Confessions of the Pricing Man (eBook)

Hermann Simon is Chairman of Simon-Kucher & Partners Strategy & Marketing Consultants, which has 27 offices in 22 countries. He is the world’s leading authority on pricing.Simon was a professor of business administration and marketing at the Universities of Mainz (1989-1995) and Bielefeld (1979-1989). He was also a visiting professor at Harvard Business School, Stanford, London Business School, INSEAD, Keio University in Tokyo and the Massachusetts Institute of Technology. He studied economics and business administration at the universities of Bonn and Cologne. He received his diploma (1973) and his doctorate (1976) from the University of Bonn. He has received numerous international awards and honorary doctorates and was voted the most influential management thinker in German-speaking countries after the late Peter Drucker.Simon founded Simon-Kucher & Partners in 1985 together with two of his doctoral students. After advising the firm for a decade, Hermann left his academic career in 1995 to assume the full-time role as CEO of Simon-Kucher & Partners, where he led the firm’s international expansion. When he left that role in 2009, Simon-Kucher & Partners had become the world’s largest pricing consulting practice, active in all major industries. The firm has consulted with almost 100 members of the Fortune 500, some in decades-long relationships. Simon has published over 30 books in 26 languages, including the worldwide bestsellers Power Pricing (Free Press, 1997), Manage for Profit, Not for Market Share (Harvard Business School Press, 2006), Hidden Champions (Harvard Business School Press, 1996), and Hidden Champions of the 21st Century (Springer New York, 2009). He has served on the editorial boards of numerous business journals, including the International Journal of Research in Marketing, Management Science, Recherche et Applications en Marketing, Décisions Marketing, European Management Journal as well as several German journals. Since 1988 he has been a columnist for the business monthly Manager Magazin. He is also a board member of numerous foundations and corporations.    

Preface: Confessions 6
Acknowledgements 8
Contents 10
About the Author 16
1: My First Painful Encounters with Prices 17
Pricing Student: The Journey Begins 18
Pricing Professor: Academia Was Still My Only Option 21
Pricing Consultant: We Take Theory into the Real World 22
2: Everything Revolves Around Price 25
What Does “Price” Actually Mean? 26
“Price” Goes by Many Aliases 28
Price = Value 29
Creating and Communicating Value 31
What Smart Pricing Can Achieve: The 2012 London Olympics 33
What Smart Pricing Can Achieve: The BahnCard 34
Supply and Demand 37
Scarcity and Boom-and-Bust Cycles 38
Price and Government 39
Price and Power 40
Pricing Pushes Its Boundaries 41
3: The Strange Psychology of Pricing 43
The Prestige Effect of Price 44
Price as an Indicator of Quality 45
The Placebo Effect of Price 46
Price as a Defused Weapon 47
Price Anchor Effects 47
The Magic of the Middle, or the Story of the Padlock 49
Neither the Cheapest nor the Most Expensive Wine 49
A Profit-Generating Product No One Ever Buys 50
Creating Scarcity 50
Selling More by Offering Additional Alternatives 51
Price Thresholds and Odd Prices 53
Prospect Theory 56
Prospect Theory and Price 57
Business or Economy? 57
Free or Paid: A Big Difference 58
Better to Pay in Cash 58
The Temptation of Credit Cards 59
“Cash Back” and Other Absurdities 59
Moon Prices 60
Price Structures 61
Mental Accounting 62
Neuro-Pricing 63
In Conclusion: Be Cautious! 64
4: Price Positioning: High or Low 66
Success Strategies with Low Prices 66
Aldi 66
IKEA 67
H& M and Zara
Ryanair 68
Dell 69
Less Expensive Alternatives 70
Amazon and Zalando: Revenue vs. Profit 70
Success Factors for a Low-Price Strategy 71
Ultra-low Prices: Can You Go Lower than Low? 72
Dacia Logan and Tata Nano 73
Honda Wave 73
Ultra-low price Positioning in Other Consumer and Industrial Goods 74
Ultra-low Price Products Also for Sale in Highly Developed Countries? 76
Success Factors for an Ultra-low Price Strategy 77
Success Strategies with High Prices 78
Premium Pricing 78
