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Journal of Business Strategy Thinking strategically about pricing decisions Nigel F. Piercy, David W. Cravens, Nikala Lane,
Article information: To cite this document: Nigel F. Piercy, David W. Cravens, Nikala Lane, (2010) "Thinking strategically about pricing decisions", Journal of Business Strategy, Vol. 31 Issue: 5, pp.38-48, https://doi.org/10.1108/02756661011076309 Permanent link to this document: https://doi.org/10.1108/02756661011076309
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Thinking strategically about pricing decisions
Nigel F. Piercy, David W. Cravens and Nikala Lane
Pricing as a strategic decision
The global economic downturn which occurred from late 2007 to early 2010 has encouraged
many companies to direct renewed attention to the use of price to maintain sales volume, or
at least to protect market share as buyers reduce purchase levels and competitors slash
their prices. During the downturn, most developed countries experienced an
unprecedented decline in prices – although there have been different amounts of price
decline in different sectors and for different companies. In fact, there is a compelling
argument that the way prices are set not only influences demand, price also shapes how
buyers use the product or service, and can have a lasting impact on customer relationships
(Gourville and Soman, 2002).
During tough economic conditions one danger is that sellers see price as a ‘‘quick fix’’ or
perhaps the only way in which to add value for their customers. The result has not always
been what was intended. The reliance of the auto sector on repeated price cutting
campaigns was not effective in preventing hard-pressed consumers from withdrawing from
the new vehicle market and buying used vehicles or retaining their existing vehicles longer.
On the other hand, sizeable cash ‘‘grants’’, or ‘‘scrappage’’ allowances, from governments
have been effective in stimulating consumer demand (Pearson et al., 2009).
Nonetheless, the paradox remains that while some sellers see no real option other than to
reduce price to stimulate demand, others have been able to raise their prices in the same
harsh global conditions. Nestlé, for example, in the food sector has increased its prices and
margins in spite of the economic downturn in its markets.
Other companies have aggressively pursued ‘‘value pricing’’ approaches, by introducing
lower-priced product ranges to supplement or replace existing product ranges. Discount
retailers like Wal-Mart in the USA and Tesco in the UK have taken this strategic direction.
Indeed, some more up-market retailers like Waitrose in the UK have decided to adopt similar
new value ranges, notwithstanding the possible negative cannibalization of their existing
sales. L’Oreal SA is creating a special line, Basics from Garnier, to be priced below £5 to
expand market opportunity. Similarly, in the airline sector, leading European budget-airline
Ryanair is pursuing aggressive price cutting approaches to undermine the position of its
weaker competitors. Indeed, the slowing US economy has led P&G to reverse its
long-established strategy to introduce value products like Tide Basic – to compete with
low-price retailer brands, at the risk of cannibalizing sales of regular Tide (Byron, 2009).
Similarly, 2009 saw the incoming CEO at Unilever reversing his predecessor’s pricing
strategy to drive higher volumes with lower prices, notwithstanding the lower margins
achieved (Patrick, 2009).
The economic downturn has underlined the competitive importance of pricing decisions for
many companies where price has traditionally been seen as a largely tactical tool. Not least
PAGE 38 j JOURNAL OF BUSINESS STRATEGY j VOL. 31 NO. 5 2010, pp. 38-48, Q Emerald Group Publishing Limited, ISSN 0275-6668 DOI 10.1108/02756661011076309
Nigel F. Piercy is Professor
of Marketing and Strategy
and Associate Dean at the
Warwick Business School,
University of Warwick,
Coventry, UK.
David W. Cravens is
Emertius Professor at M.J.
Neeley School of Business,
Texas Christian University,
Fort Worth, Texas, USA.
Nikala Lane is Associate
Professor at the Warwick
Business School, University
of Warwick, Coventry, UK.
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among the reasons is the unprecedented level of investor, public, media and regulatory
scrutiny of prices. Nonetheless, what seems less clear is whether price is being fully
recognized by executives as a strategic issue with substantial long-term implications and
providing leverage on competitive positioning. Properly applied, price offers a powerful
strategic capability.
