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- Herausgeber: John Wiley & Sons
- Kategorie: Fachliteratur
- Sprache: Englisch
The right pricing strategy can change the entire trajectory of a business, a market, and even society at large. To help you create your best pricing strategy efficiently and confidently, two leaders from BCG are introducing fresh perspectives on pricing that take you far beyond the realm of mind-numbing numbers. In their new book Game Changer: How Strategic Pricing Shapes Businesses, Markets, and Society, Jean-Manuel Izaret and Arnab Sinha simplify and clarify pricing strategy by integrating its many frameworks and concepts into seven distinct pricing games, each with its own proven tools, rules, forces, and structures. To help you pick the right game and play it well, Izaret and Sinha have developed the Strategic Pricing Hexagon, a tool refined through years of testing, iteration, and adaptation. The Hexagon is your portal to a business world where stronger growth and better financial performance come from a set of strategic pricing decisions, not endless myopic quests for optimal prices. But more than that, the Hexagon will change the way you think about and talk about pricing. The current conversation around pricing - as expressed through economics textbooks, Excel spreadsheets, political discourse, and educated guesswork - makes it easy to believe that pricing is nothing more than a technical, tactical and, for most people, boring game of numbers. Game Changer changes that conversation bysharing stories and research that bring the Hexagon and its seven pricing games to life. With research from BCG's Bruce Henderson Institute and real-world examples from the world's most influential companies, the authors and their colleagues at BCG define pricing strategy as a business leader's or business owner's conscious decisions about how money flows in their market. They show how companies succeed in the long term when they focus on collaborative growth and value sharing with customers, not zero-sum value extraction from them. Discover how you can create and implement a winning pricing strategy that changes the trajectory of your business, your market, and even society.
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Veröffentlichungsjahr: 2023
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Table of Contents
Cover
Table of Contents
Title Page
Copyright
Dedication
INTRODUCTION: Changing the Pricing Conversation
How pricing strategy shapes a business
How pricing strategy shapes an industry
How pricing strategy shapes society
It’s time to change the game of pricing
Define your own pricing strategy
Preview of what you’ll find in the book …
… and some shortcuts as you start reading
Now let’s answer Question 1
PART I: Rethinking Pricing Strategically
CHAPTER 1: Three Information Sources
The drivers matter more than the amounts
A strategic view of costs
A strategic view of value
A strategic view of competition
The conflicting answers from pricing methods
Key takeaways
CHAPTER 2: Four Economic Frameworks
The role of elasticity
The role of differentiation
The role of game theory
The role of supply and demand
Key takeaways
CHAPTER 3: Seven Games in the Strategic Pricing Hexagon
Rationales for connecting market characteristics and pricing approaches
Value Game
Uniform Game
Cost Game
Power Game
Custom Game
Choice Game
Dynamic Game
What pricing game are you playing?
Key takeaways
CHAPTER 4: Six Market Forces
Fragmentation
Commoditization
Consolidation
Customization
Digitalization
Innovation
Key takeaways
CHAPTER 5: What the Hex? The Political Angles of Pricing Decisions
Pricing authority and leadership in the seven pricing games
Key takeaways
CHAPTER 6: What's Next? The Design of Pricing Models
Why each of these pricing model decisions matters
Making decisions on pricing architecture
Making decisions on pricing adjusters
Key takeaways
Before you move on to Part II …
PART II: Winning the Seven Pricing Games
CHAPTER 7: The Value Game: When Art Trumps Science
The special nature of pricing in the Value Game
Winning the Value Game
Impact: Long‐term value
Key takeaways
CHAPTER 8: The Uniform Game: The All‐Time Classic
The special nature of pricing in the Uniform Game
Shaping demand and elasticity to drive pricing strategy
The impact: More sophisticated Uniform Game pricing
Key takeaways
CHAPTER 9: The Cost Game: Where Efficiency Reigns
The special nature of pricing in the Cost Game
Pricing to cost to gain scale and drive efficiencies
The impact: A win–win for customers and sellers
Key takeaways
CHAPTER 10: The Power Game: When Every Move Counts
The special nature of pricing in the Power Game
Finding handholds and footholds
Impact: Getting a firm grip on pricing
Key takeaways
CHAPTER 11: The Custom Game: Making Sense of the Chaos
The special nature of pricing in the Custom Game
Imposing order on the chaos
Impact: Less chaos, more order
Key takeaways
CHAPTER 12: The Choice Game: Framing Options for Customers
The special nature of pricing in the Choice Game
Optimizing the lineup to serve more customer needs
Impact: An offer for every customer segment
Key takeaways
CHAPTER 13: The Dynamic Game: When Everything Matters
The special nature of pricing in the Dynamic Game
Optimal pricing in real time
Impact: Sustained value creation in the Dynamic Game
Key takeaways
Before you move on to Part III …
PART III: Changing Your Pricing Game
CHAPTER 14: Innovation: Seizing a Step‐Change Opportunity
How Emerald defined a new pricing strategy
How Emerald implemented its value‐driven strategy
Key takeaways
CHAPTER 15: As‐a‐Service: Growing with Your Customer
How Maricross defined a new pricing strategy
How Maricross implemented its as‐a‐Service strategy
Key takeaways
CHAPTER 16: AI: Perfecting Price Differentiation
The endless loop of promotions
How Montclaude defined a new pricing strategy
How Montclaude implemented its AI‐driven promotion strategy
Key takeaways
CHAPTER 17: Channel: Going Direct to Consumers
How Tesla defined a new pricing strategy
How Tesla implemented its D2C strategy
Key takeaways
CHAPTER 18: Scale: Achieving the Ultimate Cost Advantage
Turning internal efficiencies into a business opportunity
How Amazon defined a new pricing strategy
How Amazon implemented its cost‐driven strategy
Key takeaways
CHAPTER 19: Free: Competing with the Most Magical Price Point
The difference between low price and no price
How Intuit defined a new pricing strategy
How Intuit implemented its freemium strategy
Embracing free beyond a competitive response
Key takeaways
Before you move on to Part IV …
PART IV: Shaping Society Through Pricing Decisions
CHAPTER 20: Fairness: How to Differentiate Prices Across Customers
A fair price is … ?
