Table of contents(25 chapters)
Gerald E. Smith is chair of the marketing faculty at Boston College in the Carroll Graduate School of Management, where he leads the product and brand management MBA specialization, and teaches strategic pricing management. His research has been cited in popular press outlets such as The Wall Street Journal, The Christian Science Monitor, The Boston Globe, Across the Board, and others, and has been published in Journal of the Academy of Marketing Science, California Management Review, Sloan Management Review, Marketing Research, Marketing Management, Pricing Strategy & Practice, Journal of Retailing, Public Administration Review, Psychology and Marketing, Journal of Professional Pricing, among others. He is a frequent speaker and corporate consultant on product management and pricing, including in leading business programs at Duke, Wharton, Columbia, Boston University, and Suffolk University.
A rare and valuable combination of practical advice, theoretical modeling, and descriptive explanation of pricing decisions is the summary thought that best captures the overall contribution of Visionary Pricing (VP). VP builds principally on Dan Nimer's great foresight that pricing cannot be the sole domain of finance or any singe functional area and in offering a paradigm shift from cost-plus pricing to customer-value-based pricing.
In terms of the life cycle, pricing certainly would be considered a young and emerging discipline, only a few decades old. Even marketing is only 50 years old as a business discipline; Jerome McCarthy of Michigan State University introduced the Four P's classification (product, promotion, price, and place-distribution) in 1960. Peter Drucker's influential The Practice of Management hailed the twentieth century as a “marketing revolution” in 1954, but mentions pricing fewer than a dozen times, even then only in passing.
There must have been a time when Dan Nimer was not interested in prices, but obviously that was long ago. He was already well into his favorite subject in 1959, when as manager of budgets and sales forecasting for Zenith Sales Corp. (a division of Zenith Radio) he got his first chance to act on his conviction that pricing offers far more opportunities for managerial ingenuity than most businessmen realize. His move in 1963 to Canteen Corp., which is in the food service business, may seem surprising at first glance but fits in perfectly with another principle in the Nimer canon: that the rules of intelligent pricing, as of intelligent management in general, are sufficiently basic to apply with equal validity to radios and to hot dogs (which is what Canteen sells at Yankee Stadium).
In this chapter, we follow the growth of the pricing discipline, especially through the ideas of one of the earliest of pricing's pioneers: Dan Nimer. The Nimer influence on pricing has been foundational, sewing seeds for the growth and development of various pricing fields and subfields – pricing objectives and pricing strategy, value-based pricing, costing and pricing, financial analysis of pricing, and price sensitivity. The ideas we present in this chapter originated largely with Nimer, many in his own voice. We interweave them with the ideas of other contributors to the pricing discipline to show the development of the field. Dan taught many foundational pricing concepts; they are captured in seminars and articles kept through the years. Founding pioneer to pricing, Nimer's influence will remain long into the new century as pricing enters a new phase as a strategic capability of the firm.
Differentiation and revenue growth have heretofore been the focus of marketing practice in large Western companies. That focus is unlikely to work well as growth slows in aging Western markets and volume growth comes from more price sensitive emerging markets. Successful companies will need to deliver not just better products, but better value for money. That will require integrating marketing and operational choices to achieve greater cost-effectiveness. Pricing professionals are uniquely positioned to facilitate that integration and thus to become more involved in defining a profitable strategic focus for their companies. To fulfill that role, they will need to define and target market segments that reflect not just differences in growth potential and “unmet needs,” but also each segment’s “strategic fit” with the firm’s capabilities.
This chapter describes and discusses the coming of age of price consulting from the perspective of Simon, Kucher, and Partners, today the world’s leading price consultancy. Starting with modest beginnings of a predominantly theoretical and methodological nature, the field has evolved into many specializations along measurement, model building, and structural and industry lines. The current stage of development is characterized by an advanced integration of theory and practice. In spite of the big progress, large growth potentials are previewed for the future. Price consulting is today seen as a young adult who still has a lot to learn and can further contribute to the professionalization of price management.
Although critical to profitable pricing, competitive strategy is often overlooked in the pricing process. This often leads to poorly developed competitive actions with profitability suffering. This paper provides a comprehensive integrated process for the strategic management of the connection between pricing and competitive strategy. The use of the process proposed here provides active management of competitive interactions and significantly improves profitability.