Our objective is to examine making pricing decisions strategically, determining the role of
price in strategic positioning, addressing the challenges in raising prices, and designing a
value-based pricing strategy. These initiatives provide a management action agenda for
making strategic pricing decisions, which is most relevant as companies come out of the
recession and prepare for market recovery. The intent is to build on basic pricing principles
(pricing objectives, situation analysis, and price determination), incorporate a strategic
perspective to the process, address the complex challenge of determining customer value
requirements, and examine other pricing strategy issues which are particularly relevant
during economic declines and recovery. These initiatives provide a management action
agenda for making pricing decisions, which is most relevant as companies come out of the
recession and prepare for market recovery. This process for making pricing decisions is
shown in Figure 1.
Making pricing decisions strategically
Conventionally, in the past many executives have treated price as a given – a value
determined by calculation and shaped by sales negotiations with buyers, largely separated
from marketing concerns with advertising, promotion and brand development. Driving
forces have tended to be cost-based calculations and comparisons with competitor prices
in deciding where to be positioned against alternatives. Moreover, there is long-standing
concern that price is the most neglected element of marketing in spite of its major impact on
profitability. Only more recently has strategic thinking about price changed from seller
concerns regarding costs, to critical buyer concerns with value.
Locating pricing authority
In the past, because pricing was largely a computational exercise, decisions were often
made by junior marketing and finance executives, or largely negotiated by salespeople
working with major customers. Responsibility for pricing was often split between the center
and operating units, and also between marketing, sales, finance and manufacturing.
Figure 1 Management action agenda for making pricing decisions
Making Pricing Decisions Strategically
Determining the Role of Price In Strategic Positioning
Addressing the Challenges In Raising Prices
Designing Value-Based Pricing Strategy
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In particular, pricing expert Ove Jensen concludes from his extensive research in Europe
that top management has given far less attention to pricing than that justified by its profit
impact. Indeed, A.T. Kearney research suggests that because of the complexity of
negotiated prices – volume discounts, payment terms, local deals, freight and handling,
service calls, and so on – the actual price paid by customers may be half the product’s list
price, and importantly executives in the seller organization may not know what that price is
(Lester, 2005).
Unsurprisingly, there have been calls for the establishment of a central pricing function to
provide expertise and a bridge between marketing, finance, and sales (Monroe, 2003).
While pricing is in the forefront of executive thinking because of the economic downturn,
there is an important opportunity to streamline and rationalise the pricing process to
considerable advantage. Unfortunately, much of the executive attention during the
recession has been on tactical pricing decisions. Achieving a more strategic perspective on
price mandates clear senior management responsibility for prices. This responsibility should
encompass explicit decisions on price levels and changes and close monitoring of unit
revenues obtained in different segments and with different customers. From a strategic
perspective, price effectiveness is a boardroom issue which cannot be delegated to lower
levels in the organization. Nonetheless, involvement in the pricing process by lower levels is
essential.
The core issue is that the strategic role of price is often not fully recognized and understood
by executives and that price is considered last, after decisions have been made on
products, communications and the value chain, and is treated as a tactical issue (Cravens
and Piercy, 2009). In particular, a pricing perspective concerned only with stimulating
demand and securing purchase commitment neglects the important link between price and
strategic positioning.
Traditional pricing approaches
The evidence is that pricing has traditionally been dominated by balancing costs with
competitor prices – whether in complex quantitative pricing models or on ‘‘the back of an
envelope’’. Even new products have too often been priced based on the price of existing
products. Basic principles for determining prices have tended to be cost-oriented (e.g.
‘‘cost-plus’’), competition-oriented (e.g. meeting the competition or pricing relative to their
prices), or demand-oriented (e.g. judging ‘‘what the market will bear’’) (Cravens and Piercy,
2009). The result has often been a piecemeal and fragmented approach to pricing.
Indeed, the result of ad hoc price decisions for some companies has been ‘‘confusion
pricing’’ when customers do not know the real price to be paid for the product or service.
