In this post, I review the book “Pricing Strategy: Setting Price Levels, Managing Price Discounts and Establishing Price Structures” by Tim J. Smith.
In many of the blogs, I see reviews of strategic pricing books, usually digging down on a single concept or explaining a new perspective. Since thepricingblog.com is an execution-oriented blog, I picked my favorite pricing book – a text book! And also, for a change, instead of giving you a summary of the book you can buy and read yourself, I will try to explain how I used the concepts in this book in my experience as a pricing professional.
The Pricing Strategy, by Tim J. Smith, was published February 1st 2011 by Thomson South-Western. The book has been shelved by 200+ readers on Goodreads, and it has 30+ ratings on Amazon and Goodreads alike. The author, Tim J. Smith, PhD, is the founder and CEO of Wiglaf Pricing, an Adjunct Professor of Marketing and Economics at DePaul University. On Amazon, you can use the “look inside” feature to see the table of contents.
Part 1 – Setting the price
If you studied marketing at the university, I’m sure you’ve spent a big deal of time discussing pricing in the 4Ps of marketing. Like many of us, if you were taught marketing with the book of Kotler (Principles of Marketing) you will see an overlap with the chapters 10 and 11, but also additional perspectives to that. Part 1 of this book brings the math behind the basic pricing concepts. For example it showcases how price elasticity is calculated at an FMCG environment.
Some subjects from Part 1, and how I used it (or not):
- Price elasticity calculations: In marketing classes, economics classes and in pricing discussions we heard a lot about price elasticity concept. Honestly speaking, in an industrial B2B pricing environment, I’ve never attempted to calculate the price elasticity, neither heard any of my peers do so (I got to know 10-20 professionals in various trainings I joined). I believe this concept is widely used in FMCG where substitute products is a reality. In industrial B2B environment, a substitute product usually requires a change in the entire installation, thus is rarely preferred.
- Conjoint analysis: I used the lighter version of this when working as a product manager. There’s a saying that “historically, price was a function of cost, but now, in a competitive market, the cost if a function of the price”. Just like that, when I was specifying the requirements for our new product family, we already knew what the acceptable price range was. We then had to fit the features into the new product family, and each had a cost. So to be able to pick the right features that fits into the target cost, we used conjoint analysis in customer surveys. It is indeed very useful in setting prices for a new product range.
- Price to benefits map: For every business case I prepared for new product ranges, I drafted these maps. In new-product-development stage, these maps will help you explain to public where the new product sits, and which market segment you are addressing with that. It also helps the audience check how realistic the target price is. You bring in the insights in the conjoint analysis on this map as well, to see if it checks. I would highlight this map as one of the most useful simple chart in pricing/product management, when it comes to explaining the competitive environment in a product category, and when you are pricing new products.
Part 2 – Price Segmentation
Needless to say, you see that this blog is a lot about price-analysis, and I use a lot of concepts from the 3 coming chapters (segmentation, promotions, discount management) in the day-to-day of price management.
Here are some concepts from Part 2, and how I’ve been using them:
- Price segmentation: I think this is a subject a pricing manager spends a big amount of his/her time on: why do we sell this same product to X dollars to Customer A, and Y dollars to Customer B? When you start digging down to your invoice data, you see a large variance in selling prices of a single product (see previous blog post, for example). How is this justified? Simply, not all the products offer the same value to the same customer segment, and their willingness to pay differs. By price-segmenting your market, you can make sure you don’t leave money at the table at the premium side, and you do not miss the large volumes as the other segments. The book gives a good perspective on B2C segmenting (consumer profiling) as well as B2B perspective (like customer usage, complexity charges). The exhibit 6-3 lists the factors to consider in industrial markets, and re-reading this chart long years after helped me question how I approach price-segmenting in my industry.
