Kindle Notes & Highlights
by
Tim J. Smith
Read between
September 26 - October 6, 2019
Well-known price structures include unit pricing, two-part tariffs, tying arrangements, tiered pricing, bundled pricing, subscription p...
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Many of these structures require adding or subtracting features from the core offering to increase or decrease the benefits delivered and therefore enable higher...
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After considering costs, how well does a given structure align with the willingness to pay by the chosen target market?
Price structure decisions require choices of metrics used to define the price.
pricing. In general, the goal is to align the price metric to the benefits delivered,
Changes in price structures have a very high impact on industries and profits.
American Airlines enjoyed higher profits
due to its early adaption of revenue managem...
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day. General Electric changed the standard price structure by offering jet engine usage by the hour rather than direct sales of the entire engine.
Google AdWords with pay-per-click pricing rather than pay-per-view pricing
Tactical price variances
encompass discounts, rebates, coupons, temporary sales, and other forms of promotional or tactical discounts.
It impacts the characteristics of the target market and required organi...
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Not all firms rely on tactical price variances. Apple and Walmart are known for avoiding price discounts,
These tactical price variances are much more difficult to manage. They can lead to improved profits as a firm serves more customers, but they can also lead to dramatic profit erosions if poorly executed.
A firm’s competitive price reaction strategy refers to how it plans to manage pricing actions in relation to its competitors.
In reacting to a competitor’s pricing actions or the entrance of a new competitor, executives can calculate their position on the Competitive Price Reaction Matrix
Pricing power refers to the firm being able to, within reasonable limitations, unilaterally set prices in the market where its competitors’ price actions will have little impact.
A firm can be said to have pricing power when it is not forced to follow every competitive pricing move, or at least not immediately, in order to retain its relationship with its chosen market segment.
Pricing power can be measured by the relative attractiveness of the firm’s offer to customers.
Competitive advantage can be measured by the relative profitability of customers,
In any case, a competitive advantage should be reflected in the firm’s relative profitability.
How can a firm know this? This needs knowledge of competitors’ cost structure.
We can also observe the exact same strategic position and reaction from Apple in 2011.
Clearly, price reductions will erode margins, but due to the firm’s relative competitive advantage it should retain a more profitable position than its competitors, and the cost of this price reduction should be less challenging than the potential cost of lost market share.
A clear example of these dynamics can be found in the global oil market of 2015.
Oil production break-even prices in the United States were between $39 and $65 per barrel in 2015, depending on the well. Those in Saudi Arabia were at $7 per barrel (Williams et al. 2015). Given the clear cost advantage of Aramco, they held a competitive advantage without any pricing power.
The Competitive Price Reaction Matrix calculates
that Aramco should defend its market share by managing price erosion. And that is exactly what Aramco has do...
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Due to the attractiveness of the firm’s value proposition, market share should be somewhat defendable without heavy price concessions through communicating the differential benefits of the firm’s offering.
5-Hour Energy targeted a different consumer need than Red Bull:
launched its product with a target price of $2.99, a $0.50 premium to Red Bull,
The company’s calculation to mitigate price competition by targeting a different need and sales channel paid off.
Strategic patience, where the firm survives to await a market change or some other development that enables it to create an opportunity or invest in a new one, is required to survive.
to define the firm’s capability to manage these pricing decisions,
The pricing capability required is dependent on the corporate strategy. This decision is tied to the price segmentation strategy, price positioning, and
competitive price reaction strategy.
For instance, grocers practicing category management will require a set of routines, skills, and technology distinct from air...
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CEO of Abercrombie & Fitch, chose to lead the firm through the painful
process of developing a tactical price variance strategy and organizational skill development.
Strategic choices had to be made on which brands would allow for price variances and which would not. Furthermore, decisions were made regarding how the brands would be repositioned compared to the competitors’, how those price variances would ...
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a firm’s superior ability in pricing offers effectively and efficiently that leads to capturing higher profits from that given market can be said to be a form of competitive advantage based in the capability
resources of the firm.
Firms decide the type and depth of their pricing capability: how well their p...
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much of the firm’s pricing capability must be built within the firm itself. This means developing people with the right skills, designing processes to engage the right people at the right time and inform their decisions with the right set of facts for good decision-making, and orienting the culture of the firm toward value-based pricing.
Price management converts the firm’s business and pricing strategy into action.
Price management can be disaggregated into three types of challenges supported by a fourth challenge. These three types of challenges are market pricing, price variance policy, and price execution. To inform the price management challenges with facts, as well as to inform pricing strategy and perhaps even business strategy, there are pricing analytics.
Market pricing refers to the setting of the list price or margin, or at least the target price or margin, of an offering within a specific market.
Price variance policy refers to the determination of the specific types of price promotions to be offered, price discounts to extend, and the conditions or timing in which these price variances will be allowed.
Price execution refers to the extending and collecting of specific prices from individual customer purchase decisions at the transactional level.
