Book Overview: The Strategy and Tactics of Pricing (4th Edition)
Book Overview: The Strategy and Tactics of Pricing (4th Edition)
*The Book Overview series covers a Summary and Practical Takeaways of the Book. It is designed to give you an idea whether the Book is worth purchasing/reading, not to replace the reading of the book. All Books in the Book Overview series are recommended to be read word by word to extract maximum learning value which cannot be replicated by a simple Book Overview*
Arguably the most mind-blowing Textbook I’ve ever read, The Strategy and Tactics of Pricing explains in full depth how Pricing works, how to use Mathematical Models to help determine Pricing, and Strategies/Tactics available to win the Pricing Game. It combines schools of thought from Marketing, Finance and Economics together for a comprehensive practical Marketing guide.
Let’s talk about the mind-blowing parts of the Textbook.
A new concept to Pricing introduced in the textbook is “Value-Based Pricing”, and that the only purpose of all Marketing activities is to maximize Profit and to never forget that.
Compared to traditional Pricing models such as “Cost-Plus Pricing”, it reverses the thinking process of “Cost-Plus Pricing” from New Product’s Research & Development, Identifying the Cost to Mass Produce the newly developed Product, Determining a Price based on Unit Cost to produce New Product, Finding out the Value of the Product to the Customers, before selling it to the Customers (Product R&D -> Cost -> Price -> Value -> Customer), to thinking process of “Value-Based Pricing” (Customer -> Value -> Price -> Cost -> Product R&D).
The Textbook does mention the problem of Pricing based on Willingness of Customers since Customers have every motivation to tell you to offer Existing Products at a lower price while Innovative Products maybe too new for Customers to understand its value.
For B2B customers, understanding their Business Models would allow you to understand the EVC which reveals the maximum price customers are willing to pay.
For B2C customers the Textbook’s advice for organizations that sell through salespeople is training the salespeople to ask questions such as “What do you do for a living? How long have you lived in the area? What are products you’ve bought before? Where else have you lived? Have you seen or planned other alternatives?” to determine Customer’s Willingness to Pay.
However, the Textbook did provide a framework to still make educated Pricing decisions despite not knowing Market Demand by doing an Incremental Breakeven Analysis. Incremental Breakeven Analysis basically calculates the amount of products needed to Breakeven for different pricing points. After finding out Breakeven point for each hypothetical pricing point, Management can then consult all parties involved with selling the products to have an idea which Breakeven point is more realistic to achieve.
“Value-Based Pricing” also allows us to do STP more effectively, Segmenting the Customers by Value they perceive to receive from the Product. After Value Segmentation, the next step an organization can do is to discover the Value Drivers (aspects of the Product that are perceived to be of Value to Customers) for each Value Segment. The different Value Drivers can give insights to achieving Profit Maximization by knowing what Products/Services to bundle or unbundle, what discounts are given for different situations, and what the Unit Cost to serve each Value Segment is.
The remaining part of the Textbook are Strategies/Tactics for various situations.
Some situations you can expect to have Strategies/Tactics explained for:
- Questions to ask before each Pricing Decision
- How to deal with Customer Complaints of High Prices
- Pricing Policies (What to avoid/When to amend)
- Types of Pricing Strategies
- Types of Competitive Advantages (Positioning)
- Dealing with Price Attacks by Competitors
- Promotion Tactics (Loyal Repeat Customers stem from Product Familiarity)
- How to deal with Declining Market
Questions to ask before each Pricing Decision:
- What is sales changes necessary/tolerable to profit from price change?
- Is the Marketing strategy that keeps sales changes within acceptable ranges?
- Are the Costs we afford to incur given prices we can achieve and still earn a profit?
- Is Price justifiable given objective value of product or service?
- How to better communicate value to justify price?
- Are the level of sales/market share something we most profitably can achieve?
- What marketing tools can we use for cost-effective market share?
How to deal with Customer Complaints of High Prices:
- Are Customers Uneducated about the Product’s Value?
- Are Customers’ Needs not Met?
- Solve Question 1 and/or 2
Pricing Policies (What to avoid/When to amend):
- Don’t discount only if better price from competitor, discount to meet sales goals, discount for annual sales volume only, discount with unpredictable schedule/frequency/magnitude,
- Have a Centralized Pricing Policy as lack of one causes inconsistency, bad LT incentives and lack of analytics
- When Customers request Price Exceptions, treat it as opportunity that Pricing Policy needs to change
Types of Pricing Strategies:
- Skimming (Requires huge commitment to communicating/guaranteeing Product Value)
- Sequential Skimming (Gradually reducing Price Skimming over time)
- Penetration Pricing
- Neutral Pricing
Types of Competitive Advantages (Positioning):
Dealing with Price Attacks by Competitors:
- 2 things required before Retaliatory Price Cut: Clear statement of long term strategic benefit and risks and Quantitative estimate of value of strategic benefit
- 4 Price Competition options (Weak Opponent + Costly = Ignore, Weak Opponent + Cost-Justified = Attack, >=Neutral Opponent + Costly = Accommodate, >=Neutral Opponent + Cost-Justified = Defend)
- Practice diplomacy: Sometimes revealing upcoming Pricing Plans prevents whole industry from collapsing into Pricing War
Promotion Tactics (Loyal Repeat Customers stem from Product Familiarity):
- Trial Offers
How to deal with Declining Market:
- Exit with minimum losses
- Survive decline with competitive positions intact and strengthened by experience
- Harvesting – phased withdrawal
*Disclosure* I am not affiliated with any of the authors, textbooks or websites listed above. Book Cover image is used based on Fair-Use law (http://en.forums.wordpress.com/topic/using-images-in-blog-posts?replies=3#post-660360)