- Price promotions: Since I recently moved to Channel Marketing, I am quite involved in designing sales campaign that involve price promotions. I found the Chapter 7 of this book more focused on consumer markets than B2B. I did not find much references to the kind of promotions I’ve been running. If this chapter was to be extended, I would add more aspects like – how to execute a promotion (i.e. financial targets of a promotion, how to measure, communication, how much discount is enough for a promotion etc.).
- Discount management (hey! See the exhitbit 8-2, net price band. Doesn’t it look like “Revenue per ASP Range” chart in the previous blog post?): If I had to chose one chapter from this book to recommend to the pricing professionals, it would be this chapter. The amount spent on hundreds of price agreements with thousands of SKUs in it is a real hurdle for a pricing manager. (Actually, looking at this book, I decided to add a “net price by market region” chart to my previous blog post, using the concept explain on Exhibit 8-4). The price waterfall is a must-do analysis to explain the leaks and act on them. We see revenue-bridges in regular business reviews. The “price” step in the revenue bridge must be broken down to a waterfall as explained in this chapter. Unfortunately you do not always have structured data on why the price of a transaction was different than the other, but you can put it together with the help of sales / customer care. Decision rights (which are also called Levels of Authorities – LoA – in audit terms) are must-haves in discount management, and the lack of it might get you in trouble in a financial audit.
Part 3 – Establishing Price Structures
- Add-ons, accessories, and complementary products: Actually in our industry a product is rarely sold stand-alone, therefore the add-on pricing is a critical subject for us. You might need to see this also “solution pricing vs product pricing”, because a single product might offer basics, but a product with add-on might offer a solution to a different problem, thus it might be priced in a totally different range. I also want to highlight a new trend in “negative option pricing” – I noted that Opel sells crazy colors like flashy-green or lemon-yellow as standard colors for Corsa model in Belgium, and if you like the most popular colors like white or black you have to pay. This is totally opposite of how color (as an option) was priced before – basic colors are free (included in the purchase price), other colors come with a fee. The concept of “lock-in with complementary products” is not as common in our industry as discussed in the book, usually I see competitors try to lock-in with the basic product and not talk about how expensive the options are until the moment comes. This is a point-for-thought for me.
- Versioning: I recently spent time on how to calculate “software version upgrade prices” , and what’s the right price for auto-upgrades or new versions. I think this subject is a bit outdated since 2012, because in the last 5 years software-as-a-service (SaaS) broke through, and even giants like Microsoft is offering its Office as a service rather than single licensing.
- Subscriptions: This is a very hot topic for industry firms – almost any player in established industries are running after additional revenue and margins through recurrent services. In certain cases, we indeed come up with new services (remote assistance thanks to the new technologies for example), but we also try to convert previous one-off sales (like software licenses) into subscription model. In my experience, the risk the seller takes with the subscription model should be well integrated in the pricing. In a recent discussion with a customer in Scandinavia, I had understood that the subscription model they tried breaks even the 4th year in comparison to the one-off sales, and that is very risky. The “customer life-time value” calculation in this book is very useful in defining subscription value.
Part 4 – Pricing strategy
- I like how practical the “competition and pricing” chapter is. Very actionable recommendations on how to react to competitive pricing behavior seen in the market. In reality, we see usually new entrants trying to push the existing price brackets in the market, since in established markets the price segments do not shift as quick (except technologies getting older and new ones being introduced).
- And this takes us to the product life cycle pricing. There’s one thing I disagree with the assumption that the price point goes up towards the end of the lifecycle. In my opinion this is usually in conflict with the fairness perception (also discussed in this book in chapter 5), and we should be careful with playing with that. Locked-in customers (who have the replace a product or extend an existing installation) might have to buy a product in decline, but forcing them to pay almost the price of a better product might hurt the relation.
Overall, I had learnt a lot reading this book when I first started working on the pricing subject. And today, reviewing the book years later I got to take some points to question certain things at my work. For the reason that it is very practical and the subjects of the book covers quite a big deal of a pricing manager’s day-to-day considerations, I recommend this book to anyone interested in the subject.