Advances in technology, operations research, and data driven pricing and marketing are leading pricing strategy into new and untested waters – toward dynamic pricing, and variable pricing strategies, which ultimately require changes in how we view pricing strategy. The dominant view of pricing strategy is that pricing goals, objectives, and strategies should be formulated a priori, and should be consistent with marketing and corporate strategies – deliberate pricing strategy. This chapter argues that firms need to develop new strategic pricing skills that lead to more improvisational, innovative, or adaptive pricing strategies. I call this type of price strategy-making emergent pricing strategy. Innovative pricing strategies that the organization judges, or senses to be effective, are repeated, shared, expanded, and refined into successful pricing patterns that, over time and across situations, become pricing strategy. Thus, rather than specifically designing pricing strategy to achieve a goal, here the organization acts upon a price innovation that seems to make sense for this customer, this market segment, this setting, and this situation, then interprets the outcomes, signals, and reactions that seem to flow from the pricing action, and shares and encourages adoption and adaption by others in the organization. Emergent pricing strategy is particularly useful in unstable, turbulent, and complex product and market environments in which price-sensitive buyers wield significant power and influence.
This chapter summarizes the behavioral pricing research findings of price and how buyers respond to price. This includes the relationship between price and perceived value and the decision heuristics that help us understand how price influences perceptions of value and eventual product choice. Buyers also use price as an indicator of product quality, and customers’ perceptions of quality, benefits, and value affect how they will respond to a purchase situation. In addition, buyers’ perceptions of the sacrifice affect the purchase decision, that is the degree that consumers reflect on the amount that they would “give up” by paying the monetary price for a product may vary according to a variety of situations and conditions, such as type of product or service, or the perceived unfairness of the price, or if the buyer perceives a brand is superior to competing brands. The chapter also discusses how buyers trade off or compare the perceived gains arising from price-quality judgments versus the perceived sacrifice required to acquire the product or service, including whether buyers integrate price and other attribute information following a nonlinear (proportional) or linear (subtractive) process. It also summarizes research on price as a multidimensional attribute, considered with additional dimensions such as warranty coverage, and warrantor reputation. Finally, the chapter examines perceived product value as being decomposed into its (1) perceived acquisition value (the expected benefit to be gained from acquiring the product less the net displeasure of paying for it) and (2) perceived transaction value (the perceived merits or fairness of the offer or deal).
As pricing has evolved as a specialty over the past 20 years, there has been increased focus on the concept of value – what it is, how to measure it, and why it is important. Value is important not only for setting prices but for establishing product and negotiating strategies and tactics. This chapter first discusses the importance of value in the price-setting process. Second, it frames how to define and measure value. Last, it explains how value tools can help salespeople in their negotiations process. It will review the application of these value measures in a business-to-business (B2B) environment and report on a technique of value measurement called Case ROI™. This measurement is particularly useful because it calculates the value of new products, technologies, and services at both the segment and the individual customer levels with a higher level of precision and relevance than other methods. It is based on a field-value-in-use technique that will be discussed in detail.
“Price is what you pay. Value is what you get.”
– Warren Buffett
Value pricing can be a successful means to maximize profit by pricing products and services based on their value to end users. Using this approach necessarily means that customers are segmented, with some receiving better prices than others. However, many companies mistakenly believe that U.S. law requires that all customers receive the same price or a “fair and equitable” price, an unrealistically high standard that is a self-imposed roadblock to value-based differentiation.
Not only is the law supportive of segmentation and the economic discrimination that goes with it, but, where resellers are involved, the law also permits value pricing to be facilitated and preserved through the use of non-price vertical restrictions and resale price setting. In addition, price signaling can be a lawful way to avoid sending wrong messages to the marketplace that jeopardize value pricing strategies.
The price of a product or service must reflect and capture the value delivered, but the bulk of attention paid to the area of value determination is to methods of calculating value. This approach ignores the less tangible but equally or more important aspects of value that often drive decision-making, aspects that don’t lend themselves easily to the metrics many believe are essential to solving the pricing puzzle. Pricers, to be effective, must understand how to identify these nonmetric aspects of value and incorporate them into their pricing decisions. This chapter provides a foundation for determining the sources of value of a product or service, tools and models that can be used to determine and understand value, and commentary on ways to capture this value through pricing.