Traditional approaches have led to major pricing errors – Sony overpriced the PS2 in
competition with Nintendo and had to quickly bring the price down to stay competitive while
more recently repeating the error with the PS3 and cutting prices again; Apple overpriced
the first iPhone and very early in the cycle had to reduce the price and apologise to the
existing buyers and offer refunds.
In fact, important insights are gained by examining companies who have developed new
pricing models to more effectively break free of cost and competition models to focus on
providing superior value for customers.
‘‘ [. . .] there is a compelling argument that the way prices are set not only influences demand, price also shapes how buyers use the product or service, and can have a lasting impact on customer relationships ’’
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Customer value challenges
Making pricing decisions during economic downturns accentuates the need for examining
these decisions strategically with a clear focus on meeting customers’ value requirements.
Delivering superior value during and after an economic downturn is a major management
challenge. Importantly, pricing strategy is a significant part of the value challenge during
economic declines. The value proposition ‘‘explains the relationships among the
performance of the product, the fulfilment of the customer’s needs, and the total cost to
the customer over the customer relationship life cycle’’ (Payne and Frow, 2005, p. 172).
While the role and importance of price varies in the range of pricing situations which span
from transactional to strategic partnerships, price becomes particularly important to buyers
during demanding economic times. Determining price using the economic value model is
very important during demanding economic declines. Economic value consists of the price
of the customer’s best competing alternative plus the value of the supplier’s incremental
offering over and above the best alternative (the positive differentiation value) (Smith and
Nagle, 2005). The economic value perspective shifts price determination away from lower
pricing to a focus on strategic value pricing.
Innovative pricing models
Creative strategic approaches to pricing offer a different way of delivering value to
customers which go beyond simple cost-based computations. We examine four innovative
pricing strategies which are particularly appropriate during economic declines and
recovery.
Payment-by-results for medicines. In 2007, British drug company Janssen-Cilag, a
subsidiary of Johnson & Johnson, led the way towards ‘‘payment by results’’ for medical
treatment. The company offered to cover the cost of a £25,000 cancer drug if the patient
failed to show adequate progress. The hospital only pays for the drug if the patient responds
well to it. This price strategy allows the company to maintain the nominal price for the product
(a global price benchmark in the sector) and receive payment only when the patient benefits
(Timmins, 2007). Sharing the risk makes the drug more affordable for the hospital. This value
offer was so compelling it has generated a raft of new pricing models from competitors
aimed at value-based pricing. This strategy is very relevant during economic declines. As
well as being attractive to the purchaser, these price strategies avoid cutting prices, which
risks copycat reductions by global competitors.
Kodak’s printer and cartridge pricing. In attempting to build a new position in the printer
market, Kodak has challenged industry convention with low prices for the ink cartridges for
its newest printers. This strategy presents a price opportunity for buyers. The conventional
approach by printer manufacturers is a ‘‘razor and blades’’ price strategy (cheap printers
but expensive cartridges), while Kodak is charging slightly more for the printer and
substantially less for replacement ink cartridges. While the traditional approach means high
volume users effectively subsidize low volume users, Kodak is targeting high volume printer
users with a better deal based on a different pricing architecture (Taylor, 2007). The role of
price is a critical element of the Kodak business model in this sector.
À la carte pricing by airlines. Faced with more thrift-oriented passengers during economic
declines and the commoditization of their product, US airlines are moving towards pricing
‘‘extras’’ separately from the price of the ticket – charging for checking baggage, selling
‘‘ Making pricing decisions during economic downturns accentuates the need for examining these decisions strategically with a clear focus on meeting customers’ value requirements. ’’
VOL. 31 NO. 5 2010 jJOURNAL OF BUSINESS STRATEGYj PAGE 41
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pillows and bottled water. The attraction of this incremental pricing strategy is a better deal
for passengers who do not use these services, and it generates additional revenue from
those who do (McCartney, 2008). Leading European budget airline Ryanair charges not
simply for any checked baggage, but also for airport check-in (rather than online). The
ancillary revenue has proven to be a very important contributor to airline financial
performance.
