Price Management: Strategy, Analysis, Decision, Implementation

569 Pages·09.532 MB·English

by  Simon, H.

Hermann Simon
Martin Fassnacht
Price
Management
Strategy, Analysis,
Decision, Implementation
Price Management
(cid:129)
Hermann Simon Martin Fassnacht
Price Management
Strategy, Analysis, Decision,
Implementation
HermannSimon MartinFassnacht
Simon-Kucher&PartnersStrategy WHU–OttoBeisheimSchoolofManagement
andMarketingConsultants ChairofMarketingandCommerce
Bonn,Germany Düsseldorf,Germany
ISBN978-3-319-99455-0 ISBN978-3-319-99456-7 (eBook)
https://doi.org/10.1007/978-3-319-99456-7
LibraryofCongressControlNumber:2018959416
#SpringerNatureSwitzerlandAG2019
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Testimonials
“Thisbookistrulystateoftheartandthemostcomprehensiveworkinprice
management.”
—Prof.PhilipKotler
KelloggSchoolofManagement,NorthwesternUniversity
“Thisveryimportantbookbuildsanoutstandingbridgebetweenscienceand
practice.”
—KasperRorsted
CEO,Adidas
“This book provides practical guidelines on value creation, communication
and management, which is an imperative for businesses to survive in the
comingeraofuncertainty.”
—Dr.Chang-GyuHwang
ChairmanandCEO,KTCorporation(KoreaTelecom)
v
Preface
ThetitlePriceManagementexpressesourambitiontoproduceabookwhichisboth
grounded in theory and relevant in practice. The author team—an academic
(Fassnacht)andapractitioner(Simon)—guaranteesthedesiredintegrationoftheory
andpractice.
State of the Art
Thisbookisstateoftheartyetalsolooksintothefuture.Digitalizationispenetrating
allphasesofthepricingprocess,fromstrategyandanalysistodecision-makingand
implementation. The Internet and other new technologies (sensors, measurement,
etc.)haveledtoawealthofpricemanagementinnovationswhichthisbookexplores
in detail. These include flatrates, freemium,pay-per-use, pay-what-you-want, new
pricemetrics,two-sidedpricesystems,negativeprices,sharingeconomy,BigData,
artificial intelligence, and machine learning. Innovative paymentsystems and even
cryptocurrenciesarealsohavingeffectsonpricemanagement.
The Integration of Theory and Practice Using Case Examples
Weusereal-worldcasesthroughoutthebooktoensurethelinkbetweentheoretical
rigorandpracticalrelevance.Thatispossiblebecausewecoulddrawonthevastand
diverseexperienceofSimon-KucherandPartners,theglobalmarketleaderinprice
consulting. We have anonymized these examples whenever necessary to protect
confidentiality.
vii
viii Preface
Industry Orientation
It is easy to see price management as a basic discipline, similar to accounting or
controlling andgenerallyapplicableacrossallsectors.Butourdecades ofinvolve-
ment in price management have taught us that the ways of framing and solving
pricingproblemsareoftenindustry-specific.Consumergoods,forexample,aresold
primarily through intermediaries (retailers), while industrial products are predomi-
nantly sold directly. The resulting pricing issues, strategies, and tactics in these
sectors are very different. For this reason, we devote separate chapters to the
respective price management issues in the consumer goods, industrial goods, ser-
vice,andretailsectors.
Global Approach
This is the global book on pricing! We committed ourselves to a global approach
throughoutthebook.Globalcompetitionmeansthatcompaniesaroundtheworldare
confronted with similar price management challenges. In line with this global
approach, we selected representative case studies and practical examples from
aroundtheworld.
Target Audience
Theintegrationoftheoryandpracticemakesthisbookequallyrelevantforstudents
and academics as for entrepreneurs and managers. Price management is becoming
more and more professionalized in companies around the world, with stronger
engagement from senior management, all the way up to the CEO. We not only
covertheroleofpriceasashort-termprofitdriverbutalsoshowhowcompaniescan
usepriceasameanstodrivesustainedincreasesinshareholdervalue.
Pricemanagementistakingupalargerportionofbusinessstudies.Thisisduein
part to the Internet, which has massively increased price transparency, intensified
price competition, and triggered more price wars. But at the same time, the
Internetalsoincreasesvaluetransparency.Thisdichotomyresultsinsomesurprising
andhighlyasymmetriceffectsforthemarketinginstrument“price.”
We have many people to thank for their contributions to this book, and we call
attention to them individually in the acknowledgments. But we are especially
thankful to Anna-Karina Schmitz for her outstanding work as our project leader
andtotheassociatesofSimon-KucherandPartnersfortheirvaluablesupport.
The preoccupation with price management dates all the way back to Ancient
Rome.TheLatinlanguageusestheidenticalwordfor“price”and“value,”namely,
theword“pretium.”
Preface ix
Pretium¼Price¼Value
Thatisthecoreequationofpricemanagement!
HermannSimon MartinFassnacht
Bonn,Germany HermannSimon
Düsseldorf,Germany MartinFassnacht
Contents
1 FundamentalsofPriceManagement. . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 ProfitandPrice. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 DefinitionofPrice. . . . . . . .. . . . . . . .. . . . . . . .. . . . . . . . .. 5
