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Fifth dition

INTERNATIONAL EDITION

THE S TRATEGY AND

T A C T I C S O F P R I C I N G

A GUIDE TO GROWING

MORE PROFITABLY

Thom as T N agle

Monitor roup

JohnE ogan

Monitor roup

Joseph Zale

Monitor

roup

Boston Colum bus Indianapolis New York San Francisco Up per Saddle River

Am sterdam Cape Town Dubai London M adrid Milan M unich Paris

Montreal Toronto Delhi Mexico City Sao Pau lo Sydney Hong Kong

Seoul Singapore Taipei Tokyo

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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

Wha t sStrategic Pricing? 21

Value Crea tion 23

Price Struc ture 25

Price and Value Com munication 27

Pricing Policy 28

Price Level 29

Imp lementing the Pricing Strategy 30

Summary 31 Notes 32

Chapter 2 Value Creation 33

The Source of Pricing Advantage

The Role o f Value in Pricing 34

How to Estimate Economic Value 37

.Competitive Reference Prices 37

Estimating M one tary Value 39

M one tary Value Estimation: An Il lustration 42

Estimating Psychological Value 48

Psychological Value Estimation: An Illustra tion 48

The High Cost of Shortcuts 52

Value-Based Marke t Segm entation 54

Step 1: Determ ine Basic Segm enta tion Criteria 56

Step 2: Iden tify Discrim inating Value Drivers 57

Step 3: Determine Your Operational Constraints

and Advantages 57

Step 4: Create Primary and Secondary Segments 58

Step 5: Create Detailed Segm ent Descriptions 60

Step 6: Develop Segm ent Metrics and Fences 60

Summary 62 Notes 62

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Contents

Policies fo r Dealing w it h Power Buyers 124

Policies fo r M an ag ing Price Increases 126

Policies fo r Lead ing an Industry-W ide Increase 127

Policies fo r Transitioning fr om Low

One-Off Pricing 128

Policies for Dealing w it h an Economic D ow ntu rn 130

Pol icies fo r Prom otiona I Prici ng 131

Summary 133 Notes 133

C h a p te r 6 Price Level 134 >

Setting the Right Price for Sus tainable Profit

The Price-Setti ng Process 13 5

Defining the Price W ind ow 137

Establishing an Initia l Price Po int 139

Pricing Objectives 141

Defin ing th e Price-Volume Trade-off 145

Estimating Consumer Response 147

Com municate New Prices to th e M arke t 153

Summary 156 Notes 156

C h a p te r 7 Pr ic ing Ove r the Product L i fe Cycle 157

Adap ting Strategy in an Evolving Market

New Products and th e Product Life Cycle 157

Pricing th e Innovation fo r M arke t Introd uctio n 159

Com mun icating Value w it h Trial Promotions 160

Communica ting Value w it h Direct Sales 161

Marketing Innovations Through

D istrib ution Channels 162

Pricing New Products fo r G ro w th 162

Pricing w ith in a Differe ntiated Product Strategy 163

Pricing w it h in a Cost Leadership Strategy 164

Price Reductions in G ro w th 165

Pricing th e Established Product in M atur ity 166

Pricing a Product in M arke t Decline 169

Altern ative Strategies in Decline 170

Summary 171 Notes 172

C h a p te r 8 Pric ing St ra tegy Im plem enta t ion 174

Em bedding Strategic Pricing in the Organ ization

Organization 176

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Contents 11

Appendix 10A

De rivation of th e Break-even Formula 249

Appendix 10B

Break-even Analysis o f Price Changes 251

C h a p t e r 1 1 C o m p e t it io n 2 6

Ma naging Conflict Thoughtfully

Unde rstanding the Pricing Game 261

Com petit ive Adva ntage: The O nly

Sustainable Source of Profita bility 262

Reacting to Co m pe tition: Think Before You Act 267

Ho w Should You React? 273

M anag ing Com petit ive Inform ation 277

Collect and Evaluate Info rm atio n 277

Selectively Com mu nicate Info rm atio n 279

W he n Should You Com pete on Price? 282

Summ ary 283 Notes 283

C h a p te r 12 M eas urem ent o f Price Sens it iv ity 285

Research Techniques to Supplement Judgment

Types o f Measu rement Procedures 286

Un controlled Studies of Ac tual Purchases 287

Experimentally Controlled Studies

of Actu al Purchases 292

Un controlled Studies of Preferences and Inten tions 298

Experimentally Controlled Studies

/ of Preferences and Intentions 304

Using Mea surement Techniques Ap pro priate ly 310

Using Judg ment fo r Better Measurement 311

Using Internet-Based Techniques 313

Outside Sources o f Data 314

Selecting th e App rop riate Measurem ent Technique 315

Summary 316 Notes 317

C h a p te r 13 Eth ics and the Law 321

Understanding the Constraints on Pricing

Ethical Constraints on Pricing 321

The Legal Fram ework fo r Pricing 324

The Effect o f Sarbanes-Oxley on Pricing Practices 325

Price-Fixing or Price Encouragem ent 326

Hor izo nta l Price-Fixing 327

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12 Contents

Resale Price-Fixing or Encouragement 328

Vertical Price-Fixing 328

Direct Dea ling Programs 330

Resale Price Encouragem ent 330

Price and Prom otional Discrimination 331

Price Discrim ination 331

Defenses to Price Disc rimina tion 333

Prom otional Discrimination 334

Competitive Injury, Defenses,

an d Indirect Purchasers 335

Using Nonprice Variables to Support Pricing Goals 336

Ve rtical Nonprice Restrictions 336

Nonprice Incentives 338

Other Pricing Issues 338

Preda tory Pricing 338

Price Sign aling 338

Summary 339 Notes 339

Index 347