… a price accepted by both parties?
… a price that is the same for everyone?
… a price set by the free market?
… a price that shares value equitably between parties?
Progressive pricing as practical application for low‐marginal‐cost offers
Key takeaways
CHAPTER 21: Equitable Pricing: How Buyers and Sellers Share Value
The fairest price – not the highest price – optimizes profits
How to implement fair pricing
Key takeaways
CHAPTER 22: Access: How Pricing Can Eradicate Diseases
Hepatitis C: The economic burden of a cure
A uniform, up‐front, per‐patient pricing model is intrinsically flawed
Exploring the Value Game: The payer licensing agreement
Benefits of the payer licensing agreement
The challenges of implementation
Key takeaways
CHAPTER 23: Green Premium: How to Shape Demand for Sustainable Solutions
Quantifying the Green Premium Quandary
Segmenting consumers to understand demand for green products
Redesigning offers to reshape the green demand curve
Key takeaways
CHAPTER 24: CO
2
: How to Encourage Lower Carbon Emissions
What is the voluntary carbon market?
The VCM should move from the Custom Game to the Choice Game
The VCM should evolve into a structured lineup of offers targeting different customer segments
Key takeaways
CHAPTER 25: Impact: How Progressive Pricing Can Scale Social Ventures
Why nonprofits hesitate to become commercial
How charging for initiatives can increase their social impact
How higher revenue drives greater scale and greater impact
Progressive pricing is an option for social ventures
How the strategic pricing questions are also relevant for nonprofit organizations
Key takeaways
As you move on …
Epilogue
Appendix: About the Studies
Chapter 20: Fairness
Chapter 21: Equitable Pricing
Chapter 22: Access
Chapter 23: Green Premium
Chapter 24: CO
2
Notes
Introduction
Part I
Chapter 1
Chapter 2
Chapter 3
Chapter 4
Chapter 5
Chapter 6
Chapter 7
Chapter 8
Chapter 9
Chapter 10
Chapter 11
Chapter 12
Chapter 13
Chapter 14
Chapter 15
Chapter 16
Chapter 17
Chapter 18
Chapter 19
Chapter 20
Chapter 21
Chapter 22
Chapter 23
Chapter 24
Chapter 25
Epilogue
Acknowledgments
About the Authors
Jean‐Manuel Izaret (JMI)
Arnab Sinha
Index
End User License Agreement
List of Illustrations
Introduction
FIGURE I.1 The Strategic Pricing Hexagon
FIGURE I.2 The elements of a pricing model
Part 1
FIGURE PI.1 The layers of the Strategic Pricing Hexagon
Chapter 1
FIGURE 1.1 Three information sources used to make pricing decisions
FIGURE 1.2 Renting a car versus taking a taxi from the seller's perspective...
FIGURE 1.3 The value ladder
FIGURE 1.4 Cupcake prices using different standard pricing methods
Chapter 2
FIGURE 2.1 Venn diagram of information sources forming four economic framewo...
FIGURE 2.2 Uniform pricing model value distribution
FIGURE 2.3 Duopoly equilibrium upset by a competitor cutting prices by 5%
FIGURE 2.4 Supply–demand curve
Chapter 3
FIGURE 3.1 How the Venn diagram of information sources transforms into the H...
FIGURE 3.2 Summary of the market characteristics where an economic framework...
FIGURE 3.3 Offer, seller, and buyer characteristics by game
Chapter 4
FIGURE 4.1 The six forces that influence a company's position in the Hex
Chapter 5
FIGURE 5.1 The natural fit between organizational functions and the seven pr...
FIGURE 5.2 The Strategic Pricing Hexagon (the Hex)
Chapter 6
FIGURE 6.1 Pricing model elements
FIGURE 6.2 Dimensions of the main pricing basis
FIGURE 6.3 Some offer structures fit better to certain games
FIGURE 6.4 Pricing mechanisms along vertical and horizontal axes in the Hex...
FIGURE 6.5 Customer programs are associated with long‐term customer value
FIGURE 6.6 Competitors can match transaction incentives, exerting a downward...
FIGURE 6.7 Fees and functional discounts are associated with cost
FIGURE 6.8 Offer, seller, and buyer characteristics by game
Chapter 7
FIGURE 7.1 The market for the iPod was ideally suited to the Value Game
FIGURE 7.2 The value ladder representation
FIGURE 7.3 The pricing model levers for the iPod in the Value Game
FIGURE 7.4 Value ladder for the iPod at launch, versus the Rio PMP300
FIGURE 7.5 Value ladder for the iPod at launch, versus the NOMAD Jukebox
Chapter 8
FIGURE 8.1 The typical characteristics of the Uniform Game
FIGURE 8.2 Demand curves showing linear and S‐shaped demand
FIGURE 8.3 Actual demand and profit curves for one product at a US retailer...
FIGURE 8.4 Levers that Nona Lim can use in the Uniform Game
FIGURE 8.5 Change in Nona Lim's profits from different price changes and ela...
