• Author / Uploaded
• Jason McCoy

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Fifth

Edition

INTERNATIONAL EDITION

THE STRATEGY AND TACTICS OF PRICING A GUIDE TO GROWING MORE PROFITABLY

Thomas T. Nagle Monitor Group

John E. Hogan Monitor Group

Joseph Zale Monitor Group

Boston Columbus Indianapolis New York San Francisco Upper Saddle River Amsterdam Cape Town Dubai London Madrid Milan Munich Paris Montreal Toronto Delhi Mexico City Sao Paulo Sydney Hong Kong Seoul Singapore Taipei Tokyo

CONTENTS Preface 8 About the Authors 16

Chapter 1 Strategic Pricing 17 Coordinating the Drivers of Profitability Cost-Plus Pricing 18 Customer-Driven Pricing 19 Share-Driven Pricing 20 What Is Strategic Pricing? 21 Value Creation 23 Price Structure 25 Price and Value Communication Pricing Policy 28 Price Level 29

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Implementing the Pricing Strategy Summary

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Chapter 2 Value Creation

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Notes

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The Source of Pricing Advantage The Role of Value in Pricing 34 How to Estimate Economic Value 37 .Competitive Reference Prices 37 Estimating Monetary Value 39 Monetary Value Estimation: An Illustration 42 Estimating Psychological Value 48 Psychological Value Estimation: An Illustration 48 The High Cost of Shortcuts 52 Value-Based Market Segmentation 54 Step 1: Determine Basic Segmentation Criteria 56 Step 2: Identify Discriminating Value Drivers 57 Step 3: Determine Your Operational Constraints and Advantages 57 Step 4: Create Primary and Secondary Segments 58 Step 5: Create Detailed Segment Descriptions 60 Step 6: Develop Segment Metrics and Fences 60 Summary

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Notes

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8

Contents

Chapter 3 Price Structure 63 Tactics for Pricing Differently Across Segments Price-Offer Configuration 66 Optimizing an Offer Bundle 67 Designing Segment Specific Bundles 69 Unbundling Strategically 70 Price Metrics 71 Creating Good Price Metrics 72 Performance-Based Metrics 76 Tie-Ins as Metrics 77 Price Fences 79 Buyer Identification Fences 80 Purchase Location Fences 81 Time of Purchase Fences 82 Purchase Quantity Fences 84 Summary

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Notes

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Chapter 4 Price and Value Communication 88 Strategies to Influence Willingness-to-Pay Value Communication 89 Adapting the Message for Product Characteristics 90 Adapting the Message to Purchase Context 97 The Buying Process 98 Multiple Participants in the Buying Process 102 Price Communication 103 Proportional Price Evaluations Reference Prices 104 Perceived Fairness 106 Gain-Loss Framing 107 Summary

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Notes

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Chapter 5 Pricing Policy 112 Managing Expectations to Improve Price Realization Policy Development

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Policies for Responding to Price Objections 116 The Problem with Ad Hoc Negotiation 116 The Benefits of Policies for Price Negotiation 118 Policies for Different Buyer Types 119

Contents Policies for Dealing with Power Buyers 124 Policies for Managing Price Increases 126 Policies for Leading an Industry-Wide Increase 127 Policies for Transitioning from Low One-Off Pricing 128 Policies for Dealing with an Economic Downturn Pol icies for Promotiona I Prici ng 131 Summary

Chapter 6

Price Level

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Notes

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Setting the Right Price for Sustainable Profit The Price-Setti ng Process 13 5 Defining the Price Window 137 Establishing an Initial Price Point 139 Pricing Objectives 141 Defining the Price-Volume Trade-off Estimating Consumer Response

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Communicate New Prices to the Market Summary

Chapter 7

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Notes

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Pricing Over the Product Life Cycle

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Adapting Strategy in an Evolving Market New Products and the Product Life Cycle 157 Pricing the Innovation for Market Introduction 159 Communicating Value with Trial Promotions 160 Communicating Value with Direct Sales 161 Marketing Innovations Through Distribution Channels 162 Pricing New Products for Growth 162 Pricing within a Differentiated Product Strategy Pricing within a Cost Leadership Strategy 164 Price Reductions in Growth 165 Pricing the Established Product in Maturity 166 Pricing a Product in Market Decline 169 Alternative Strategies in Decline 170 Summary

Chapter 8

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Notes

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Pricing Strategy Implementation

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Embedding Strategic Pricing in the Organization Organization 176

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Contents Organizational Structure Decision Rights

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Pricing Processes 181 Motivation 182 Customer Analytics 184 Process Management Analytics 187 Performance Measures and Incentives 191 Managing the Change Process 194 Senior Management Leadership 194 Demonstration Projects Summary

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Notes

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Chapter 9 Costs 197 How Should They Affect Pricing Decisions? The Role of Costs in Pricing 197 Determining Relevant Costs 198 Why Incremental Costs? 199 Why Avoidable Costs? 202 Avoiding Misleading Accounting 205 Estimating Relevant Costs 207 Activity-Based Costing 212 Percent Contribution Margin and Pricing Strategy 213 Managing Costs in Transfer Pricing 215 Summary

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Chapter 10 Financial Analysis Pricing for Profit

Notes

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Break-even Sales Analysis: The Basic Case 225 Break-even Sales Incorporating a Change in Variable Costs 228 Break-even Sales with Incremental Fixed Costs 229 Break-even Sales Analysis for Reactive Pricing 232 Calculating Potential Financial Implications 233 Break-even Sales Curves 236 Watching Your Baseline 239 Covering Nonincremental Fixed and Sunk Costs 240 Summary

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Notes

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Contents Appendix 10A Derivation of the Break-even Formula Appendix 10B

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Break-even Analysis of Price Changes 251 Chapter 1 1 Competition 260 Managing Conflict Thoughtfully Understanding the Pricing Game 261 Competitive Advantage: The Only Sustainable Source of Profitability 262 Reacting to Competition: Think Before You Act How Should You React? 273

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Managing Competitive Information 277 Collect and Evaluate Information 277 Selectively Communicate Information 279 When Should You Compete on Price? 282 Summary 283 • Notes 283 Chapter 12

Measurement of Price Sensitivity

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Research Techniques to Supplement Judgment Types of Measurement Procedures 286 Uncontrolled Studies of Actual Purchases 287 Experimentally Controlled Studies of Actual Purchases 292 Uncontrolled Studies of Preferences and Intentions Experimentally Controlled Studies / of Preferences and Intentions 304 Using Measurement Techniques Appropriately Using Judgment for Better Measurement

Chapter 13

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Using Internet-Based Techniques 313 Outside Sources of Data 314 Selecting the Appropriate Measurement Technique 315 Summary 316 • Notes 317 Ethics and the Law 321 Understanding the Constraints on Pricing Ethical Constraints on Pricing 321 The Legal Framework for Pricing 324 The Effect of Sarbanes-Oxley on Pricing Practices 325 Price-Fixing or Price Encouragement 326 Horizontal Price-Fixing 327

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Contents Resale Price-Fixing or Encouragement Vertical Price-Fixing

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Direct Dealing Programs 330 Resale Price Encouragement 330 Price and Promotional Discrimination 331 Price Discrimination 331 Defenses to Price Discrimination 333 Promotional Discrimination 334 Competitive Injury, Defenses, and Indirect Purchasers 335 Using Nonprice Variables to Support Pricing Goals 336 Vertical Nonprice Restrictions Nonprice Incentives 338 Other Pricing Issues 338 Predatory Pricing 338 Price Signaling 338 Summary Index

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Notes

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