Price Management (eBook)

Hermann Simon is the founder and honorary chairman of Simon-Kucher & Partners, the world’s leading price consultancy. Ranked on the Thinkers50 list of the most influential international management thinkers, he is considered the world’s leading authority on pricing. Simon has published over 35 books in 27 languages, including the worldwide bestsellers Hidden Champions, Confessions of the Pricing Man, Power Pricing, and Manage for Profit, Not for Market Share. From 1995 to 2009 he served as CEO of Simon-Kucher & Partners. He has advised many of the world’s leading companies, and has served as a board member of foundations and corporations. Before committing himself entirely to management consulting, Simon was a professor of business administration and marketing at the Universities of Mainz (1989-1995) and Bielefeld (1979-1989). His visiting professorships include Harvard Business School, Stanford, London Business School, INSEAD, Keio University in Tokyo, and the Massachusetts Institute of Technology. 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, and European Management Journal. He was also president of the European Marketing Academy (EMAC). Simon studied economics and business administration at the Universities of Cologne and Bonn, where he received degrees in economics and earned his Ph.D. in management science. He has received many international awards and three honorary doctorates. He is honorary professor at the University of International Business and Economics in Beijing and the Hermann Simon Business School in China has been named in his honor.   Martin Fassnacht is the Otto Beisheim Chaired Professor of Marketing and Commerce at the WHU – Otto Beisheim School of Management in Düsseldorf, Germany. He ranks as one of Germany’s most influential economists. Under the motto “We Inspire Marketing,” he and his team at WHU generate fresh ideas for research, practice, and teaching in price management, retail marketing, and brand management. He serves as a strategic advisor to consumer goods manufacturers and retailers, and he and his team conduct projects in cooperation with partners from industry and trade. He is also the author of numerous publications in international peer-reviewed journals and magazines. Fassnacht is the scientific director of the Center for Market-Oriented Corporate Management at WHU and the academic director of WHU’s MBA program. He is the chairman of the Advisory Board of the Henkel Center for Consumer Goods (HCCG) at WHU. Fassnacht completed his post-doctoral work at the University of Mannheim and at the WHU with Prof. Christian Homburg. He received his Ph.D. in Business Administration from the University of Mainz under the direction of Prof. Hermann Simon, co-author of this book. Fassnacht was a visiting scholar at the Owen Graduate School of Management at Vanderbilt University and at the McCombs School of Business at the University of Texas at Austin.

Testimonials 5
Preface 6
State of the Art 6
The Integration of Theory and Practice Using Case Examples 6
Industry Orientation 7
Global Approach 7
Target Audience 7
Contents 9
About the Authors 15
1: Fundamentals of Price Management 17
1.1 Profit and Price 17
1.2 Definition of Price 21
1.3 Price and Management 22
1.3.1 Price as a Marketing Instrument 22
1.3.2 Understanding the Role of Price 26
1.3.2.1 Gaps Between Theory and Practice 26
1.3.2.2 The Multidimensional Effects of Price 26
1.3.2.3 Complex Chains of Effects 27
1.3.2.4 Psychology 28
1.3.2.5 Implementation Barriers 29
1.3.2.6 Industry Specifics 29
1.3.3 Price Management as a Process 30
1.4 Knowledge Sources for Price Management 32