Infosys’ new pay-per-use pricing model. Infosys Technologies is pioneering a new pricing
strategy which moves away from the traditional outsourcing industry model of charging
clients based on the number of staff needed for the job – the ‘‘body shop’’ approach. The
company is looking for new ways of driving sales growth in a ‘‘software-assisted-services’’
approach. Rather than developing software and selling it to the client, Infosys retains
ownership of the software and charges the client on a pay-per-use basis. This saves the
customer the cost of maintaining and hosting the software, while Infosys gets a longer-term
revenue stream from the product (Leahy, 2008). This pricing strategy is very attractive during
economic downturns by removing the need for organizational buyers to consider large
expenditures.
Importantly, these strategies underline the creative use of price in the value offered to
customers, and aim at impacting positively on sales, revenue and competitive advantage.
Responding to the new competitive strategic imperatives of the post-recession era will
require many more companies to develop new business models in which price plays a
different type of role. Far from operating as a tactical tool, price is becoming a key part of
reinvention in redesigning the process of how products are taken to market. The core issue is
finding new and better ways to create superior customer value. As a result, the role of price is
increasingly central to strategic positioning.
Role of price in strategic positioning
Strategic positioning choices aim to build defenses against competition or find a position in
the industry where competitive forces are weakest (Porter, 2008). The market turbulence and
change driven by economic recession and recovery have profound effects on industry
structure and competitive positioning, emphasizing the importance of renewed attention to
strategic positioning.
Notwithstanding cost pressures and the effect of changing customer expectations in the
economic downturn, price, and particularly the visibility of price, determines how a product
is positioned competitively. In particular, executives face a choice of whether price should
play an active or passive/neutral role in marketing the product or brand. An active role for
price means it features highly in advertising, selling and other promotional efforts. A
passive/neutral strategic role for price (it is at or near the prices of near competitors), places
greater emphasis on non-price competitive factors. The passive/neutral pricing strategy
seeks to remove price as the basis for choosing among competing products or brands. Also
important in strategic positioning is the price level relative to competitors (high versus low).
How is a firm’s price to be positioned compared to its key competitors? Figure 2 illustrates
the strategic alternatives which are available to management. A discussion of each strategy
follows.
High-active price strategy
This approach aims to tell the buyer that the expensive brand offers superior value. Though
used only on a limited basis, the high-active pricing strategy has been used to position
products like high-end alcoholic beverages, high-end fashion apparel and cosmetics.
Making the high price visible and active can appeal to the buyer’s perceptions of quality,
image, and dependability of the product. The strategy may also offer some protection from
competitive retaliation, particularly if the product is highly differentiated. Louis Vuitton
handbags and accessories are another illustration of a successful high-active price strategy.
The strategy does expose the company to attack by brand copies and counterfeiting.
PAGE 42jJOURNAL OF BUSINESS STRATEGYj VOL. 31 NO. 5 2010
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Moreover, during economic declines convincing buyers of value offered is unusually
challenging.
High-passive price strategy
A different high price positioning fits situations where high prices are essential to enhance
margins in small target markets, cover the costs of high quality, or to fund new product
development. These high price products require emphasis on non-price competitive
factors. Economic value model analysis is particularly important when using this strategy
during unfavourable economic conditions. Stress is placed on product functionality,
quality, features, or performance. Expensive Swiss watches are marketed using a
high-passive price strategy. Illustrative of the importance of vigorously defending this
positioning is that manufacturers of the world’s most expensive watches are paying
record prices to buy back their own watches at auction – which allows the launch of
higher price new lines without competition from the used watch market where prices have
been pushed up (Bourne, 2007).
Low-active price strategy
This price strategy characterizes the behavior of discounters in all fields: Wal-Mart and Dollar
General in retail, Southwest Airlines in air travel, and so on. When a large segment of buyers
is sensitive to price, a low-active price strategy may be highly effective – underlined by the
performance of discounters in the economic downturn. Of course, a firm using the strategy
must have costs low enough to be profitable with low prices. It is a more attractive option
when a company has a strong position in the product-market, has cost advantages, or
competition for the target market is not strong. Interestingly, when ConAgra Foods passed
on rising costs and drove the retail price of Banquet dinners from $1 to $1.25, the consumer
stopped buying the product, and the company has cut costs to get back to a $1 dinner,
because this price is its value positioning in the customer’s mind (Weber, 2009).
