Smart Pricing - PCC - ebook

In Smart Pricing: How Google, Priceline and Leading Businesses Use Pricing Innovation for Profitability, Wharton professors and renowned pricing experts Jagmohan Raju and Z. John Zhang draw on examples from high tech to low tech, from consumer markets to business markets, and from U.S. to abroad, to tell the stories of how innovative pricing strategies can help companies create and capture value as well as customers. They teach the pricing principles behind those innovative ideas and practices.   Smart Pricing introduces many innovative approaches to pricing, as well as the research and insights that went into their creation. Filled with illustrative examples from the business world, readers will learn about restaurants where customers set the price, how Google and other high-tech firms have used pricing to remake whole industries, how executives in China successfully start and fight price wars to conquer new markets.   Smart Pricing goes well beyond familiar approaches like cost-plus, buyer-based pricing, or competition-based pricing, and puts a wide variety of pricing mechanisms at your disposal. This book helps you understand them, choose them, and use them to win.

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It's amazing how many companies fail to have a deliberate pricing strategy—even though this is an absolutely critical and fundamental business element. In fact, many managers rarely give pricing much serious thought at all.

This is unfortunate, because pricing offers great opportunities to move ahead for those who are astute and nimble. Instead of pricing your products or services using simplistic methods like cost-plus, match your competitors, or figure out what people will pay and go with that as a price, there is a rich variety of other pricing strategies to try. For example, you might:

Figure out how to make money other ways by providing your product or service for free.

Allow your customers to name their own price—pay whatever they think your product or service is worth.

Build automatic price markdowns into your pricing model—so you can serve customers at both ends of the spectrum.

Set up subscription plans that allow people to save—even for items like their weekly grocery shopping.

Develop performance-based pricing systems—where people pay only if what you have to offer works.

Key Thoughts

“Getting the price right is, in the end, both art and science. Like most business practices, the best pricing decision is grounded not only in theory, but also experience and instinct. Ultimately, smart pricing demands not only deep customer knowledge and good economic intuition, but a healthy dose of street smarts. Our experience has taught us that pulling the price lever demands courage and confidence, the kind best built on your knowledge about what pricing can do, how you can price your goods and services, and how consumers and your competition might react to your pricing decisions." — Jagmohan Raju & Z. John Zhang

Part 1

Price—the Forgotten Business Lever

It's amazing how many companies work hard to grow their markets and fine-tune their operations but then pay little if any attention to how to price their products and services for maximum profitability. There's a perception that prices are beyond the control of managers. This is incorrect. Pricing is an important business lever, and more time and energy needs to be devoted to developing a pricing strategy and doing the underlying research that will make it happen.

Most companies either set their prices arbitrarily or use one of three fairly ad-hoc and simplistic approaches:

1. Cost-plus pricing—specify a sales target, figure out what your costs will be at that volume and then add your company's normal margin to come up with the retail price. The problems with this method of setting prices are:

■ When customers like what you have to offer, they don't care about your costs. All they look at is its value to them. You might be leaving lots of money on the table.

■ It's arbitrary to decide in advance what a“fair”margin is or isn't. Too many factors can come into play here.

■ Cost-plus is inward looking. It's based solely on your operations, not on what customers are willing to pay.

2. Competition-based pricing—look at what everyone else is charging and set prices a few percent below their price. Again, there are potential problems here:

■ You end up becoming passive rather than focusing on creating something customers will love. Instead of seizing the bull by the horns and figuring out how to price your offering so as to maximize profits, you merely monitor what everyone else is doing and mimic that.

■ You may lower your prices to protect market share and thereby generate some big losses. Sometimes pricing becomes a high stakes game of chicken where you wait to see who will blink first. Almost inevitably, the outcome of this kind of scenario is losses all round.

3. Consumer-based pricing—figure out what customers are willing to pay for what you have to offer and set your prices just below that threshold. Potential problems with consumer-led pricing:

■ Admittedly, this gives you the option to charge different prices to different customers, but it also encourages comparison shopping. You end up training your customers to behave badly in order to save a few bucks.

■ Discriminatory pricing almost always disadvantages your best customers because you end up giving deep discounts to attract new business. Rewarding your best customers with rock-bottom prices is a much more pleasant way to do business.