1.4.1 Macroeconomic Price Theory 32
1.4.2 Microeconomics 32
1.4.3 Marketing Science 32
1.4.4 Behavioral Economics 33
1.4.5 Brain Research 33
1.4.6 Price Consulting 33
1.4.7 Software for Price Management 34
1.4.8 Pricing Innovators 34
1.4.9 Popular Literature 34
1.5 The Legal Framework of Price Management 35
1.5.1 United States 35
1.5.2 European Union 35
1.5.3 Worldwide 36
1.5.4 Activities of the Antitrust Agencies 36
1.6 Current Trends in Price Management 37
1.6.1 Prices Are Penetrating Management Thinking 37
1.6.2 Price and Power 39
1.6.3 Price and Top Management 40
Conclusion 41
References 42
2: Price Strategy 45
2.1 Goals 45
2.2 Price Management and Shareholder Value 51
2.3 Value and Price 56
2.4 Positioning 57
Overview 59
2.5 Approach 60
2.6 Price Positions 62
2.6.1 Luxury Price Position 62
2.6.1.1 Basics 62
2.6.1.2 Management 63
Product 63
Price 65
Distribution 67
Communication 67
2.6.1.3 Opportunities and Risks 68
2.6.2 Premium Price Position 69
2.6.2.1 Basics 69
2.6.2.2 Management 70
Product 70
Price 71
Distribution 72
Communication 73
2.6.2.3 Opportunities and Risks 73
2.6.3 Medium-Price Position 75
2.6.3.1 Basics 75
2.6.3.2 Management 76
Product 76
Price 76
Distribution 77
Communication 78
2.6.3.3 Opportunities and Risks 78
2.6.4 Low-Price Position 80
2.6.4.1 Basics 80
2.6.4.2 Management 81
Product 82
Price 83
Distribution 83
Communication 84
2.6.4.3 Opportunities and Risks 85
2.6.5 Ultra-Low Price Position 86
2.6.5.1 Basics 86
2.6.5.2 Management 87
Product 87
Price 88
Distribution 89
Communication 90
2.6.5.3 Opportunities and Risks 90
2.6.6 The Dynamics of Price Positioning 91
Conclusion 95
References 97
3: Analysis: The Economics of Price 101
3.1 Introduction 101
3.2 Analysis of Price-Relevant Information 102
3.2.1 Cost-Plus Pricing 103
3.2.2 Customers 104
3.2.3 Competition 106
3.3 The Price-Response Function 108
3.3.1 Classification of Price-Response Functions 108
3.3.2 Price-Response Functions and Price Elasticity 109
3.3.2.1 Individual and Aggregated Price-Response Functions 109
3.3.2.2 The Aggregated Price-Response Function 110
3.3.2.3 Definition of Price Elasticity 111
3.3.2.4 Linear Price-Response Functions and Price Elasticity in a Monopoly 112
3.3.2.5 Linear Price-Response Functions and Price Elasticity with Competition 113
The Independent Variables 113
3.3.3 Additional Forms of the Price-Response Function 115
3.3.3.1 The Multiplicative Model 115
3.3.3.2 The Attraction Model 116
3.3.3.3 The Gutenberg Model 117
3.3.4 Empirical Findings on Price Elasticity 118
Overview 123
3.4 Empirical Determination of the Price-Response Function 124
3.4.1 Surveys 124
3.4.1.1 Expert Judgment 124
3.4.1.2 Customer Surveys 127
Direct Customer Surveys 127
The van Westendorp Method 129
Overview 132
Indirect Customer Surveys 132
Case: Automotive Study 134
From Utility to Sales Volume 138
Further Developments in Conjoint Measurement 138
Overview 143
3.4.2 Observations 144
3.4.2.1 Experiments 144
Price Experiments 144
Overview 146
Experimental Auctions 146
Overview 147
3.4.2.2 Market Observations 148
Market Data 148
Overview 151
Data from Online Auctions 151
Overview 152
3.4.3 Synopsis of Instruments 152
Conclusion 154
References 155
4: Analysis: The Psychology of Price 159
4.1 Introduction 159
4.2 Traditional Psychology of Price 161
4.2.1 Prestige Effects of Price 161
4.2.2 Giffen Paradox 162
4.2.3 The Price as a Quality Indicator 162
4.2.4 Special Cases 165
4.3 Behavioral Pricing 166
4.3.1 Theoretical Basis 167
4.3.1.1 Prospect Theory 167
4.3.1.2 Mental Accounting 170
Overview 171
4.3.1.3 Other Theories 171
4.3.2 Behavioral Pricing Effects 173
4.3.2.1 Price Threshold Effect 173
4.3.2.2 Price Anchor Effects 175
