Pricing Strategies Always Come Down to the Sales Team

I am amazed at times how pricing managers get caught up in strategies and analytics and seem to forget about where "the rubber meets the road". I'm referring to the people in an organization who are face to face with the customer on a daily basis and are often at the heart of executing price strategies.


Sales and Marketing Management magazine is featuring an article this month titled: "Be a Value Merchant, Stop playing pricing games". The article does a great job of using value a the key driver of pricing at the customer level. It helps you profile your salespeople to indicate the extent to which they sell on value. Very insightful.


The article also maps a process to help demonstrate and document superior value which is considered a rare commodity. Click here to see the full article.

Pricing Strategy: Development and Implementation Plan

Pricing Strategy: Development and Implementation Plan:

Larry teaches an MBA elective on Pricing Strategy and Tactics at Fisher College of Business at Ohio State. The course includes a group project to develop a pricing strategy for a product, including the implementation plan. In this blog, we explain the first step in the project which is to develop an Economic Value Estimation. We will explain the other four parts of the assignment in the next four blogs on Development of a Pricing Strategy. Here is Part 1:

This project is intended to help you understand the process and factors to follow in developing and implementing a pricing strategy for a product which serves two market segments or has two uses (or use occasions) which are valued differently by a target market segment.

The assignment has five parts:

1. Perform an Economic Value Estimation (EVE) for two end user segments OR two end uses (or use occasions) for a product.
2. Perform a Managerial Price Sensitivity Analysis (MPSA) to provide information on factors influencing price sensitivity.
3. Develop a pricing strategy to capture value identified in part 1 and to respond to the price sensitivities identified in part 2.
4. Develop an implementation plan to communicate and deliver the economic value.
5. Document your analysis and strategy in a presentation and in a written report to senior management of the company.

The remainder of this blog explains the four steps in an EVE.

Steps in Economic Value Estimation

A product’s economic value is the price of the customer’s best alternative (reference value) plus the value of whatever differentiates your product from the reference value (differentiation value). The EVE which is the result of this analysis is the maximum price a potential customer would pay who is fully informed about the market and is seeking the best value.

There are four steps to EVE calculation which can also be referred to as TEV-true economic value. This process can be found in Professor Robert Dolan’s note on: “Pricing-A Value-based Approach”. Similar material is also found in Tom Nagle and John Hogan: The Strategy and Tactics of Pricing, 4th edition (Prentice-Hall, 2007):

Step I: Identify the cost of the competitive product or process that the customer views as the best alternative.

This is the product’s reference value.

Step II: Identify all factors that differentiate your product from the competitive product or process.

For example:

Superior (inferior) performance
Better (poorer) reliability
Additional (reduced) features
Lower (higher) maintenance cost
Higher (lower) startup costs
Faster (slower) service
Longer (shorter) useful life
Lower (higher) total cost of ownership (TCO)
.
Step III. Determine the value to the customer of these differentiating factors. Sources of value may be subjective (such as greater pleasure in consuming the product) or objective (such as cost savings, profit gains)

The positive and negative values associated with the product’s differentiating attributes are the differentiation value.

For business markets and for some consumer markets, the value of the product may translate directly into financial savings or increased revenues for the purchaser. In markets where values are less tangible, EVE calculations may require use of choice-based research techniques such as trade-off analysis, discrete choice modeling, Price Sensitivity Meter, or other estimates of willingness to pay. Such research techniques MAY seriously underestimate the EVE, since the customer may not fully understand the economic value of the differentiators when making choice-based decisions.

Step IV. Sum the reference value and the differentiation value to determine the total economic value. TEV is the value someone would pay who is fully informed and economically rational when making the purchase decision.

The total economic value is the maximum price the company might be able to charge for the product. The company may be able to include a “reputation premium” based on brand equity from other products sold to the same customers who are targeted for this product. Also, the company may be able to get a “switching cost premium” when the cost of changing suppliers is a consideration by the buyer.

