Pricing is the driving force of a market place, allowing coordination of self-interested agents across wide divides of time, space and culture.
And that’s as it may be. “But what price should I”, asks the frustrated manager or small business owner, “charge for my product or service”?
This is where The Strategy and Tactics of Pricing 5th Edition by Nagle, Hogan and Zale steps in. Pricing takes a central consideration of business and turns it into a structured process that most businesses can follow.
To be sure, the audience is clearly MBA students. Many of the examples deal with large corporations with complex product and service portfolios. But other examples deal with small or medium businesses too. And most of the text is applicable to smaller businesses.
So how does one price a product or service?
Nagle, Hogan and Zale break their pricing approach into a layered approach. Each layer or step feeds into the next one.
First, Pricing discusses identifying value. The goal here is to establish how valuable your product or service is to the customer. A number of techniques can be used, from interviews and surveys through to complex statistical estimates. Sometimes valuation is monetary and sometimes only expressible in psychological terms.
Next this information is used to guide the selection of price structures — there are the familiar market segments, but also discussed are mechanisms for creating offer bundles and “price fences” to encourage customers to pay a large fraction of their value back to the selling business.
The next step is communicate the price/value mix to customers. Without correctly communicating the price/value mix, customers will select their own criteria and it may not be a “fair” price from the view of the business.
A chapter on pricing policy counsels against creating a culture of sales discounting and variation; instead, a predictable policy avoids teaching customers that they can always hold out for more or disrupt internal sales processes by “shopping around” amongst different sales staff.
After discussing product life cycles and pricing strategy implementation, the authors turn to the calculating prices based on breakeven analysis and cost studies.
I found these sections particularly interesting because the definition of incremental cost is neither strictly aligned with economic theory variable costs or with the accounting concept of Cost of Goods Sold. Nagle, Hogan and Zale effectively demonstrate that “unprofitable” decisions can actually contribute substantially to the bottom line.
Chapters on pricing in the face of competition, measuring price sensitivity and legal considerations round out the book.
The book’s reluctance to bow to the theoretical frameworks of marketing, economics or accounting make it a particularly interesting read. Rather, pricing is a “cross-cutting” function of a business. Pricing is where the rubber hits the road, and the authors place it at the centre of business life.
I was also interested in how carefully one must tread on some pricing decisions. Some of the behaviour described in the book is really a kind of elaborate signalling to competitors and customers about intentions. It is illegal to collude on prices, for example; but the authors discuss pricing signals and activities intended to warn off entrants, to signal intentions to reduce or increase productive capacity, to start or finish price wars and so forth. In this respect, much of the book is about how best to avoid behaving as an agent in a hypothetical perfect market.
Some of the tables are quite useful. Take for example Exhibit 6-4, “Price Sensitivity Drivers”. A lot of these I recognised only from previous observatons, but having them enumerated in a single table is useful.
I’ve done a poor job of relating the contents and quality of this book (partly because of delays brought on by Ozblogistan’s migration woes). I’ve started recommending it to any potential small business owner and entrepreneur I talk to. It so deftly and comprehensively treats a core predictor of business success that you would be remiss to pass up reading it if business is your profession. Recommended.