4.3.2.3 The Magic of the Middle 176
4.3.2.4 Assortment Effect 177
4.3.2.5 Additional Effects 180
4.3.3 Neuro-Pricing 182
4.3.4 Overall Assessment 183
Conclusion 184
References 185
5: Decision: One-Dimensional Prices 189
5.1 Introduction 189
5.2 Categorization of One-Dimensional Pricing Processes 190
5.3 Rigid Pricing Processes 191
5.3.1 Cost-Plus Pricing 191
5.3.2 Competition-Oriented Pricing 192
5.3.2.1 Adjustment Strategy 192
5.3.2.2 Niche Strategy 193
5.4 Comprehensive Pricing Process 194
5.4.1 Break-Even Analysis 194
5.4.2 Decision-Support Systems 199
Overview 201
5.4.3 Mathematical Price Optimization 201
5.4.3.1 Monopoly Case 202
5.4.3.2 Price Optimization for a Multiplicative Price-Response Function 203
5.4.3.3 Price Optimization for a Linear Price-Response Function 203
5.4.3.4 Price Optimization for a Gutenberg Function 204
Overview 208
5.4.4 Price Optimization in Oligopoly 208
Overview 210
5.4.4.1 Linear Price-Response Function, Linear Reaction Function 210
5.4.4.2 Case Study 211
5.4.4.3 Price Optimization with Subjective Estimations of Competitive Reaction 213
5.4.5 Reaction Hypotheses in an Oligopoly 214
5.4.5.1 Cournot Hypothesis 215
5.4.5.2 Chamberlin Hypothesis 216
5.4.5.3 Game Theory Interpretation 216
Overview 218
5.4.5.4 Signaling 219
Overview 221
Conclusion 221
5.5 Background Information 222
References 223
6: Decision: Multidimensional Prices 225
6.1 Introduction 225
6.2 Price Differentiation 226
6.2.1 Market Segmentation as the Foundation for Price Differentiation 227
6.2.2 Theoretical Basis of Price Differentiation 230
6.2.2.1 Definition of Price Differentiation 230
6.2.2.2 Goals of Price Differentiation 231
6.2.2.3 Tasks to Achieve Price Differentiation 232
6.2.3 Implementation of Price Differentiation 235
6.2.3.1 Individual Price Differentiation (First Degree) 236
6.2.3.2 Price Differentiation Through Self-Selection (Second Degree) 237
Performance-Based Price Differentiation 237
Volume-Based Price Differentiation 239
6.2.3.3 Price Differentiation Based on Customer Criteria (Third Degree) 242
Person-Based Differentiation 245
Time-Based Price Differentiation 246
Multi-Person Pricing 248
Regional Price Differentiation 249
6.2.3.4 Combination of Several Forms of Price Differentiation 249
6.3 Price Decisions Across Products 254
6.3.1 Price Decisions for Product Lines 254
6.3.1.1 Theoretical Basis 254
Substitutive Relationships 255
Complementary Relationships 255
Dynamic Relationships 255
Information Transfer 256
6.3.1.2 Price Optimization for Product Lines 256
Example with Substitutive Relationships 258
Example with Complementary Relationship 260
Implementation of Price Decisions for Product Lines 261
6.3.2 Price Bundling 262
6.3.2.1 The Theory of Price Bundling 263
6.3.2.2 Forms of Price Bundling 265
Pure Bundling 265
Mixed Bundling 266
Special Forms of Price Bundling 267
Unbundling 267
Price Presentation 268
Conclusion 269
6.4 Background Information 271
References 271
7: Decision: Long-Term Price Optimization 274
7.1 Determinants of Long-Term Optimal Prices 274
7.1.1 Long-Term Objective Function 275
7.1.2 Long-Term Price-Response Function 275
7.1.2.1 Product Life Cycle 276
Dynamics of Price Elasticity 276
7.1.2.2 Competitive Dynamics 277
7.1.2.3 Price Effects Across Periods 277
7.1.2.4 Carryover Effects 280
7.1.3 Long-Term Cost Function 283
Overview 287
7.2 Long-Term Price Optimization 287
7.2.1 Rules of Thumb for Long-Term Price Decisions 288
7.2.1.1 Price Decisions in the Launch and Growth Phase 288
Skimming Strategy 288
Penetration Strategy 290
7.2.1.2 Price Decisions in Later Phases 293
7.2.2 Quantitative Optimization of Long-Term Prices 294
7.2.2.1 Long-Term Optimal Price with a Dynamic Price-Response Function 295