The EVE could be the price IF purchasers knew everything the product (and the reference product) offered, knew their own needs, could easily determine how each product would help them satisfy their needs, and if they did not believe they could influence the seller’s price through negotiation. In the real world there are many reasons for gaps between buyers’ willingness to pay and the value they receive. This is why the team needs to do an MPSA to identify the reasons for price sensitivity and the tactics the supplier can use to reduce the gap between the value offered and the prices they are able to charge to win the business of the purchaser.

Our next blog will focus on Part 2 of developing a pricing strategy: Performing a Managerial Price Sensitivity Analysis (MPSA).

Pricing Strategies and Tactics MBA Elective Course

Larry teaches Pricing Strategies and Tactics at Fisher College of Business at Ohio State. The course is for the full time and the Working Professional MBA programs. The enrollments have been between 60 and 80 students each year for the past four years. The objectives for the course are:

• Develop understanding of principles managers follow to make effective pricing decisions
• Learn how to do economic value estimation (EVE) for a product or service offered to a specific market or for a specific use
• Learn how to perform managerial price sensitivity analysis (MPSA) which identifies factors that influence price sensitivity when making judgments about the importance of price in a buyer’s purchase decision
• Recognize the objective of price competition is not to win market share, but to maximize long-term profitability
• Become able to analyze pricing concepts related to: new products, pricing changes, bundling/versioning, yield management/revenue management, & price wars
• Develop ability to integrate pricing decisions with product, promotion and channel management decisions

We use as our textbook The Price Advantage by Michael V. Marn, Eric V. Roegner, and Craig Zawada. We also use case studies from Harvard, Northwestern, and Virginia. Also, each course includes five or six guest speakers who are VPs of Pricing and Pricing consultants.

If you are interested in seeing the syllabus, just send an email to robinson_878@fisher.osu.edu.

Value Based Pricing Presentation

We recently gave a presentation on Value-Based Pricing to the Breakfast Club of the Executive Education division of Fisher College of Business at Ohio State University.

We had an audience of 110 business executives for our presentation. Here is the promo piece that attracted the audience:

“Pricing is the moment of truth—all of marketing comes to focus in the pricing decision. But strategic pricing is about much more than just setting prices. There are many issues which require attention in arriving at the pricing strategy and tactics for any organization. Yet, few managers who participate in setting and implementing pricing strategies have any formal training in this important business activity.

The presentation includes:

1. The impact of 1% improvement in net realized price cmpared to 1% improvement in fixed costs, variable costs, or unit sales.
2. Why pricing is the number 1 issue for CEOs according to a recent McKinsey survey.
3. Common pricing methods compared to the best way to do pricing
4. Tools and methods used by companies known for pricing excellence.
5. Why pricing for new products and services is often done in a sub-optimal way.
6. How to assess potential for a price war and how to behave when in a price war.
7. How to do a Pricing Audit to determine actions toward pricing excellence.”

The presentation was followed by a lively and extended discussion which continued well after the meeting ended. We were also asked to develop a one-day workshop on value-based pricing to be offered by OSU’s Executive Education Division.

If you are interested in getting a copy of this presentation, just send an email to: rzuponcic@pricingpointpartners.com or to robinson_878@fisher.osu.edu

Reward Your Sales Team for Pricing Performance

We are currently working with a manufacturing company that has been hit hard by raw material cost increases. We’re talking double digit increases as high as 42% for certain components. This company happens to be in the chemical industry, enjoys generous profit margins, and wants to keep it that way. We can’t blame them.

They have asked us to help their sales force execute price increases. It seems that many companies struggle to get their sales organization to enthusiastically support price hikes and while there appears to be no outward resistance from this sales team, management wants to maximize the results.

While there are several elements to address in managing sales teams through price increase initiatives, the most critical is the incentive plan. Most companies that struggle with increases are rewarding sales reps on improvement in sales volume, not pricing or profit margin. It may be difficult to change incentive plans quickly but we have seen good results with temporary plans that reward short term price improvement results.