1.3 PriceandManagement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
1.3.1 PriceasaMarketingInstrument. . . . . . . . . . . . . . . . . 6
1.3.2 UnderstandingtheRoleofPrice. . . . . . . . . . . . . . . . . 10
1.3.3 PriceManagementasaProcess. . . . . . . . . . . . . . . . . . 14
1.4 KnowledgeSourcesforPriceManagement. . . . . . . . . . . . . . . . 16
1.4.1 MacroeconomicPriceTheory. . . . . . . . . . . . . . . . . . . 16
1.4.2 Microeconomics. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
1.4.3 MarketingScience. . . . . . . . . . . . . . . . . . . . . . . . . . . 16
1.4.4 BehavioralEconomics. . . . . . . . . . . . . . . . . . . . . . . . 17
1.4.5 BrainResearch. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
1.4.6 PriceConsulting. . . . . . .. . . . . . . . . . . . . . . . . .. . . . 17
1.4.7 SoftwareforPriceManagement. . . . . . . . . . . . . . . . . 18
1.4.8 PricingInnovators. . . . . . . . . . . . . . . . . . . . . . . . . . . 18
1.4.9 PopularLiterature. .. . . . .. . . . .. . . . .. . . . .. . . . .. 18
1.5 TheLegalFrameworkofPriceManagement. . . . . . . . . . . . . . . 19
1.5.1 UnitedStates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
1.5.2 EuropeanUnion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
1.5.3 Worldwide. . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . 20
1.5.4 ActivitiesoftheAntitrustAgencies. . . . . . . . . . . . . . . 20
1.6 CurrentTrendsinPriceManagement. . . . . . . . . . . . . . . . . . . . 21
1.6.1 PricesArePenetratingManagementThinking. . . . . . . 21
1.6.2 PriceandPower. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
1.6.3 PriceandTopManagement. . .. . . . . . . .. . . . . . . .. . 24
References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
2 PriceStrategy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
2.1 Goals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
2.2 PriceManagementandShareholderValue. . . . . . . . . . . . . . . . 35
2.3 ValueandPrice. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
2.4 Positioning. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
xi
xii Contents
2.5 Approach. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
2.6 PricePositions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
2.6.1 LuxuryPricePosition. . . . . . . . . . . . . . . . . . . . . . . . . 46
2.6.2 PremiumPricePosition. . . . . . . . . . . . . . . . . . . . . . . 53
2.6.3 Medium-PricePosition. . . . . . . . . . . . . . . . . . . . . . . . 59
2.6.4 Low-PricePosition. . . . . . . . . . . . . . . . . . . . . . . . . . . 64
2.6.5 Ultra-LowPricePosition. . . . . . . . . . . . . . . . . . . . . . 70
2.6.6 TheDynamicsofPricePositioning. . . . . . . . . . . . . . . 75
References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
3 Analysis:TheEconomicsofPrice. . . . . . . . . . . . . . . . . . . . . . . . . . 85
3.1 Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
3.2 AnalysisofPrice-RelevantInformation. . . . . . . . . . . . . . . . . . 86
3.2.1 Cost-PlusPricing. . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
3.2.2 Customers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
3.2.3 Competition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
3.3 ThePrice-ResponseFunction. . . . . . . . . . . . . . . . . . . . . . . . . . 92
3.3.1 ClassificationofPrice-ResponseFunctions. . . . . . . . . . 92
3.3.2 Price-ResponseFunctionsandPriceElasticity. . . . . . . 93
3.3.3 AdditionalFormsofthePrice-ResponseFunction. . . . 99
3.3.4 EmpiricalFindingsonPriceElasticity. . . . . . . . . . . . . 102
3.4 EmpiricalDeterminationofthePrice-ResponseFunction. . . . . . 108
3.4.1 Surveys. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108
3.4.2 Observations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128
3.4.3 SynopsisofInstruments. . . . . . . . . . . . . . . . . . . . . . . 136
References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139
4 Analysis:ThePsychologyofPrice. . . . . . . . . . . . . . . . . . . . . . . . . . 143
4.1 Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143
4.2 TraditionalPsychologyofPrice. . . . . . . . . . . . . . . . . . . . . . . . 145
4.2.1 PrestigeEffectsofPrice. . . . . . . . . . . . . . . . . . . . . . . 145
4.2.2 GiffenParadox. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146
4.2.3 ThePriceasaQualityIndicator. . . . . . . . . . . . . . . . . 146
4.2.4 SpecialCases. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149
4.3 BehavioralPricing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150
4.3.1 TheoreticalBasis. . . . . . . . . . . . . . . . . . . . . . . . . . . . 151
4.3.2 BehavioralPricingEffects. .. . . . .. . . . .. . . .. . . . .. 157
4.3.3 Neuro-Pricing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 166
4.3.4 OverallAssessment. . . . . . . . . . . . . . . . . . . . . . . . . . 167
References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169
5 Decision:One-DimensionalPrices. . . . . . . . . . . . . . . . . . . . . . . . . . 173
5.1 Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 173
5.2 CategorizationofOne-DimensionalPricingProcesses. . . . . . . . 174
5.3 RigidPricingProcesses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175