Long-Term Optimal Price with Carryover 296
Long-Term Optimal Price with Price-Change Effects 297
Overview 299
7.2.2.2 Long-Term Optimal Price with Dynamic Cost Functions 299
7.2.2.3 Synopsis on Long-Term Price Optimization 300
7.3 Long-Term Price Decisions and Relationship Marketing 301
7.3.1 Long-Term Price Decisions and Customer Acquisition 303
7.3.2 Long-Term Price Decisions and Customer Retention 304
7.3.3 Long-Term Price Decisions and Winning Back Customers 306
Conclusion 307
7.4 Background Information 309
References 311
8: Price Management and Institutional Context 313
8.1 Price and Inflation 313
8.1.1 Varying Inflation Rates and Net Market Position 314
8.1.2 Inflation-Neutral Trend 315
8.1.3 Non-Inflation-Neutral Trend 315
8.1.4 Tactical Considerations on Price and Inflation 317
8.2 International Price Management 318
8.2.1 Problems and Practices 318
8.2.2 Price and Exchange Rates 322
Overview 325
Overview 327
8.2.3 Parallel Imports 328
8.2.3.1 International Price Corridor 329
8.2.3.2 Uniform Price 332
8.2.3.3 Price Increase in the Low-Price Country 332
8.2.3.4 Price Cut in the High-Price Country 333
8.2.3.5 A Case from Practice 333
8.2.4 Price and Government Intervention 335
8.2.4.1 Customs and Taxes 335
8.2.4.2 Import Duties 336
8.2.4.3 Antidumping Duties 337
8.2.4.4 Quotas 337
8.2.5 Implementation in an International Context 338
8.2.5.1 International Terms of Delivery and Payment Terms 338
8.2.5.2 Financing 338
8.2.5.3 Allocation of Price Decision Authority 338
Conclusion 339
References 340
9: Implementation 342
9.1 Introduction 342
9.2 Responsibilities in Price Management 343
9.2.1 Definition of the Tasks 344
9.2.2 Allocation of Price Decision Authority 346
9.2.3 Price-Related Organization 349
9.2.3.1 The Price Manager 349
9.2.3.2 The Pricing Department 349
9.2.3.3 Six Sigma Pricing 351
9.2.3.4 Price Consultants 352
9.2.3.5 Pricing Software 354
9.2.3.6 Machine Learning in Pricing 355
9.2.4 The Role of the CEO 357
9.3 The Role of the Sales Force 361
9.3.1 Price Decision Authority of the Sales Force 361
9.3.1.1 Qualitative Arguments 362
9.3.1.2 Theoretical Arguments 363
9.3.1.3 Empirical Findings 364
9.3.2 Price-Oriented Incentive Systems 367
9.3.2.1 Management by Objectives 369
9.3.2.2 Non-monetary Incentives 370
9.3.2.3 Reducing Price Competition by Limiting Discounts 373
9.3.2.4 Using System Bonuses to Defend Against Aggressive Competitors 373
9.3.2.5 Using Value Bonuses to Reduce Price Pressure 373
9.3.2.6 Avoiding Abuse of Project-Based Conditions 373
9.3.2.7 Using a Partner Concept to Deepen Relationships with Strategic Customers 374
9.3.2.8 Risk Sharing 374
9.4 Price Communication 375
9.4.1 External Price Communication 376
9.4.1.1 Price Lists 376
9.4.1.2 Price-Related Advertising 378
9.4.1.3 Price Guarantees 379
9.4.1.4 Communication of Price Changes 379
9.4.1.5 Price Structure and Communication 382
9.4.1.6 Payment Terms 385
9.4.2 Internal Price Communication 386
9.5 Price Controlling 387
9.5.1 The Price Controlling Function 388
9.5.2 IT Requirements 388
9.5.3 Tools for Price Controlling 389
9.5.3.1 Price Realization 389
9.5.3.2 Price Waterfall 392
9.5.3.3 Discount Jungle 392
9.5.3.4 Analysis of Responsibilities 394
9.5.3.5 Lost Deals 395
9.5.3.6 Complex Analyses of Variance 396
Conclusion 397
References 398
10: Price Management for Consumer Goods 402
10.1 Introduction 402
10.2 Vertical Price Management 403
10.2.1 The Manufacturer Sets Both Its Selling Price and the End Consumer Price 405
10.2.1.1 Optimization of End Price and Margin 406
10.2.1.2 Manufacturer and Retailer Share 408
10.2.1.3 Margin as a Competitive Instrument 408
10.2.1.4 Empirical Aspects of Margin Elasticity 409