For example, consider a 90 day plan that simply rewards the sales rep a commission based on the actual price increase realized. I have seen companies offer as much as one half of the price increase, which is generous, and realize significant results. Most situations can be addressed with a much lower commission schedule. Also consider the amount of the reps total compensation and apply a commission accordingly.

We find that a commission for a price increase that contributes to 10% of the reps overall compensation plan is sufficient to capture their attention and get results. After all, it is only a short term effort. However, the payoff for the firm carries well into the future.

There are numerous additional schemes and one can be quite creative in developing an incentive. For some sales teams, vacations, merchandise and other tangible rewards are powerful incentives.

While incentive plans for sales reps are critical to price increase realization, there are a number of other critical details that require attention in order to successfully execute increases through the sales team. We will address some of these in future blog postings.

Inputs to Optimal Pricing

We were recently introduced to a large industrial distributor that was searching for strategies to optimize prices. Their first inclination is to identify price improvement opportunities through transactional level pricing. In other words, find the prices at the transaction level that may lie outside the target pricing range and specifically, prices that may be well below the target range.

One of our first steps in helping companies identify pricing opportunities certainly lies in an examination of transactional pricing. It is a rare case where price improvement scenarios are not discovered at this level. There are a number of analyses that can be performed to uncover these opportunities including price band analysis, margin band analysi and pricing waterfall analysis.

However, there are really three inputs to arrive at optimal pricing. The first is an analysis of historical pricing data at the transaction level. Using the analyses mentioned above is a good starting point. However, an analysis of market data is just as important.

Market data includes pricing market research performed on your customers in order to identify the perceived value of your products and services compared to the perceived value of competitive offerings. And, it includes an accurate measurement of the price sensitivity of your products offering and brand. This type of pricing research is highly specialized and accurate when appropriately administered. Without sound market data the limits of pricing thresholds are unknown and any attempt to increase price levels is akin to shooting in the dark.

The third input to optimizing prices is expert judgment. Even though we have seen great strides in pricing mangement software and other analytical tools, the expetise provided by your team and outside consultants is invaluable in making pricing decisions.

Make sure that you utilize all three inputs when optimizing prices. We see many firms focused on only one input and leaving money on the table or, worse yet, making price decisions that are disconnected from the overall business strategy.

Pricing Strategy Scholars

Pricing Strategy Scholars

Our research to identify the leading pricing strategy articles and scholars identified 1,364 articles which appeared 19 major marketing journals between 1980 and 2006. Our approach to identifying the leading scholars was to identify all authors who contributed to the 1,364 articles. We then gave weighted credit by dividing the counts by the number of co-authors for each article. For instance, Professor Kent Monroe was the highest ranked scholar by article count Professor Monroe was an author or co-author on 28 articles, including several which had one or two co-authors. His weighted articles count was 13.92. The same procedure was used to determine scholar ranking by weighted citation counts. Professor Monroe had 405.50 weighted citations according to this process.

Top 20 Pricing Strategy Authors – Weighted by number of articles.

Rank Author Weighted Articles

1. Monroe KB 13.92
2. Grewal D 10.17
3. Tellis GJ 10.00
4. Schindler RM 8.50
5. Urbany JE 7.00
6. Chintagunta PK 6.75
6. Krishna A 6.75
8. Burton S 6.58
9. Lichtenstein DR 6.50
9. Parker PM 6.50
11. Lal R 5.83
12 Gerstner E 5.75
13. Winer RS 5.61
14. Ratchford BT 5.50
15. Shugan SM 5.33
16. Bearden WO 5.33
16. Bolton RN 5.33
18. Muzumdar T 5.25
19. Gupta Sunil 5.11
20. Walters RG 4.83

The top 20 Pricing Strategy Scholars ranked by Weighted Citations:

1. Thaler R 608.00
2. Zeithaml VA 601.00
3. Monroe KB 417.17
4. Tellis GJ 405.50
5. Gupta Sunil 311.50
6. Moorthy KS 311.00
7. Winer RS 306.67
8. Little JDC 273.33
9. Shugan SM 259.67
10. Guadagni PM 232.50
11. Grewal D 224.25
12. Rao AR 224.00
13. Simonson I 218.50
14. Lal R 202.67
15. Lehmann DR 196.25
16. Lichtenstein DR 195.17
17. Jeuland AP 192.33
18. Hauser JR 189.00
19. Russell GJ 180.17
20. Kamakura WA 178.50

The Pricing Strategy Scholars listed above have made the most impact on pricing knowledge of all scholars who have published in the 19 marketing journals included in the Social Science Citation Index. Our next post will list the 19 marketing journals by number of pricing articles and by citations to those articles. We will also show the top 20 institutions for which the scholars were affiliated at the time of publication of the 1,364 articles included in our study.

Narrow Price Variance Analysis

We have the opportunity to observe the pricing controls for many companies. Our first view is often a look at price variance within a business. Variance tells a lot about the discipline within a firm's pricing system. Depending on the amount of variance, price improvement opportunities may exist.

Typically, we look for wide variances in pricing for individual products or SKUs. Wide variances can offer an opportunity for reduction and increase the lower outliers for improved margin. Sometimes prices can vary as high as 250% from the lowest price or even more. And, in some industries, this may be acceptable.

However, on the other hand, we have seen businesses with very tight variances as well. In some cases, variances of only 3-5%. What does this tell us? At first glance it indicates strong pricing controls and discipline. Orders are being priced consistently. Customers expect similar if not identical pricing order after order. Overall, not a bad situation.

But, are we leaving money on the table? Are there opportunities to capture different prices for different customer, order or product attributes? For example, can we capture a higher price for expedited orders, low volume customers, or minimum order quantities? Or, is there an opportunity to capture more sales by reducing prices for high volume or large orders?

A change in prices due to any of the attributes will automatically widen the price variance and contribute to either higher margins or more volume. There are dozens of attributes for any business that can be leveraged making wider pricing variances a good thing.

Top 10 Most Highly Cited Pricing Strategy Articles

Our last post featured top pricing strategy articles. This week we are featuring the Top 10 Most Highly Cited Pricing Strategy Articles published from 1980 to 2007. This list summarizes the most highly cited articles of the 1,364 identified in the study, using as a metric the “citations/year” which levels the playing field for more recently published articles.

The Top 10 Most Highly Cited Pricing Strategy Articles

#1. "Mental Accounting & Consumer Choice", Thaler, R,

Marketing Science, Volume 4, Issue 3, 1985 Citations per year: 27.41

#2. "Consumer Perceptions of Price, Quality & Value", Zeithaml, VA

Journal of Marketing, Volume 52, Issue 3, 1988 Citations per year: 26.89

#3. "Interactive Home Shopping: Consumer, Retailer, and Manufacturer Incentives to Participate in Electronic Marketplace", Alba, JW et al., Journal of Marketing, Volume 61, Issue 3, 1997 Citations per year: 25.00

#4. "Customer Satisfaction, Market Share and Profitability: Findings from Sweden", Anderson, EW, et al., Journal of Marketing, Volume 58, Issue 3, 1994 Citations per year: 21.31

#5. "A Logit Model of Brand Choice Calibrated on Scanner Data", Little, JDC, et al., Marketing Science, Volume 2, Issue 3, 1983 Citations per year: 19.38

#6. "Wine Online: Search Costs Affect Competition on Price, Quality and Distribution", Lynch, JG, et al., Marketing Science, Volume 19, Issue 1, 2000 Citations per year: 17.29