Low-passive price strategy
This strategy can be used by small producers who have lower-cost features than
competitors, but whose brands are not familiar to buyers. By not emphasising low price, the
company runs less risk potential buyers will equate low price with low quality. For example,
minor brands participating in conventional distribution channels may spend little on
marketing their products, so they can offer low prices because of their lower marketing
costs. One variation on this positioning is the ‘‘secret sales’’ held by retailers. Customers
receive special price offers by e-mail or similar means, thus allowing price cuts without
alerting the market to this happening.
Figure 2 Price and positioning
Role of Price
P ri
ce L
ev el
Active Passive
High
Low
High-Active e.g. based on superior value
High-Passive e.g. competing on non-price
factors
Low-Active e.g. discounters,
market share- driven
competitors
Low-Passive e.g. avoid
price comparisons
Source: Cravens and Piercy (2009, p. 363)
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The Figure 2 framework emphasizes that when executives consider price from a strategic
perspective, there should be active search and analysis for real strategic positioning
alternatives, which may have previously been neglected. Nonetheless, while under
unfavorable economic conditions buyers are constantly pressing for lower prices and are
unlikely to object to price cuts. This leaves the key question of whether prices can be
increased under these conditions or those that follow. The price rise issue is becoming
increasingly urgent as companies in different sectors look at the prospects of economic
recovery in their markets.
Challenges in raising prices
Perhaps the most significant challenge facing executives looking to change their price
positioning (moving from one alternative to another in Figure 2), or seeking to rebuild price
levels as economic recovery occurs, is how to increase price without disrupting customer
demand and setting off adverse and hostile distributor reactions. In fact, there is growing
evidence that falling prices only partly reflect the credit crunch and loss of consumer
confidence – oversupply is at least as important a factor. Prices have fallen most
dramatically in sectors plagued by an excess of factories and ways to get goods to
consumers (Coy, 2009).
Importantly, the impact of price increases on profitability is favorably disproportionate –
McKinsey Consultants estimate that a 1 percent increase in price improves operating profit
by 11 percent (Cram, 2004). Yet, in recessionary times, and even during economic recovery,
executives may struggle to identify opportunities to earn higher prices. Moreover, even when
products are in short supply, it is rare for companies to increase prices to balance supply
and demand. Indeed, under very tough market conditions there may be no choice for
companies other than to cut prices – notwithstanding the fact that even for non-premium
industries it takes three to five years to get consumers to pay the full price again (Gapper,
2009).
Important insights for the future come from identifying which companies have been able to
raise their prices during the recession. One approach to an insightful analysis suggests that
executives examine product differentiation from the customer’s perspective (ranging from a
commodity to a product which is completely unique), and how strongly the customer feels
the need for the product (from considering it a ‘‘must-have’’ to seeing it as totally
discretionary) (Colvin, 2009). The previously discussed economic value model provides a
framework for the analysis. Products can be positioned on the Figure 3 matrix as:
1. Unique necessities – the customer has to have the product and there are no close
substitutes, e.g. the customer’s favorite toothpaste (few people stop brushing their teeth
Figure 3 Price, needs and differentiation
Source: Colvin (2009, p. 19)
P ro
du ct
D iff
er en
tia tio
n
Perceived Product Need
Unique
Commodity
Necessity Discretionary
Unique Necessities e.g. favourite
brand of toothpaste
Discretionary Necessities e.g. air travel,
household appliances
Unique/ Discretionary e.g. expensive
cars and gadgets
Commodity/ Necessity e.g. soap, lightbulbs
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because of economic recession and personal-care brand preferences are deeply
ingrained). Accordingly, Colgate has been able to raise its prices during the recession.
2. Discretionary commodities – customers see one competitor as much like another, and
they don’t particularly need any of them, e.g. major airlines, mass market autos –
consumers can postpone the trip and make do with an existing auto. Prices are falling.
