Kindle Notes & Highlights
by
Tim J. Smith
Read between
September 26 - October 6, 2019
Every offering of a firm and every transaction that firm has with every customer has a price. That price may be the result of a lengthy deliberation that includes market research, competitive dynamics, highly researched algorithms, intense customer negotiations, and torrid management discussions, or just a number that popped out of someone’s head. Somehow, every transaction gets priced.
The job of management is to get the right people doing the right thing at the right time toward the right goal.
Pricing isn’t just one thing. It isn’t just a decision done before launching a new offering, a number that is estimated in conjunction with a contract or the result of a client negotiation. Nor is pricing a single technique, method of analysis, research effort, or piece of information to gather. Pricing isn’t an event. It’s a continual process.
And pricing can’t be done in isolation. The decisions in pricing affect every part of the organization. They are integral to every healthy customer relationship. And, they influence the competitive engagement of the firm with its competitors.
In value-based pricing, firms seek to set prices according to the value customers place on the offering in comparison to its alternative. Using the nearest competing alternative as a starting point, an offering’s differential benefits will either add or subtract value in the minds of customers. In value-based pricing, the prices of offerings are set in relationship to the price of the nearest competing alternatives adjusted for the offering’s value differential.
When firms adapt value-based pricing, they often adopt its corollary: value engineering. In value engineering, attributes and features are added and subtracted to offerings according to the
willingness-to-pay of customers for the benefits those attributes ...
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Though simple enough to state, value engineering implies a process where innovation and pricing are inherently connected.
Business strategy, the first decision area within the Value-Based Pricing Framework, comprises the choices the firm makes to differentiate itself
from its competitors in a way that results in serving its customers’ needs more profitably than competitors.
Pricing strategy, the second decision area within the Value-Based Pricing Framework, refers to the manner in which firms will manage prices.
includes its
price positioning plan, price segmentation plan, competitive price reaction strategy, and its ...
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Price positioning refers to the choice to price an offering at either a penetration, neutral, or skim position.
Price segmentation refers to charging different customers different prices
A firm’s competitive price reaction strategy determines how the firm will react to price changes within the market.
moves. The optimal competitive price reaction strategy will depend on the firm’s pricing power and level of competitive advantage.
Pricing capability defines the firm’s ability to manage pricing decisions across the company.
Market pricing,
Framework, is the setting of starting prices for every offering of the firm.
Generally, market pricing decisions rely on some form of market research.
Price variance policy,
determines the rules for granting discounts ...
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Price execution,
applies the correct
prices according to the rules developed by strategic and managerial decisions and then collects those prices fr...
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Supporting each of these five decision areas within the Value-Based Pricing Framework is pricing analysis.
The Value-Based Pricing Framework calls for pricing decisions to engage four key roles: marketing, sales, finance, and pricing. One person may take on two of these roles simultaneously.
Because pricing decisions flow from business strategy to execution, the pricing community will have both centralized and decentralized roles.
In staffing the pricing function, individuals are needed with both a strong analytical bent and business acumen, for pricing isn’t just math, it’s strategic.
In stating that the existential purpose of a firm is to serve a customer profitably, we can even leave the word “profitably” out of this claim and still be accurate. Customers that are not profitable are not customers. They are leeches sucking the lifeblood, that is, cash flow, out of the firm. No firm can serve leeches for long. Leeches should be eschewed rather than pursued. Hence, we could simply state that the purpose of a firm is to serve customers. Period.
the activities of the firm shift from the sequence of engineering an offer, costing the offer, marking up the price of the offer, and then pitching the offer to gain customers, to detecting the needs of customers, understanding the value of meeting those customer needs, defining the target price according to the value customers place on the offer, then defining a target cost below that target price to ensure profitability, and finally engineering that offer to meet those needs profitably.
This clarity in the purpose of the firm has driven a change in the culture of pricing, one that is radically different from the pricing practices of the past. This culture is known as value engineering and it results in value-based pricing.
In setting prices, rather than focusing on costs and markups, value-engineered firms work from an understanding of their customers’ willingness to pay. This is called value-based pricing. In value-based pricing, a firm identifies those prices that most closely match customers’ willingness to pay without leaving money on the table nor entering into unprofitable or unhealthy transactions.
That is, value-based pricing seeks to identify the value an offering delivers from the customer’s perspective and then charge accordingly.
Value-based pricing requires approaching pricing challenges through the lens of detecting and understanding value from the customer’s perspective.
Value-based pricing isn’t a specific technique or process, but rather a paradigm for managing exchanges between the firm and its customers.
Value is the benefits a customer receives, less the price the firm extracts. where V denotes value, B denotes benefits, and P denotes price. This definition of value is also the economist’s definition of consumer surplus.
the relevant meaning of value for customers is not an absolute, total value construct but a relative, differential value construct. Differential value is the difference in value delivered to customers by choosing one firm’s offer compared to that delivered by choosing an alternative offer.
Differential value is the differential benefits less price differential.
Customers will choose the offer that they perceive, at the moment of purchase, has a positive
differential value in comparison to all alternatives in their consideration set. That is, they seek a positive ΔV. Customers will purchase if the differential value is positive.
One way to think about benefits is that they are outcomes that are enabled by the product or
service’s features.
Market share has nothing to do with profitability. Market share says we just want to be big: we don’t care if we make money doing it. That’s what misled much of the airline industry
the maximum price the firm can achieve with an offer is that of its nearest competitive alternative adjusted for the difference in benefits.
is, the exchange value to customers is the price of the nearest alternative plus the sum of the additional benefits an offer provides less its missing benefits, which are found in the alternative solution, all taken from the customer’s perception of reality.
the exchange value to customers identifies the maximum willingness to pay of customers.
Thus, a direct answer to the relation between costs and price is as follows: If customers are willing to pay more than the cost to produce, then the firm should produce. If customers are not willing to pay
more than the cost to produce, then the firm should not produce.