Apple vs. Samsung 79
Gillette 80
Miele 81
Porsche 81
Enercon 82
“Bugs” Burger Bug Killers 83
Premium Strategies Can Also Backfire 84
Success Factors for a Premium Price Strategy 85
Success Strategies for Luxury Goods Pricing 85
How Much Does a Luxury Watch Cost? 86
Swiss Watches 87
LVMH and Richemont 87
Stumbling Blocks in Luxury Goods Marketing 88
Maybach 88
Are There Limits to Prices of Luxury Goods? 90
The Challenge of Creating Enduring Value 90
Observing Volume Limits 91
Success Factors for Luxury Goods Price Strategies 92
What Is the Most Promising Price Strategy to Pursue? 93
5: Prices and Profits 96
Chasing the Wrong Goals? 98
How Does a Price Increase of 2 % Affect Profits? 101
Price Is the Most Effective Profit Driver 102
Now … Let’s Change Your Prices and See What Happens 103
Back to the Future: The General Motors Employee Discount Program 106
Prices, Margins, and Profits 107
Price Is a Unique Marketing Instrument 108
6: Prices and Decisions 111
Who, What, Where, When, Why … and How? 111
The Effects of a Price Decision 113
Price and Volume 114
Using Costs to Set Prices 115
Following the Competition 116
Market-Based Price Setting 117
Sharing Value Fifty-Fifty 118
How to Determine Demand Curves and Price Elasticities 120
Expert Judgment: Making Direct Estimates of Price Elasticities 120
Asking Customers About Prices Directly 122
Asking Customers About Price Indirectly 122
Price Tests 123
The Big Data Myth: Using Market Data for Demand Curves and Price Elasticities 123
So … What About the Competitors’ Prices? 125
The Prisoner’s Dilemma: Let the Game Begin 126
Price Leadership 127
Signaling 127
Competitive Reaction and Price Decisions 128
Inflation: What It Is and Why It Matters for Price Decisions 131
Price and Inflation: A Lesson from Brazil 133
7: Price Differentiation: The High Art 135
Going from the Profit Rectangle to the Profit Triangle 136
What Does a Can of Coca-Cola Cost? 137
The Difference Two Prices Can Make 139
Why the First Beer Should Be More Expensive 140
Nonlinear Pricing for a Cinema 141
Price Bundling 143
Price Bundling for Optional Accessories 145
Unbundling 146
Multi-Person Pricing 146
The More, the Cheaper? Be Careful! 147
Differentiation or Discrimination? 148
Price and Location 150
Price and Time 152
Perishable Goods 154
Patents for Dynamic Pricing 154
Juggling Capacities and Prices 155
Price and Scarcity 156
Hi-Lo vs. EDLP 157
Advance Sale Prices and Advance Booking Discounts 158
Penetration Strategy: Toyota Lexus 159
Skimming Strategy: The Apple iPhone 161
Information and Profit Cliffs 163
Fencing 164
Pay Attention to Costs 165
8: Innovations in Pricing 166
Radical Improvements in Price Transparency 166
Pay Per Use 167
New Price Metrics 169
Introducing a New Price Parameter: The Case of Sanifair 170
Amazon Prime 172
Industrial Gases 172
ARM 172
Freemium 173
Flat Rates 176
Prepaid Systems 178
Customer-Driven Pricing 178
Pay What You Want 179
Profit-Oriented Incentive Systems 180
Better Price Forecasts 181
Intelligent Surcharges 182
à la Carte Pricing 185
Harvard Business Review Press 186
Auctions 187
9: Pricing in Crises and Price Wars 189
Crisis: What Does That Mean? 189
Cut Volume or Cut Price? 191
Making Intelligent Price Cuts 192
Offer Cash or Goods Instead of Lower Prices! 194
Staying Off the Customers’ Radar Screen 195
The Arch-Nemesis: Overcapacity 197
Price Increases in Times of Crisis 199
Price Wars 200
10: What the CEO Needs to Do 204
Price and Shareholder Value 205
How Price Can Increase Market Capitalization 206
$120 Million More Through Pricing 207
Price and Market Capitalization 208
The Day the Marlboro Man Fell Off His Horse 208
20 % Off on Everything: The Praktiker Case 208
The Devastating Effect of Price Wars: The Potash Oligopoly Case 210
Pride Before the Fall: The Netflix Case 211
A Failed Attempt to Trade Customers Up: The J.C. Penney Case 212
Discounts and Promotions: The Abercrombie & Fitch Case
Price Discipline Increases a Company’s Market Value: A Telecom Case 215
Pricing and Financial Analysts 216
Price and Private Equity Investors 218
The Key Role of Top Management 219
Name Index 222
Companies and Organizations Index 224
Subject Index 227