Overview 410
10.2.2 The Manufacturer Sets Only the Manufacturer´s Selling Price 411
10.2.2.1 Behavior of the Trade 411
10.2.2.2 Optimization of the Manufacturer´s Selling Price When the Trade Partner Uses Cost-Plus Calculation 411
10.2.2.3 Optimization of the Manufacturer´s Selling Price When the Trade Partner Maximizes Profit 414
10.2.2.4 Comparison of the Two Situations 416
Overview 417
10.2.3 Manufacturer and Trade Partner Pursue Joint Profit Maximization 417
10.2.4 Distribution of Profit 419
10.2.4.1 On the Relationship Between Manufacturer and Trade Partner 421
10.2.4.2 Practical Aspects of Joint Profit Maximization 422
Overview 423
10.3 Multichannel Price Management 423
Conclusion 427
References 428
11: Price Management for Industrial Goods 430
11.1 Introduction 430
11.2 Analysis 432
11.3 Decision 434
11.3.1 Value-Based Pricing 434
11.3.2 Cost-Oriented Pricing 437
11.3.3 Auctions 439
11.3.3.1 Tender Processes 439
11.3.3.2 Online Auctions 441
11.4 Implementation 443
11.4.1 Price Negotiation 443
11.4.2 Price Contracts and Price Hedging 449
Conclusion 451
References 453
12: Price Management for Services 456
12.1 Introduction 456
12.2 Analysis 460
12.2.1 Company Information 461
12.2.2 Customer Information 462
12.2.3 Competitor Information 465
12.3 Decision 465
12.3.1 Decision-Support Methods 465
12.3.2 Price Differentiation for Services 467
12.3.2.1 Time-Based Price Differentiation 467
12.3.2.2 Regional Price Differentiation 468
12.3.2.3 Person-Based Price Differentiation 468
12.3.2.4 Performance-Based Price Differentiation 469
12.3.2.5 Volume-Based Price Differentiation 470
12.3.2.6 Price Bundling 470
12.3.3 Yield Management 471
12.4 Implementation 477
12.4.1 Implementation of Differentiated Prices 477
12.4.2 Fixed Prices or Case-Specific Prices 478
12.4.3 Price Communication 479
Conclusion 479
References 481
13: Price Management for Retailers 483
13.1 Introduction 483
13.2 Strategy 485
13.2.1 Price Positioning 485
13.2.1.1 Discounters 486
13.2.1.2 Suburban/Greenfield vs. Urban Locations 488
13.2.1.3 E-Commerce 488
13.2.2 Price Image 490
13.3 Analysis 495
13.3.1 Company Information 495
13.3.2 Consumer Information 496
13.3.2.1 Scanner Registers 497
13.3.2.2 Customer Cards 497
13.3.2.3 E-Commerce 498
13.3.2.4 Analysis of Price Promotions 499
13.3.3 Competitor Information 501
13.4 Decision 502
13.4.1 Setting Price Ranges 502
13.4.2 Price Decisions for Individual Items 503
13.4.2.1 Rules of Thumb 503
13.4.2.2 Theoretical Considerations 504
13.4.3 Price Decisions and Assortment Effects 506
13.4.4 Decisions on Price Promotions 508
13.4.4.1 Forms of Price Promotions 509
13.4.4.2 Short-Term Effects 511
13.4.4.3 Long-Term Effects 512
13.5 Implementation 513
13.5.1 Organizational Aspects 513
13.5.2 Controlling 515
13.5.3 Price Communication 516
Conclusion 518
References 520
14: Innovations in Price Management 524
14.1 Pricing Innovations: A Historical Overview 524
Overview 528
14.2 Changes in the Price-Response Function Due to Increased Transparency 529
14.2.1 Price Transparency 529
14.2.2 Value Transparency 531
14.3 Innovative Pricing Models 533
14.3.1 Flat Rates 533
14.3.2 Freemium 536
14.3.3 Interactive Pricing Models 540
14.3.3.1 Name-Your-Own-Price 540
14.3.3.2 Pay-What-You-Want 541
14.3.3.3 Rebate Systems 543
14.3.4 Pay-Per-Use 543
14.3.5 New Price Metrics 546
14.3.6 Two-Sided Price Systems 549
14.3.7 Negative Prices 550
14.3.8 Marginal Costs of Zero and the Sharing Economy 555
14.3.9 Innovative Payment Systems 557
14.3.9.1 Prepaid Systems 557
14.3.9.2 Bonus Systems 558
14.3.9.3 Internet-Oriented Payment Systems 559
14.3.9.4 Cash and Bitcoin 560
Conclusion 562
References 563
Acknowledgments 568