FIGURE 8.6 Finding the profit‐maximizing price or price change
FIGURE 8.7 Cross‐elasticity analysis reveals potential volume movement
Chapter 9
FIGURE 9.1 Construction market was ideally suited to the Cost Game
FIGURE 9.2 Illustrative scale curves related to different types of costs
FIGURE 9.3 Example of a complexity curve for six manufacturing plants
FIGURE 9.4 Pricing models for Wrightway & Sons
FIGURE 9.5 Wrightway's historical bids pricing versus competitors' bids
Chapter 10
FIGURE 10.1 Typical characteristics of the Power Game
FIGURE 10.2 Pricing model in the Power Game for HDD manufacturers
FIGURE 10.3 Power Game Pricing Chessboard, from the lens of Company A
FIGURE 10.4 Example Target Pricing Grid
FIGURE 10.5 End‐of‐quarter deal helps the team meet all short‐term goals
FIGURE 10.6 Same deal causes mid‐term decrease of margins and revenues
Chapter 11
FIGURE 11.1 DTNA's market was ideally suited to the Custom Game
FIGURE 11.2 Every player in the Custom Game has a cloud like this one
FIGURE 11.3 Shifting from discretionary price variance
FIGURE 11.4 The NVS provides the anchor for modifying your pricing model
FIGURE 11.5 How DTNA made changes to win the Custom Game
FIGURE 11.6 New logic shifting prices to their own natural optimal levels
Chapter 12
FIGURE 12.1 Starbucks and the Choice Game
FIGURE 12.2 A good‐better‐best lineup allows for more value sharing
FIGURE 12.3 Offer structure is the main pricing model element
FIGURE 12.4 Drinks targeting different customers with different price points...
FIGURE 12.5 FactSet packages for Wealth Management and Hedge Fund clients...
FIGURE 12.6 Starbucks' Frappuccino lineup
Chapter 13
FIGURE 13.1 Airlines and other industries fit the Dynamic Game specificities...
FIGURE 13.2 Supply–demand model for a category at a retailer
FIGURE 13.3 Price variation drivers are a key pricing lever in the Dynamic G...
FIGURE 13.4 Illustration of dynamic pricing managed by an AI algorithm
Chapter 14
FIGURE 14.1 Value ladder for Emerald's new platform
FIGURE 14.2 Emerald's changing position in the Strategy Hex
Chapter 15
FIGURE 15.1 Maricross's move from the Cost Game to the Choice Game
FIGURE 15.2 Maricross's pricing model for the XaaS offering
Chapter 16
FIGURE 16.1 Montclaude moving from the Uniform Game to the Dynamic Game
FIGURE 16.2 Business processes need more attention than algorithms and tech...
Chapter 17
FIGURE 17.1 Tesla moving from the Custom Game to the Choice Game
Chapter 18
FIGURE 18.1 AWS moved IT infrastructure market toward the Cost Game
Chapter 19
FIGURE 19.1 Intuit needed to move from Value Game to Choice Game
Chapter 20
FIGURE 20.1 US survey respondents showed higher support for price discrimina...
FIGURE 20.2 Perceived fairness of price discounting by country, product cate...
FIGURE 20.3 Transaction value sharing between buyer and seller
FIGURE 20.4 Value‐sharing pricing is a form of uniform pricing, with the per...
FIGURE 20.5 Uniform pricing with negligible marginal costs
FIGURE 20.6 Progressive pricing – implementing a value‐sharing mindset
Chapter 21
FIGURE 21.1 The margin‐optimizing share of seller value is around 50%
FIGURE 21.2 Profit‐maximizing share of seller value
FIGURE 21.3 Price differentiation, fairness, and value‐sharing proportions b...
Chapter 22
FIGURE 22.1 HCV 10‐year health care costs variation
9
FIGURE 22.2 When the HPV cure was priced at $22,000 per patient, many payers...
FIGURE 22.3 A PLA allows all HCV patients access to the cure, resulting in h...
FIGURE 22.4 PLA cures the most patients at the lowest cumulative cost
13
,
14
...
Chapter 23
FIGURE 23.1 The Green Premium Quandary
FIGURE 23.2 Consumer behavior for a selection of green goods
FIGURE 23.3 Schematic demand curve
FIGURE 23.4 Actual demand curve for laundry detergents in the United States...
FIGURE 23.5 Willingness to pay for a product at a premium at 5% and 20%
FIGURE 23.6 How a reshaped demand curve resolved the Green Premium Quandary...
FIGURE 23.7 Share of emissions and cost increases for green raw materials
Chapter 24
FIGURE 24.1 Different examples of projects resulting in carbon credits
FIGURE 24.2 Carbon credit buyers' segmentation
FIGURE 24.3 Conjoint analysis showing willingness to pay based on quality
FIGURE 24.4 Conjoint analysis showing willingness to pay by project type
Chapter 25
FIGURE 25.1 Setting multiple price points allows for more value capture
Guide
Cover
Table of Contents
Title Page
Copyright
Dedication
Begin Reading
Epilogue
Appendix: About the Studies
Notes
Acknowledgments
About the Authors
Index
End User License Agreement
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PRAISE FOR GAME CHANGER
“The biggest benefit of Game Changer is that it will encourage business leaders to step back and think through the fundamentals of their business: How do we create and share value? This is the first book I've read that provides a clear and practical definition of pricing strategy – and how to determine one – instead of going straight to the numbers.”
—Marin Gjaja, Chief Customer Officer, Ford Model e
“Game Changer provides a clear and actionable framework for using pricing strategy to drive long‐term profitable growth. This insightful book is required reading for all pricing professionals and pricing stakeholders.”
—Glenn Dearing, SVP Pricing Strategy, Salesforce
“What I appreciate most about Game Changer is that it left me with more practical options and ideas about pricing strategy, rather than more math problems and more complicated theories.”
