The Strategy and Tactics of Pricing – Book Review

By: Thomas Nagle Georg Muller

Introduction:

The article emphasizes the significance of effective pricing as the harvest of business success, asserting that companies adopting a value-based pricing strategy and building the capabilities to implement it can earn 24 percent higher profits. The subsequent sections delve into strategies and steps to achieve optimal pricing.

How Not To Price:

This section identifies three sub-optimal pricing strategies. Cost-Plus Pricing, Customer-Driven Pricing, and Share-Driven Pricing are discussed as ineffective approaches. The emphasis is on understanding the true value of the product to the customer rather than pricing based on cost or market share objectives.

Strategic Pricing:

This section introduces three principles of effective pricing: value-based, proactive, and profit-driven. The focus is on creating a values-based segmentation strategy, involving steps such as determining segmentation criteria, identifying value drivers, and understanding operational constraints.

Price Structure:

The article outlines mechanisms for creating a segmented price structure: offer configurations, price metrics, and price fences. It explains how to use these mechanisms to serve different customer segments profitably, considering factors like discriminating value drivers and operational advantages.

Price Setting:

This section details the five steps of the price-setting process. It begins with defining the viable price range and making strategic choices, followed by assessing breakeven sales changes, gauging price elasticity, and accounting for psychological factors. Strategies like skimming, penetration, and neutral pricing are explored.

Price and Value Communication:

Once the pricing structure is in place, effective communication becomes crucial. The section discusses factors such as competitive reference, switching costs, and the end-benefit effect that influence customers’ perception of value. It emphasizes the psychological aspects of pricing and how they impact decision-making.

Pricing Policy:

The article emphasizes the importance of having well-documented pricing policies. It discusses the significance of policies in addressing price objections, implementing increases, transitioning from flexible to policy-based pricing, and dealing with promotional pricing. Consistency across different scenarios is highlighted.

Price Competition:

Engaging in price wars is discouraged, and the section provides five questions to consider before reacting to a competitor’s pricing change. It advises against reactive price cuts without strategic evaluation, emphasizing the importance of assessing the long-term impact on sales and market position.

Conclusion:

The article provides a comprehensive guide to implementing effective pricing strategies, from understanding customer value to setting prices, communicating value, and handling competitive pricing dynamics. Adopting a strategic, value-based approach is presented as key to maximizing profits in the marketplace.