This paper introduces the development of a new type of sales promotion strategy to create more value for goods and to avoid price discounting. I use a psychological approach designed by creating consumer insight hypotheses based on in-depth interviews, which are then verified by web-motivation research and text-mining. This innovative sales promotion approach is a very hot topic as a new type of promotion development among large companies in Japan and is useful in avoiding price-discounting sales. This paper explains the concrete process used in this type of promotion and reveals the successful case of a large spice company in Japan. The process uses price sensitivity measurement (PSM) as a pricing technique. In the experiment, conducted in nine retail stores, the most successful sales promotion condition saw an increase of 900% in monetary sales without price discounting during the two weeks of the experiment, and 500% in the two weeks after that.
Many companies have made progress in pricing – instituting pricing rules, creating pricing organizations, and getting high-level visibility on pricing performance. Few, however, have truly turned pricing into a competitive advantage. Unfortunately, the growing complexity of pricing demands that companies take their pricing capabilities to the next level of performance. This chapter outlines some of the ways that companies can take their pricing capabilities to a higher level of performance. Managers should look at these ideas and identify one or two areas where they will take their capabilities not just to good but to a level of world class. Those that do will increasingly be able to outperform their competitors and drive significant value to the company's bottom line.
Recent years have seen explosive growth in the use of enterprise pricing software. Pricing software contributes to business returns by improving pricing decision-making, and by providing monitoring and process control for pricing processes across the corporation. This software has developed in a number of significant ways over the past decade and continues to evolve in terms of sophistication and ability to contribute to both top- and bottom-line growth. In this paper, the authors present a brief historical context for the role that pricing software fulfills in a typical B2B corporation, and a set of predictions of future capabilities based on emerging trends.
When linked to human behavior and executed effectively, value-based pricing represents the most effective lever that a company has at its disposal to maximize profitability. The ability to integrate sophisticated analytics and market research in order to sell a customer the right product (and value) at the right price will drive profitability far more effectively and sustainably than other business initiatives (Marn & Rosiello, 1992, p. 84). This chapter addresses the use of analytics to determine where value resides and how to turn that analysis into an effective platform for pricing decisions. Organization-wide involvement in pricing is essential. A company must provide those persons responsible for pricing – including finance and sales persons – with information regarding the levers they can pull in the product transaction execution. Statistical business analytical software enables companies to apply microeconometrics (analytical and statistical capabilities) for the pricing and selling of products. The pricing waterfall helps companies understand where they can increase profits by using the pocket price and pocket margin to gain insights into which customer relationships can be more profitable than others. By examining the transaction structure, behavioral segmentation, and price optimization (three dimensions of the Analytics Triad), a company can conceive the full value proposition for groups of customers. An effective process and technology infrastructure that enables granular data development and analysis will help enable accurate and timely pricing decisions.
This chapter makes the case for companies to improve pricing operations that enable pricing strategies in any given set of market conditions by taking certain steps before embarking on large initiatives that can affect prices, such as mergers or acquisitions, continuous improvement efforts, breakthrough changes (e.g., business process redesign or new technology implementation), or large-scale reorganization. Starting with pricing-related challenges, we draw attention to the importance of pricing operations by clarifying how pricing operations differ from pricing strategy and also how they directly impact profitability. Companies should follow a four-step approach to precede any major initiative affecting pricing, including Assessment of their pricing processes, Analysis of these pricing operations before bringing about sustained changes, then making and implementing Recommendations that should include Training of functional teams, in short, through AART. We discuss how companies can implement AART with illustrative examples.
George E. Cressman, Jr. is President and Founder of World Class Pricing, Inc. George spent 30 years in industry, and has been consulting in marketing strategy, competitive strategy, and pricing for 15 years. George provides marketing and pricing solutions for global business-to-business and business-to-consumer firms. George has been named Marketer of the Year by the American Marketing Association, and is a frequent speaker in management education programs.