—Eric Reynolds, COO, Clorox
“Strategy is a sub‐set of pricing – yes that may sound strange, but after reading Game Changer, you will see how a thoughtful and well executed pricing approach is actually the foundation for your company's overall business and customer strategy”
—Zia Yusuf, SVP Strategic Ecosystem & Industry Solutions, VMware
“Game Changer elevates pricing from a specialized practice to a strategic perspective on the entire business. Even better, it makes pricing accessible, practical, and enjoyable. The seven pricing games and the associated playbooks are very insightful and have far reaching implications for go‐to‐Market strategies.”
—Steve Mallouk, SVP Global Business Strategy, Visa
“Game Changer provides the clarity and systematic approach to enable market‐based solutions to some of our planet's most pressing crises. Whether in carbon or plastic waste, the ability to clearly define value drivers, align incentives, and apply the ‘Choice Game’ will catalyze efficient capital investment in long‐term solutions. I highly recommend anyone seeking to drive near‐term environmental impact or socioeconomic benefits for underserved communities to read and reread this book, so that we can accelerate our path to a better future for all.”
—Sebastian DiGrande, CEO, Plastic Credit Exchange
“Game Changer the dynamic nature and challenges of pricing exceeding well. It provides economic, behavioral, and strategic frameworks and templates to help business leaders formulate and implement integrated pricing strategies within the context of any market. Its creative way of conveying pricing concepts in a well‐structured framework also makes it an essential resource for professors focusing on strategy, marketing or microeconomics.”
—Wasim Azhar, Marketing and Pricing Faculty and Distinguished Fellow of Teaching, Berkeley‐Haas Business School, UC Berkeley
“Game Changer insightfully breaks down the elements of sophisticated pricing models. It will elevate the way you think about pricing from a numbers game to a strategy game. This book will help you create a framework to share value with customers for mutual strategic advantage. This should be required reading for anyone in a commercial or product management function.”
—Jim Bozzini, COO, Workday
“Pricing has been the single lever in value creation since the creation of civilization during Mesopotamian times. Game Changer offers a primer and roadmap on how to execute an effective pricing strategy that drives better outcomes for your business.”
—Sampath Sowmyanarayan, CEO—Verizon Consumer
GAME CHANGER
How Strategic Pricing Shapes Businesses, Markets, and Society
Jean‐Manuel Izaret & Arnab SinhaGlobal Leaders of the BCG Pricing Practice
Copyright © 2024 by The Boston Consulting Group, Inc. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.Published simultaneously in Canada.
No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per‐copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750‐8400, fax (978) 750‐4470, or on the web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748‐6011, fax (201) 748‐6008, or online at http://www.wiley.com/go/permission.
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Library of Congress Cataloging‐in‐Publication Data
Names: Izaret, Jean‐Manuel, author. | Sinha, Arnab, author.Title: Game changer : how strategic pricing shapes businesses, markets, and society / Jean‐Manuel Izaret, Arnab Sinha.Description: First edition. | Hoboken, New Jersey : Wiley, [2024] | Includes index.Identifiers: LCCN 2023025590 (print) | LCCN 2023025591 (ebook) | ISBN 9781394190584 (cloth) | ISBN 9781394190607 (adobe pdf) | ISBN 9781394190591 (epub)Subjects: LCSH: Pricing. | Strategic planning. | Consumer behavior. | Game theory.Classification: LCC HF5416.5 .I943 2024 (print) | LCC HF5416.5 (ebook) | DDC 658.8/16—dc23/eng/20230721LC record available at https://lccn.loc.gov/2023025590LC ebook record available at https://lccn.loc.gov/2023025591
Cover Design: BCG BrightHouseAuthor Photos: Elijah Ellis & Lauren Janney
To our parents (Christiane, Pierre, Rita, and Tuhin), for the intellectual curiosity and rigor they fostered and the sense of collective responsibility and empathy they exemplified.
To our families (Christine, Axel, Ernest, Varsha, Arjun, and Saahil), for the joy and pride they bring us every day and for their tolerance for the enormous space the book took in our lives.
INTRODUCTIONChanging the Pricing Conversation
Companies, governments, and individuals make countless price decisions every day, because every commercial transaction involves a price. The collective sum of the value they exchange represents not only the size of the world economy – estimated at roughly $100 trillion per year – but also all of the decisions about how that “pie” gets divvied up.1 Prices are the numerical shorthand that allows the transacting parties to make quick, easy comparisons to other transactions and gives them trust and confidence that the money exchanged represents a fair trade.
That’s why business executives and economists acknowledge that prices play a critical role in markets and society. But the current conversation around pricing – as expressed in economics textbooks, anecdotal “war stories,” political discourse, and the backs of cocktail napkins – makes it easy to believe that pricing is nothing more than a technical, tactical, and, for most people, boring game based on four premises:
Zero sum:
Think of your price as a position on a slider bar of fixed length. The more you charge, the less the other party gets, and vice versa.
Value extraction:
Given a zero‐sum scenario, sellers have a natural and strong incentive to extract the maximum value, and buyers strive to strike the best bargains. Neither party wants to leave money on the table.
Static:
Demand, customer needs, willingness to pay, capacity, and competition are all given. Markets set prices, whether guided by Adam Smith’s invisible hand or other interpretations of collective action. Your only incentive is to act and react to earn what you can within those constraints.
Numbers:
The goal for every seller is always to find the “right” price. This elusive quest for the perfect number focuses an organization’s energy on analytical methods, each more sophisticated than the last. But no number is ever “right” for more than a few microseconds, because every factor is always in flux.
We think that this game and its underlying premises are myopic. It is important for business leaders to step back and look at two things: the choices they make before they set prices and the real‐life consequences their prices have on businesses, markets, and societal outcomes. This strategic perspective about pricing expands the degrees of freedom that business leaders can use to reshape their pricing models and enhance their competitive advantages. Customers, in turn, can do much more than simply evaluate whether the prices they pay are cheap or expensive, relative to the value they receive. They can pay attention to the seller’s pricing structure and decide whether it aligns with how they derive value.