#7. "A Probabilistic Choice Model for Market Segmentation and Elasticity Structure", Russell, GJ, et al., Journal of Marketing Research, Volume 26, Issue 4, 1989 Citations per year: 14.61

#8. "Effects of Price, Brand and Store Information on Buyer's Product Evaluations", Dodds, WB, et al., Journal of Marketing Research, Volume 28, Issue 3, 1991 Citations per year: 13.19

#9. "On the Profitability of Long-Life Customers in a Noncontractual Setting: An Empirical Investigation and Implicatons for Marketing", Kumar, V. et al., Volume 64, Issue 4, 2000 Citations per year: 13.00

#10. "Long-term Manufacturer-Supplier Relationships: Do They Pay Off For Supply Firms?", Kalwani, MU, et al., Journal of Marketing, Volume 59, Issue 1, 1995 Citations per year: 12.75

Most Highly Cited Articles on Strategic Pricing-1980 to 2007

We are working on a project to define the pricing research that has appeared in the 19 marketing journals included in the Social Science Citations Index in the years since 1980. This chart summarizes the most highly cited articles of the 1,364 identified in the study, using as a metric the “citations/year” which levels the playing field for more recently published articles.

We have compiled the top 20 articles and feature articles 11 through 20 in this post. Next week we will feature the top 10 articles on strategic pricing.

Top 20 Most Highly Cited Articles Based on Citations Per Year

#11. “Work and Fun-Measuring Hedonics and Utilitarian Shopping Value”
Babin, BJ, et al., Journal of Consumer Research, Vol. 20, Issue 4, 1994
Citations per year: 12.46

#12. “Impact of Sales Promotions on When, What, and How Much to Buy”
Gupta Sunil, Journal of Marketing Research, Vol. 25, Issue 4, 1988
Citations per year: 12.37

#13. “Service Quality Delivery Through Web Sites: A Critical Review of Extant Knowledge”
Zeithaml, VA, et al., Journal Academy of Marketing Science, Vol. 30, Issue 4, 2002
Citations per year: 11.80

#14. “No Pain, No Gain: A Critical Review of the Literature On Signaling Unobservable Product Quality”
Kirmani, A. et al., Journal of Marketing, Vol. 64, Issue 2, 2000
Citations per year: 11.29

#15. “A Dynamic Model of Customers’ Usage of Services: Usage as an Actecedent and Consequences of Satisfaction”
Bolton, RN et al., Journal of Marketing Research, Vol.36, Issue 2, 1999
Citations per year: 11.13

#16. “The Effects of Price Comparison Advertising on Buyers’ Perceptions of Acquisition Value and Transaction Value”
Grewal, D et al. Journal of Marketing, Vol. 62, Issue 2, 1998
Citations per year: 11.11

#17. “The Price Knowledge & Search of Supermarket Shoppers”
Dickson, PR et al., Journal of Marketing, Vol. 54, Issue 3, 1990
Citations per year: 10.29

#18. “The Long Term Impact of Promotion and Advertising on Consumer Brand Choice”
Mela, CF, et al., Journal of Marketing Research, Vol. 34, Issue 2, 1997
Citations per year: 9.7

#19. “Managing Channel Profits”
Jeuland, AP et al., Marketing Science, Vol. 2, Issue 3, 1983
Citations per year: 9.50

#20. “The Internet Shopper”
Donthu, N et al., Journal of Advertising Research, Vol. 39, Issue 3, 1999
Citations per year: 9.25

What does this table mean to the reader of this blog?

You can presume these articles are worthy of being on your reading list if you are a scholar or practitioner in pricing. These articles have had the most influence (some times referred to as “impact”) on scholarly research in pricing in the past 25 years. Each “citation” is a reference to prior research made in articles published after the cited article was published. Importantly, the citation was in an article also published in a journal included in the SSCI.

In the next week or so, we will post blogs about “who and where” for the most highly cited research on pricing. We will recognize the most highly cited researchers, research institutions and marketing journals based on our study.