Preface

Since the first edition of this book over 30 years ago, our goal has been to rebut the common misperception that pricing is an afterthought to a growth strategy: a simple process of calculating the “right” price for a product or transaction. Over those years, both marketing practitioners and academics have largely come to recognize that a profitable pricing strategy requires proactively managing much more than just price. It requires thoughtful and proactive management of choices about what to offer, how information about price and value is communicated, perceptions created in the process of price negotiation, and choices about when, where, and how to compete for market share. Today leading organizations are leveraging the principles of strategic pricing described in this book to actively influence willingness-to-pay. They are, in effect, shifting demand curves as opposed to just reacting to them.

To influence demand and willingness-to-pay, profitable pricing requires looking beneath simple concepts like demand and demand elasticity to understand and manage the perceptions of monetary and psychological value that motivate purchase decisions. Mastering the value proposition enables a firm (i) to segment prices to reflect differences in value and cost; (ii) to communicate the value of its offers to customers unfamiliar with the market; and (iii) to create pricing policies for managing pricing issues fairly and consistently. In short, this book shows managers how to move from tactically “optimizing” prices in markets where they seemingly exercise little control to managing the market strategically. When that happens, pricing becomes an integral part of a strategy to grow profitably, rather than just a blunt instrument to drive sales and market share.

The principles of strategic pricing, which were foreign to most business practitioners when the first edition of this book was published more than three decades ago, are now more widely accepted in principle. However, most companies still struggle with their application. The changes in this sixth edition of our book reflect our attempts to address this need:

• To help our readers better conceptualize the range of interrelated tasks involved in strategic pricing, we have organized this edition around a “value cascade” that organizes those tasks into six distinct categories.
• The field of behavioral economics has absolutely exploded since the first edition of this book and has gained more widespread acceptance; the chapter on “Price and Value Communication: Strategies to Influence Willingness-to-Pay” highlights several of the behavioral economic principles that are particularly important to consider when proactively managing prices and value perceptions.
• We have substantially revised the chapter on “Price Level: Setting the Prices That Capture a Share of the Value Created” to present a robust process for determining appropriate price levels. The chapter reflects the reality that companies in only a few markets (e.g., online retailing) can map their demand, and its changes over time, with sufficient accuracy to set the “best” price exactly. Our approach now describes how to assemble data and process information to support a cross-functional dialogue that arrives at “good” price decisions based upon thoughtfully weighing the information at hand.
• The chapter on “Price Competition: Managing Conflict Thoughtfully” provides an in-depth understanding of value-destroying price wars, how to mitigate the damage of a price war, and perhaps most important, how to minimize the chances of provoking destructive responses to one’s own pricing decisions.
• The chapter on “Specialized Strategies: Adapting Pricing to Accommodate Common Challenges” has been added to address some of the more technical issues that managers might encounter such as managing pricing over a product lifecycle, addressing foreign exchange risks, how to act when a market slumps, and managing transfer prices between independent profit centers.
• A completely rewritten chapter on “Creating a Strategic Pricing Capability” describes the process for transforming an organization to one that embeds the principles of value-based strategic pricing into the processes and incentives of the organization.
• Throughout this edition, we have updated examples to illustrate more current pricing challenges, new revenue models enabled by our increasingly digital economy, and advances in the study of buyer decision making. At the same time, we have also retained a number of “classic” examples that contain lessons that remain highly relevant and applicable today.

As with prior editions, the primary objective of this book is to develop a practical and readable manager’s guide to pricing. Professors will be happy to learn that we have updated the Instructor’s Manual for this edition to include new exercises, mini-cases, and examination questions. We also provide a link to Deloitte’s Polaris analytical pricing software to allow students to put theory into practice by exploring real-world scenarios.