Our mission with Game Changer: How Strategic Pricing Shapes Businesses, Markets, and Society is to change the game of pricing, literally and figuratively. We will expose the dangerous flaws behind the prevailing pricing “game,” because there is too much at stake to let misperceptions about pricing persist. But our larger and more important mission is to show you, step by step, how the right pricing strategy can change the entire trajectory of your business, your industry, and, in many cases, society as well.
To change the conversation around pricing, let’s start by refuting the flawed premises behind the current game of pricing. When you read the four new perspectives below, notice how the incentives and tradeoffs have changed. Notice how they create new opportunities and open more degrees of freedom for you to pursue them.
Collaborative growth, not zero sum:
Before wondering about your position on that zero‐sum slider bar, you need to decide what variable calibrates it. Prices are expressed as an amount per unit, but the choice of unit can incentivize buyers and sellers to work collaboratively as opposed to against each other. The standard pricing unit in the music industry, for example, was per album or per song, until streaming services led a shift to pricing per person per month. This shift reversed a long decline in industry revenues. The International Federation of the Phonographic Industry (IFPI) reported that global recorded music revenues grew for the eighth consecutive year in 2022 to $26.2 billion – a level not seen in absolute dollar terms since 1999 – after having bottomed out at $13.1 billion in 2014. Streaming – a revenue source that barely existed at all 15 years ago – accounted for two‐thirds of overall revenue,
2
and revenue from physical formats such as vinyl grew as well. Consumers were willing to listen to more music and spend more on this category, but the old pricing unit had been constraining volume and overall market size. Pricing is your means to create and align incentives, grow your market, and escape the high–low constraints of a zero‐sum mentality.
Value sharing, not value extraction:
When you view pricing as a way to share value rather than extract it, you foster a sense of fairness and give customers incentives to try and then reuse your offerings. By balancing how and when to share value, you also create opportunities to scale your business massively and quickly and then retain or upsell loyal customers over the course of a long relationship, not a transactional one. The question
“How much money should we leave on the table?”
is no longer heretical. It becomes an essential strategic question for every business leader.
Dynamic, not static:
Demand, customer needs, willingness to pay, capacity, and competition are fluid and dynamic, not given. This helps explain why startups can successfully innovate and change markets by introducing new pricing models. Google reshaped the advertising industry by using auctions to sell advertising inventory.
Salesforce.com
revolutionized the software sector and created growth opportunities for its customers by selling software as a service. Uber created a new mobility business by charging by the ride rather than flat rates for the mile and minute.
Strategy, not numbers:
No matter how many data scientists or advanced algorithms you deploy in the quest for optimal prices, the numbers aren’t helpful unless you have the right pricing models in place. A pricing model is the manifestation of your pricing strategy, a set of choices that aligns incentives across your entire business, both in the market and within your organization. These choices include defining the offer itself, the pricing basis, and how to determine and adjust prices as market conditions change. Business leaders need to make all of these choices before they ever set a price.
This new way to talk about pricing – eagerly, comfortably, and, above all, strategically – is long overdue. It takes pricing out of your company’s boiler room and places it in the boardroom, where it belongs. It allows pricing to inform and determine corporate strategy, rather than serve it, because it motivates vision and structure, not the myopic quest for better price points.
No matter how future markets around the world evolve, pricing will remain the common business challenge that every executive and manager must address. Every commercial transaction involves an exchange of value, and the amounts of money involved – for better or worse – are the direct results of strategic pricing decisions the seller makes long before the transaction takes place.
We define a pricing strategy as a business leader’s conscious decisions on how to shape their market by determining the amount of money available, how that money flows, and to whom. It reflects the company’s philosophy on how to acquire, retain, and satisfy customers by sharing value with them fairly. How much a company can share depends on the characteristics of their market and how they choose to play in that market with their competitive advantages. How much value a business leader wants to share depends on the company’s short‐ and long‐term objectives. The choices of sharing method and model reflect how they want to use the pricing agency at their disposal.
Those decisions will shape not only your own business, but your market and society as well. In the following three examples, none of the business leaders or companies could have made their choices within the constraints of zero‐sum, value extraction, static, and number mentalities. We found in our work with thousands of companies that this strategic perspective can add points of margin and growth to almost any business. In our work with social ventures the impact can multiply their reach. The strategic view of pricing we introduce in this book is what makes their changes possible.
How pricing strategy shapes a business
Imagine that you are planning a large function such as a wedding or a graduation party. Several caterers offer you quotes, and you choose the one that best fits your plans and budget.
But how do caterers arrive at their prices? Most use the “cost‐plus” method, the world’s oldest and still most widely used way to set a price.3 They sum up their costs – for food and drink, preparation, delivery, and service – and then add their desired profit margin.
Judgment then comes into play, because the caterers want to avoid the high–low anxiety of zero‐sum pricing. Strong demand may boost their confidence to nudge prices higher, while weak demand may lead them to cut prices to get cash to cover themselves and their fixed costs. Ultimately, they settle on a price that represents the safest compromise.
How can the caterers escape this anxiety? It may sound paradoxical, but an experienced caterer in the western US named Mark escaped it by focusing on upside opportunities in ways that are less risky for his business over time than making safe compromises. Instead of being everything to everybody at whatever price he can negotiate, he formulated a pricing strategy by making conscious choices about how to shape demand, share value, and design his prices.
He started by rethinking how he creates value to meet his customers’ needs. That is an easy statement to make, but it’s little more than pricing pixie dust without a way to apply it. The caterer’s customers want the best fit to the venue, the menu, the desired level of refinement in food preparation, and the nature and length of service. Each of these requirements will vary significantly across different types of customers. Some customers will have fixed budgets, while others can afford to spend more, perhaps because they will ask attendees to participate financially in the event.
