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Professor Mark Bergen was an invaluable sounding board and source of inspiration in developing portions of this book. We would also like to thank our colleagues at Deloitte Con- sulting who have supported our efforts.

In addition, we had the good fortune of working with our editors at Routledge, where Sharon Golan, acquisitions editor, and Erin Arata, editorial assistant, were very thoughtful and exhibited great patience in guiding us to the end product. Finally, Tom Nagle would like to thank his wife, Leslie, for her patience and diligent copy editing which she has generously provided through 32 years of marriage and six editions of this book.

NOTE This publication contains general information only and is based on the experi- ences and research of Deloitte practitioners. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Deloitte shall not be responsible for any loss sustained by any person who relies on this publication. Warren Buffet1 Marketing consists of four key elements: The product, its promotion, its placement or distribution, and its price.

If effective product development, promotion, and placement sow the seeds of business success, effective pricing is the harvest. Regrettably, this is a common occurrence. Congested cities, such as London and Singapore, charge to drive a car into congested areas during peak times and highways in major U. Most companies still make pricing decisions in reaction to change rather than in anticipation of it. This is unfortunate, given that the need for rapid and thoughtful adaptations to changing markets has never been greater.

The information revolution has made prices everywhere more transparent and customers more price aware. At the extreme, many retailers charge online shoppers different prices or offer them different product assortments based on the type of device they are using to access the site, with the theory that the type of device can signal a systematic difference in willingness- to-pay. As the PIMS database grew to cover multiple years, more nuanced relationships were revealed. Deloitte compiled a time-series dataset of companies, covering the period from to with exceptional, mediocre and poor performers matched by industry.

Their conclusion: a [near term] focus on profitability, rather than revenue growth or [stock] value creation, offers a surer path to enduring exceptional performance.

It is not the result of slashing overheads more ruthlessly than their competitors. The difference between successful and unsuccessful pricers lies in how they approach the process.

Instead, they consider how they can segment the market with different products or distribution channels to serve these customers without undermining the perceived value to other customers. For exam- ple, strategic pricing requires anticipating price levels before beginning prod- uct development. It requires determining the economic value of a product or service, which depends on the alternatives customers have available to sat- isfy the same need.

Abdicating responsibility for pricing to the sales force or to the distribution channel is abdicating responsibility for the strategic direction of the business. Financial prudence, according to this view, is achieved by pricing every product or service to yield a fair return over all costs, fully and fairly allocated.

Because unit costs change with volume. Unfortunately, because these allocations depend on volume, and volume changes as prices change, unit cost is a moving target. According to cost-plus theory, that would call for lower prices.

Cost-plus pricing leads to overpricing in weak markets and underpricing in strong ones—exactly the opposite direction of a prudent strategy. Value-based pricing must begin before investments are made using a process that we will describe later in this chapter. In theory, this trend is consistent with value-based pricing, since marketing and sales are that part of the organization best positioned to understand value to the customer. Customer satisfaction can usually be bought by a combination of overdeliv- ering on value and underpricing products.

But marketers delude themselves if they believe that the resulting increases in sales represent marketing successes. First, sophisticated buyers are rarely honest about how much they are actually willing to pay for a product. Professional purchasing agents are adept at concealing the true value of a product to their organizations.

But we know from studies of innovations that the price has little impact on whether customers are willing to try them. Forget what customers who have never used your product are initially willing to pay.

Low pricing is always a poor substitute for an inadequate mar- keting and sales effort. In this view, pricing is a tool to achieve gains in market share. In most cases, however, there is no reason why an organization should seek to achieve market share as an end in itself.

Because a price cut can be so easily matched, it offers only a short-term market advan- tage at the expense of permanently lower margins.

These trade-offs come in two forms. Cost-plus pricers are often reluctant to exploit these opportunities because they reduce the average contribution margin across the product line, giving the appearance that it is underperforming rela- tive to other products. The second trade-off involves the willingness to give up volume by raising prices.

Yet the economics of a price increase can be compelling. We will show you how to make such calculations later in this book.