3. Commodity/necessity – customers will not stop buying these products, but brands do not
matter that much, e.g. toilet paper, lightbulbs. Retailers readily discount these products.
4. Unique/discretionary – products like a Ferrari sports car are unique but no-one really
needs one. Price is a very small part of the purchase decision.
Determining the value proposition (unique value offered to the customer) is a sound basis for
addressing the challenge of raising prices. The Figure 3 analysis provides a way to evaluate
customers based on their perceptions of products and suppliers, as a basis for creating
different value propositions in which price plays a greater or lesser role (positioning on the
basis of price visibility). Value proposition analysis also suggests the gains that may be
made by attempting to change customer perceptions of how differentiated products are and
how necessary they are. The iPod and iPhone could be seen as Unique/Discretionary
products, but have quickly moved into the Unique Necessities position for many groups of
consumers. The analysis is also important in identifying important differences in price
sensitivity in different market segments, and the opportunities which may exist for higher
prices in selected segments.
Indeed, while price has fallen into disuse in an era of never-ending demands from customers
for lower and lower prices, it remains a prime criterion for reaching market segments whose
buyers are prepared to pay more for the product or service that meets their value
requirements. The pricing of travel by air at different levels remains a prime example of
price-based segmentation – some people will pay substantially more for the trip if they get
the exclusivity and extra services of a premium class (even if those additional services are
minimal). The search for opportunities to earn additional revenue from customers who are
willing to pay more may take various forms:
B a unique target strategy, which treats each customer as an individual and charges
according to how much they are willing to pay – these are the skills of the used car
salesperson, the realtor, and the antiques seller;
B a group target approach offers different prices to members of different groups – Disney
offers admission discounts to local people in Florida to get them to visit the theme parks
more regularly, knowing they are more price-sensitive than are tourists; and
B a ‘‘self-incrimination strategy’’ in which customers give themselves away – prepared, for
example, to pay more for Fairtrade coffee (Harford, 2005).
Setting aside the corporate social responsibility aspects of the Fairtrade movement, it is
illustrative to note that supermarkets profit more from the higher price of Fairtrade goods
than do the developing world farmers, taking around a third of the consumer spend on
Fairtrade products, and only a fifth of produce grown on Fairtrade-approved farms is
actually purchased at its guaranteed fair price (Adam Smith Institute, 2008). Fairtrade
achieves substantial price premiums in many consumer markets.
‘‘ [. . .] when ConAgra Foods passed on rising costs and drove the retail price of Banquet dinners from $1 to $1.25, the consumer stopped buying the product. ’’
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The critical issue is determining what drives value for different customers and accordingly
how price-sensitive they are, as the basis for identifying price increase opportunities.
Designing value-based price strategy
The last stage in the action agenda for making pricing decisions is strategically designing a
value-based pricing strategy. The decision situation confronting executives is designing the
strategy and over time adapting the strategy to competitor and market changes.
Increasingly the focus has to be on value in customer terms rather than price alone.
Importantly, customer value must be assessed in terms of existing economic conditions. The
earlier discussion has indicated several pricing issues relevant during and after economic
declines. Ove Jensen’s research suggests that the ‘‘price champions’’ are those firms who
educate customers to value services and to be prepared to pay for them in higher prices.
Certainly, sellers who do not analyze customer value requirements and focus on value are
likely to lose out on the price they can achieve.
In the business-to-business context, James Anderson and his colleagues have articulated a
compelling case for companies to be ‘‘value merchants’’ (Anderson et al., 2007). Their
approach to customer value management relies on salespeople using hard data to
demonstrate superior value to purchasing managers who are conventionally focused on
price. The core logic is that if salespeople have a better idea of what constitutes value for a
customer they can use analytics to sell on the basis of value instead of price. This is far
superior to making vague promises without hard value data. Too often salespeople play the
role of ‘‘value spendthrifts’’, giving value away through price concessions, rather than value
merchants who achieve profitable growth by stressing the superior value of the firm’s
offerings. Otherwise, despite offering superior value, salespeople are forced to compete as
offering a commodity, so the company does not get a return for its investment in superior
value.