Based on what he learned, Mark decided how to use these variations to his own advantage. What imbalances will allow him to play to his strengths, by aligning what he does best with the customers who want that kind of service? Knowing that allowed him to craft a few packages with different options, with a fixed price per either event or person. That fixed price – which can include some allowance for changes within a similar range of menu items or service level – offered more certainty to customers with a fixed budget and avoided the hassle of change orders.
Academics, consultants, and other observers often refer to this approach as “value‐based pricing.” But that phrase grossly oversimplifies what Mark could now accomplish. His new pricing strategy went far beyond the numbers. It changed every aspect of his business, from procurement to marketing to sales to staffing. It also changed the level of ambition he could pursue. Catering is a business with few barriers to entry, so margins can be thin. A value‐based pricing approach increased the predictability and stability of his business, both on the volume side (thanks to higher win rates) and on the profitability side.
How pricing strategy shapes an industry
Carriers in the cellular service industry face frequent “innovate or die” challenges. Over the past few decades, they have survived the transition from analog to digital, the launch of the iPhone, and the successive introduction of next‐generation technologies from (so far) 2G to 5G.
To encourage customers to join their networks, carriers once subsidized the adoption of new mobile devices in exchange for the predictable revenue stream of a contract, typically lasting two years. But this stability – and the carriers’ profits – came under threat when global spending on phone subsidies ballooned by an estimated 40% to $48.5 billion per year between 2009 and 2011, thanks to the introduction of more expensive smartphones.4,5
The prevailing pricing model also posed a threat to carriers’ profits. Churn rates spiked for customer cohorts reaching the end of their two‐year contracts, because customers had strong incentives to shop around for another subsidized device. Why should they keep paying the same monthly amount when they had already amortized the cost of a device that was likely obsolete anyway? Churn substantially reduced customer lifetime value and forced carriers to increase their already high levels of spending on new customer acquisition.
These dynamics changed in June 2012, when Verizon reshaped the market by changing the pricing model from uniform individual plans to plans that bundled devices, minutes, messages, and data allowance under one household account with one bill.6 The “Share Everything Plan” gave customers a strong incentive to stay with the same carrier, because the hassle of coordinating among family members would outweigh the benefits of switching.
AT&T launched a similar bundle in August 2012.7 Sprint and T‐Mobile initially resisted, but eventually launched their own shared data plans in 2014.8 One year after introduction, their average monthly churn rates for postpaid contracts decreased by 64 basis points and 19 basis points, respectively.9,10
The extent and impact of bundling in the telecommunications industry goes well beyond family plans for cellular service. In Europe, mobile and fixed‐line offerings started converging under one bill in the early 2010s. Spain’s Telefónica saw the penetration of its fixed‐mobile bundle increase from 16% in 2013 to 48% in 2017, and its churn rates fall by half.11,12 Average revenue per user (ARPU) for the bundle rose by around 25% between 2014 and 2017, suggesting that the sharing of value under the new model benefited both Telefónica and its customers.
How pricing strategy shapes society
Tipping incentivizes good service, because it allows customers to show their gratitude to the individuals who served them. The practice has existed in many countries for several centuries, but it is not universal.13 It is impolite to tip service workers in Japan, for example, because of the implicit assumption that the server lacks the means to survive without the tip. In the United States, however, service workers in hospitality, foodservice, and other sectors rely on tips to make a living.
Tipping may seem like a benign and convenient two‐part pricing structure. The customer pays for the service – such as the meal, the repair, or the valet parking – and then adds an incremental amount for the server, who has an incentive to perform their job well. That tipped amount is usually either a percentage of the service charge (say, 15%) or a flat amount, such as a $20 cash tip for a mechanic who provided roadside assistance.
By using this two‐part structure, the seller shifts some of the responsibility for labor costs from themselves to the customers. This shift shapes society, because it leaves vulnerable groups susceptible to mistreatment and lower incomes, which in turn magnifies the effects of existing class biases. All else being equal, customers tend to tip service workers differently on the basis of race, sex, or other characteristics protected under labor laws.14
Male customers often get away with harassing female service workers, who are caught in the dilemma of either saying nothing or reporting the harassment and possibly forfeiting extra tips, which represent a significant portion of their salary.15 The Washington Post reported in 2016 that the restaurant industry generates five times the average number of sexual harassment claims per worker.16 Only 7% of American women work in restaurants, but 37% of all sexual harassment complaints to the Equal Employment Opportunity Commission come from this industry.17 Tipping also has implications along racial lines. Studies show that this structural bias is so pervasive in American society that even Black customers tip white service workers more on average for the same level of service.18
Recent evidence from the United States shows that changing this pricing model could start to reshape society. Seven states – Alaska, California, Minnesota, Montana, Nevada, Oregon, and Washington – have passed laws to raise minimum cash wages for tipped workers to the state’s full minimum wage, while 15 states still keep it at the US federal minimum of $2.13 per hour.19 Those seven states show consistently higher restaurant sales per capita and tipped worker job growth than the others.20
It’s time to change the game of pricing
As we said earlier, one of our primary objectives with this book is to change the game of pricing, literally and figuratively. That takes us beyond refuting the four premises that underpin the generally accepted version of how the game of pricing works. Game Changer: How Strategic Pricing Shapes Businesses, Markets, and Society replaces that game with seven distinct pricing games that, in aggregate, cover nearly every challenge and opportunity a business leader will encounter.
These games and their distinct natures are not arbitrary or gimmicky choices, nor are they mere byproducts of what we and our colleagues have experienced over the past few decades. They are, in fact, the logical outcomes of a thought process that integrates familiar pricing inputs, frameworks, and methods in a systematic way.