In theory, this is totally consistent with the approach we propose in this book, but in practice it is almost always impractical. Contrary to the assumptions that economists make when studying mar- kets, the demand for individual products or brands within markets is rarely stable or easily measured.

The reason: Sensitivity to price depends as much on ever-changing purchase contexts and perceptions as on underlying needs or preferences. For example, contradicting the assumption of a demand curve, the amount of a product that customers will buy at a particular price point is strongly affected by the prices they paid recently.

When gasoline prices are rising, the demand for premium grades of gasoline will fall quickly by a much greater percentage than demand for regular grades.

But when prices decline back to where they started, demand for premium grades will not recover quickly. What it does not predict is that the mid-priced version will at the same time gain sales at the expense of the cheapest version even though the prices of those two versions remain unchanged.

Economists refer to the actual percentage change in sales divided by the percentage change in price as the price elasticity of demand.

Actual elasticity depends in part upon how effectively marketers manage customer perceptions and the purchase context, as you will come to see in the following chapters. Technical details about how to cal- culate a correct breakeven sales change for any particular product and pricing decision are described in Chapter 9.

None of this implies that research to understand demand price elasticity is not valuable. Research is also useful when developing offers to understand the relative impact of different features and services that one might offer on perceived value. Consumer packaged goods compa- nies can purchase huge quantities of scanner-recorded sales data from retail stores, far more than would ever be practical to generate from market research. As you probably remember from basic economics, the optimal price one can charge is limited by the demand curve: A summary of what customers are willing to pay to buy various quantities of volume.

Pricing, given the assump- tions of economics, is simply about optimizing the price level given that demand. In reality, however, demand for most products and services is not given. It is created, sometimes thoughtfully and sometimes haphazardly, by decisions that sellers make about what to offer their customers, how to com- municate their offers, how to price differently across customers or applications and how to manage customer price expectations and incentives.

Help others learn more about this product by uploading a video! About the author Follow authors to get new release updates, plus improved recommendations. Read more Read less. Customer reviews. How customer reviews and ratings work Customer Reviews, including Product Star Ratings help customers to learn more about the product and decide whether it is the right product for them. Learn more how customers reviews work on Amazon.

Images in this review. Reviews with images. See all customer images. Top reviews Most recent Top reviews. Top reviews from the United States. There was a problem filtering reviews right now. Please try again later. Verified Purchase. Clearly defined the value and price and how customers measure the value. Useful for beginners and professionals. I was thinking about using the book for a course I am going to teach next spring. Turns out the book will not work.

It arrived before scheduled, right before my class started. Good condition and clean. Great read on pricing with updates including new trends on the topic. Selling is not as advertised, for 70 bucks you get a Philippines only version which is sketchy AF.

By Manders on March 20, An evolving timepiece that encapsulates the best MBA in a single book. This book exceeding my needs bar none. This edition features a new discussion on harnessing concepts from behavioral economics as well as a more streamlined value cascade structure to the topics. Readers will also benefit from:Major revisions to almost half of the chapters, including an expanded discussion of big data analytics and a revised chapter on Specialized Strategies, which addresses timely technical issues like foreign exchange risks, reactions to market slumps, and managing transfer prices between independent profit centers.

A completely rewritten chapter on Creating a Strategic Pricing Capability, which shows readers how to implement the principles of value-based, strategic pricing successfully in their organizations. In-chapter textboxes, updated to provide walk-through examples of current pricing challenges, revenue models enabled by an increasingly digital economy, and advances in buyer decision-making, explained through classic principles that still apply today. Chapter summaries and visual aids, which help readers grasp the theoretical frameworks and actionable principles of pricing analysis.

This comprehensive, managerially-focused text is a must-read for students and professionals with an interest in strategic marketing and pricing. More documents Similar magazines Info. Share from cover. Annotation Susan Polgar became the first female Grandmaster at age 15 - and it wasn't luck that got her there. Table of contents : 1.

Strategic pricing: coordinating the drivers of profitability -- 2. Economic value: the guiding force of pricing strategy -- 3. Price and value communication: strategies to influence willingness-to-pay -- 4.

Price structure: tactics for pricing differently across customer segments -- 5.

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