus operandi. These chapters cover customizing prices along different dimensions, e.g. across different customers, national/global markets, product variants, and short/long time horizons, providing great insights into pricing strategies and recommendations.

Chapter 5 introduces the concept of price/value customization. Not all customers have the same value for a product, yet they might pay the same price for the product. Therefore, customizing prices to the customer’s value is a breakthrough pricing opportunity. The authors explain customizing price along different product variants by perceived customer value and the level of customer loyalty. This understanding at a disaggregate level then helps a marketer to design appropriate pricing strategies. Potential marketing‐mix strategies are also recommended to implement the price customization concept along the customer value dimension.

Chapter Six extends the customization concept to address pricing complexity across different national and international markets. The issues of price harmonization and alignment are discussed. The interrelatedness of markets generally increases the complexity of pricing, as the customer price and service sensitivities, importance of various product attributes, and distribution arrangements differ so vastly in global markets. The authors suggest that international markets provide the biggest challenge for the power pricer as well as the best opportunity to reap big profits by meeting those challenges.

Chapter Seven discusses the strategy of non‐linear pricing. It involves a discount in the price with an increase in the number of product or service units purchased. Non‐linear pricing can take many different forms and is most widely practiced by industrial, service and consumer product companies. Non‐linear pricing is one of the most interesting and effective methods of price customization in the variable quantity purchasing situations. Its optimal application requires a high level of sophistication. The chapter specifically addresses the following questions:

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  Why is non‐linear pricing optimal and under which condition?

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  What are the various forms and tactics of non‐linear pricing and what type of information is required to develop non‐linear schedules?

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  How should prices for multiple persons be set?

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  How should non‐linear pricing strategy or tactics be implemented?

The huge profit potential associated with non‐linear pricing suggests that each company should carefully examine the adoption of this strategy, and this chapter offers abundant help in this direction.

The eighth chapter focuses on product‐line pricing issues and specifically on customizing pricing where interdependencies in demand for various products items exist. In this age of product variety and mass customization, the multiple product line strategy presents new pricing issues and opportunities for firms.

The chapter addresses such questions as:

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  Which interdependencies are relevant for profitable product‐line pricing opportunities?

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  What combination is required in introducing and positioning additional products in a product line?

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  How does the expected revenue stream from services affect the selling price of a product?

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  What and how to structure information required for effective product‐line pricing?

The authors discuss these questions and provide several illustrative examples to enhance our understanding and know‐how on product‐line pricing strategies.

Chapter Nine deals with price bundling issues and opportunities in a variety of industries including computer, software, automobile, restaurant, pharmaceutical, travel, hotel, insurance, advertising, film and furniture.

Specifically the authors address the following aspects of price bundling:

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  What are the relevant forms of the price bundling and under which conditions and why is price bundling optimal?

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  How to apply bundling as a price customization technique and select a right form of bundling.

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  Knowing when to unbundle and how to implement price bundling successfully to avoid pitfalls, including legal problems and restrictions, as well as customer reactions to price bundling strategies.

Price bundling is a potentially powerful method to exploit profit potential better and to maximize profits in a multi‐product company. However, it requires a careful analysis of various factors and situations to apply this strategy. The chapter offers a complete guide, using example of various companies and marketing situations, for managers to consider price bundling strategies for their products and services.

The tenth chapter, “Time customization of prices: the short term”, shows how to customize prices over time through a temporary discount or sale policy. Price discounts and sales promotions are widely practiced to achieve a variety of marketing goals (e.g. match supply and demand conditions, induce purchasing) and consumers have come to expect them. The material covered in this chapter, therefore, is extremely important. The time customization of prices can be a powerful profit enhancer. The authors develop a taxonomy of demand conditions promoting understanding about the motivations for time customized prices and when it is advisable to persue them. Full understanding of the customer’s economic and emotional reactions as well as profit consequences is required. For example, time customization can induce disruptions to efficient operation of manufacturing and supply systems, especially when demand is fundamentally stable. Costs and benefits of alternative strategies and how to profitably implement time customized pricing strategy are also discussed.

Chapter 11, “Time customization of prices: the long term”, on the other hand, treats strategic pricing issues. A proactive approach to manage price over the product life cycle is identified. This is an excellent chapter to enhance understanding about the dynamic relationships between current sales volume, current prices, future costs, and competitive situations, and how to manage them for long‐term profit and attainable unit margins. The dynamic relationships link the present and the future. Tradeoffs between reaping the harvest now and investing in the future are discussed. A power pricer helps the industry to realize a long‐term path that promotes industry profitability through effective pricing and communication with major players in the market.

Power pricing typically requires the involvement of various functions with different information backgrounds and careful management of the pricing information, processes and strategies. Part three of the book which contains the two final chapters, 12 (Organizing for power pricing) and 13 (Becoming a power pricer) is entirely devoted to the pricing management issues. Pricing authority and organization for effective pricing, how to enhance pricing one’s IQ for becoming a power pricer, how to implement pricing actions with regard to preparation, communication, negotiation, and corrective actions are some of the issues addressed in these two chapters.

Overall, the pricing material covered in the book is very powerful. It is comprehensive in tapping the domain of pricing functions as well as in relating to several other major businesses and marketing decisions. Its practical significance and value for the manager is heightened as the authors have captured the typical pricing decisions and situations of real life companies, both operational and strategic in nature, encompassing several industries. Unique decision frameworks are developed, and detailed examples and case studies are used to illustrate how to use the frameworks. Throughout the book guidelines are provided on how to become a power pricer.

Without any reservations, Power Pricing is a must‐read book for business leaders, general managers, marketing personnel, accounting and finance managers, as well as faculty members with teaching and research interests in pricing.