This process culminates in the Strategic Pricing Hexagon, a proven empirical framework we have designed to help executives make strategic choices about pricing with greater speed, confidence, efficiency, and impact.
FIGURE I.1 The Strategic Pricing Hexagon
The locations of the seven games within the Strategy Hex, as we will refer to it throughout the book, are not coincidental. They arise from intersections and interactions across information sources (cost, competition, and customer value), economic frameworks (elasticity, differentiation, game theory, and supply and demand), and specific market characteristics. Each game is subject to six well‐defined market forces, and each game has a function within an organization that serves as its natural leader for strategic pricing decisions.
By synthesizing all this information, the Strategy Hex becomes a decision support tool that enables any business leader to formulate a clear pricing strategy and shape their business and markets with authority. It is a logical, common‐sense guide to help you identify the imbalances in your market, assess the resulting opportunities and risks, and then frame your options based on your pricing strategy and your pricing agency. It also prevents you from acting on incomplete information, falling prey to the misconceptions about how pricing works, or applying frameworks or techniques that are ineffective or inefficient for a particular game.
For a variety of reasons – from university training to corporate legacy to experience – you might easily and intuitively imagine that your company is playing one of the three games at the top of the Hex.
Value: Aligning prices of unique solutions with customer value
Think breakthrough or highly differentiated products. Companies succeed when they express their differentiation convincingly and match it with a pricing model that reinforces the value. Companies in the high‐tech, luxury goods, and pharmaceuticals sectors tend to choose the Value Game.
Uniform: Optimizing the same price for all customers
Crack open an Economics 101 textbook and at some point, you’ll see the hallmarks of the Uniform Game: companies offering one transparent price to all customers. Sellers weigh the tradeoffs between volume and margin to optimize their own uniform price and maximize profits. Retailers and many consumer goods companies choose to play the Uniform Game.
Cost: Driving efficiency to set prices in commoditized markets
Cost‐plus is common in markets with a high proportion of variable costs and several small suppliers competing for the business of very large customers. A seller needs a pricing model that incentivizes customers to work with them toward the shared goal of optimal efficiency. Tailoring their offers in a cost‐effective way is paramount. Many industrial suppliers and distributors play the Cost Game very well.
But these three games apply, in aggregate, only to a minority of the challenges that confront business leaders. That brings us to the four games in the middle and lower half of the Strategy Hex.
Power: Negotiating high‐stakes deals in concentrated markets
The stakes are high in markets where a small number of sellers with highly standardized offerings negotiate with a small number of customers. Losing even one major deal can wreck a seller’s business. Customers, meanwhile, can suffer when they give a seller an exclusive deal and that seller suddenly faces supply constraints and cannot deliver. In the Power Game, it is vital for sellers to understand the very fine advantages they might have versus each competitor at each customer. Their pricing model must enable them to keep prices in harmony within this delicate balance of power.
Custom:
Customizing offers and discounts to beat competitors
Think of an industry with a handful of suppliers selling to hundreds or thousands of customers. The core offerings of each competitor are usually comparable, but the negotiated terms, conditions, and supplemental offerings can make each deal unique. In that sense, the Custom Game is the polar opposite of the Uniform Game. Individual customer discounts form the primary tool for price differentiation.
Choice: Shaping customer behavior with segmented offers
When a few companies in a market offer a variety of products or services at a wide range of prices, how those prices compare to each other matters far more than the individual prices themselves. The way that the offers are presented – factually and emotionally – influences how customers choose, which means that behavioral biases drive outcomes much more than the precision of price points do. A well‐structured lineup of offerings incentivizes returning customers to upgrade progressively and choose higher‐margin options.
Dynamic: Managing floating prices based on real‐time dynamics
Pricing can become dynamic when demand fluctuates, capacity is fixed, marginal costs are low, and competitive prices constantly shift over time. Airlines were the first ones to price dynamically, but this approach has spread to hotels, sports teams, e‐commerce retail, and many more sectors. Technology is critical, because it enables a company first to collect all the inputs at high frequency and second to process them and determine prices for every customer at any point in time. Some companies have begun to apply artificial intelligence together with human judgment to make initial attempts to play this game, but in many industries the evolution of the Dynamic Game remains in its early stages.
One consequence of the Strategy Hex is that there are no standard off‐the‐shelf pricing strategies that you can quickly cut and paste to your own situation. To assume that pricing strategies or pricing methods are universally applicable and fungible is tantamount to saying that playing golf, basketball, soccer, and baseball all demand the same skills and fitness, simply because each sport involves a ball.
Deciding which of the seven games you will play is one essential part of defining your pricing strategy. The following section introduces the full step‐by‐step process.
Define your own pricing strategy
Our book offers you a structured and powerful way to craft a well‐founded pricing strategy with speed, confidence, efficiency, and impact. The process builds on three questions:
How do you create and share value?
What pricing game do you want to play?
What pricing model best fits your value creation strategy?
Answering each question, in turn, depends on your answers to a block of more detailed questions.
Question 1: How do you create and share value?
Your answer to this first fundamental question derives from your answers to these three questions:
1a.
What do you do to create
measurable value
for your customers?
1b.
What are your main
drivers of value
and the
limitations
to value creation?
1c.
How well do your
differentiation and growth objectives
justify how you share value with your customers?
Our foundations for pricing strategy begin with the premise that pricing is about value sharing in a repeated game – which describes virtually all markets – rather than maximizing one’s own outcome by extracting value from a zero‐sum game. We also assert that business leaders themselves set the rules and guidelines for shaping demand and sharing value.