The powerful impact of value innovation and value-based pricing is also illustrated in
consumer markets by companies like P&G. For example, a recent P&G innovation is Olay
Pro-X – a range of clinical anti-ageing products that sell for around twice the price of its
regular Olay creams. Pro-X is aimed at a more prosperous consumer who is accustomed to
paying much more for similar products in department stores rather than in drug stores. P&G
sees Pro-X as one of its ‘‘big ideas’’ that represent superior value to the specific target
consumer. Pro-X has taken around 5 percent of the anti-aging clinical market (Birchall,
2009a).
With its established products P&G is pursuing ‘‘performance-based value messaging’’,
communicating to frugally-minded customers that it is worth paying more for products like
Tide and Bounty towels because they save money by doing a better job in the customer’s
terms. The company is responding to the challenge of differentiating products to prove to
customers that they are ‘‘better’’ than alternatives (Birchall, 2009b).
However, value-based pricing depends heavily on customer and market knowledge and
insight which go beyond conventional market research information. Making smart decisions
on price levels and changes depends on a thorough and deep understanding of the
customer and the competition. While conventional market research is often
backward-looking and descriptive, superior ‘‘market IQ’’ comes from a deeper immersion
in the marketplace to identify customer perceptions and feelings about value and to better
predict the emergence of new value-creating opportunities (Day, 2005). Superior market
sensing and the capability to learn from markets is a priority in a world of thrifty consumers,
scarred by the credit crunch, and looking for new types of value.
Value-based strategies also require metrics that parallel the value proposition. For example,
General Electric wrong-footed aero engine competitors by changing its pricing metrics.
Instead of pricing a new line of engines based on greater efficiency and power delivered, GE
charged a user fee based on flying time, charging more to customers realizing the greatest
value. Similarly, pharmaceutical gas is sold to hospitals using a traditional per-liter metric.
However, elderly patients use the gas sporadically but in large quantities, while infants in
PAGE 46jJOURNAL OF BUSINESS STRATEGYj VOL. 31 NO. 5 2010
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intensive care use the gas continuously but in small quantities. Although each unit of gas has
a greater value to the hospital in intensive care, the manufacturer’s price was constrained by
the much lower value per unit realised in the geriatric ward. By changing the price metric to
duration of use, prices charged to the hospital were better aligned with the criticality of
patient need (Donath, 2007).
A strategic view of price
It is very important that business executives recognize pricing decisions as a strategic
responsibility with long-term implications. Addressing a management agenda that
emphasizes a creative review of prices, which encompasses the role of price in strategic
positioning and the potential for higher prices, is urgently required in many companies
looking at the potential for economic recovery in their markets. The key objective is a
value-based pricing strategy built around opportunities to deliver and prove superior
customer value.
We start from basic pricing foundations to develop a strategic perspective, because many
existing pricing processes are essentially tactical in nature. We believe that executives
should give explicit attention to moving from tactical pricing to strategic pricing decisions.
The impact of the harsh economic conditions experienced during economic downturn, and
the major new opportunities emerging in economic recovery, make such moves timely and
relevant.
Our decision process emphasizes the need for executives to adopt a strategic perspective
on price and to approach decisions from this perspective – notwithstanding the short-term
pressures to meet the demands of recession and recovery with price cuts. In particular, we
focus on the role of price in strategic positioning to support this perspective, and in
addressing the challenges of raising prices. The underlying logic is to argue the case for
designing a value-based pricing strategy, where delivering superior customer value is
pivotal in developing new business models, occupying a desirable position in the market,
and achieving higher prices.
Keywords:
Pricing,
Strategic management,
Pricing policy
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About the authors
Nigel F. Piercy is Professor of Marketing and Strategy, and Associate Dean, at Warwick Business School. Nigel F. Piercy is the corresponding author and can be contacted at: [email protected]
David W. Cravens is Emeritus Professor in the M.J. Neeley School of Business at Texas Christian University.
Nikala Lane is Associate Professor in Marketing and Strategy at Warwick Business School.
PAGE 48jJOURNAL OF BUSINESS STRATEGYj VOL. 31 NO. 5 2010
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