We are not referring to value sharing in the sense of what Michael Porter and Mark Kramer defined over a decade ago. They referred to “shared value” as “creating economic value in a way that also creates value for society by addressing its needs and challenges.”21 While we address the important societal impact of pricing in Part IV, our definition of shared value is narrower and more precise. We focus on the voluntary exchanges between buyers and sellers, regardless of how large or small the impact on society may be.
Question 2: What pricing game do you want to play?
Your initial answer to the second fundamental question – what game do you want to play? – derives from your answers to these three questions:
2a.
Which game aligns best with the
characteristics of your market
?
2b.
Which game aligns best with your current
pricing approach
?
2c.
Which game aligns best with the
market forces
and your
competitive advantages
?
We feel confident that your answers will evolve over the course of our book. Here are the seven games again in summary form:
The Seven Games in the Strategic Pricing Hexagon
Value Game:
Aligning prices of unique solutions with customer value
Uniform Game:
Optimizing the same price for all customers
Cost Game:
Driving efficiency to set prices in commoditized markets
Power Game:
Negotiating high‐stakes deals in concentrated markets
Custom Game:
Customizing offers and discounts to beat competitors
Choice Game:
Shaping customer behavior with segmented offers
Dynamic Game:
Managing floating prices based on real‐time dynamics
Question 3: What pricing model best fits your value creation strategy?
Your answer to this third fundamental question derives from your answers to these three questions:
3a.
What should your
pricing architecture
be (i.e., pricing basis, offer structure, and pricing mechanism)?
3b.
What should drive your
price variation
(e.g., geography, channel, and time)?
3c.
What
price adjustment
levers should you use (i.e., customer programs, transaction incentives, and fees and functional discounts)?
Figure I.2 – which we will use throughout the book – provides an organized view of these questions. The pricing architecture assembles all the decisions that leaders need to make before they can even set a price: the unit to express the price, the offer that people get when they pay the price, and the way the number is determined. Once a company can set a price, it needs to decide what will make that price vary, whether over time, by location, by store, by customer, or other factors. Finally, in markets where companies first anchor their prices around a number – a list price or reference price – they adjust those prices, sometimes by very small amounts and sometimes by much larger amounts. We refer to the means they use to make these changes as price adjusters and classify them by the purpose they serve. All these pricing model decisions have one point in common: implicitly or explicitly, they come before a buyer and a seller agree on any price. These decisions provide the strategic frame for the price.
FIGURE I.2 The elements of a pricing model
* * *
Preview of what you’ll find in the book …
Part I introduces the logical building blocks of the Strategy Hex – information sources, economic frameworks, market characteristics, and market forces – and then shows how typical functions within any organization, such as marketing, sales, and finance, fit to each game. Part I concludes with guidance on how to use the Hex to understand and exercise your pricing agency. By the end of Part I, you should already be able to answer the second fundamental question for defining your pricing strategy: What game do you want to play?
Part II devotes one full chapter to each of the seven games. By the end of Part II, you should have a complete basis for understanding each game and how you can win yours. You should also be able to answer the third fundamental question for defining your pricing strategy: What pricing model best fits your value creation strategy?
But we do not stop there.
Part III brings the Strategy Hex to life by showing you how to play the games when market‐shaping events occur. How do you bring an innovation to market? How do you make a transition to an “as a service” pricing model? Your choice of which game to play is not permanent. Companies change their games or defend their positions as their businesses and markets evolve.
Part IV shows that pricing strategies have social consequences. Think, for example, about how you would define a “fair price.” You may be surprised to read how your definition stands up to scrutiny. At the same time, pricing strategy can address social problems that people normally don’t view as pricing challenges, such as how a nonprofit can achieve a greater impact or how societies can reduce net emissions of CO2.
… and some shortcuts as you start reading
This book’s structure should allow you to navigate toward the parts and chapters that align with your strongest interests. As with most business books, you will probably not read the chapters in this book sequentially. But we do have some specific recommendations to guide your reading plan.
In Part I, Chapters 1 and 2 cover very familiar ground for people with a basic economics background. But we advise all readers to read Chapter 3 carefully. It explains what makes the games so different from each other. Understanding the rationale behind how market characteristics define the games is foundational for all the arguments we make in the book. Chapter 3 should also enable you to identify the one or two games that best fit your market situation. Chapters 4 through 6 develop a more nuanced understanding of the games. You can read them sequentially or skim them and come back later as needed, say, if you are wondering why we connect different organization functions, market trends, or pricing levers to their natural positions in the Hex.
If you have an appetite for targeted reading, skip straight to the chapters in Parts II and III that you find most intriguing. Part III chapters should be easy to navigate, depending on what is happening in your market. We hope that chapters focused on adjacent games will be instructive as well, highlighting opportunities for strategic moves or risks of market shifts.
Unique among pricing books, this one is not only for people who need to set pricing strategies and prices. It is also for all those interested in understanding how our modern free‐market societies are shaped by the way commercial transactions are structured. Chapters 20 and 21 cover age‐old questions such as the fairness of prices and how value is shared or distributed between buyers and sellers. They provide a more detailed logic behind some of our more provocative claims about the ethical case for price differentiation or the importance for businesses to share value.
Chapters 22 to 25 address specific societal challenges where strategic pricing approaches can help contribute to solutions. They include the challenges to provide broad or universal access to drugs or education, how to shape demand in order to scale sustainable, environment‐friendly products, and solutions on how to disincentivize CO2 emissions.
Finally, we suspect that this is going to be a book worth keeping in your library for frequent reference. We hope you will find many connections between the real world and the games that will trigger diving into the relevant chapter. No matter how you use this book, though, we welcome feedback and reactions to the ideas we present.
Now let’s answer Question 1
To help with the active reading of this book, we will have some brief exercises to help you translate the ideas of the book into practical real‐world consequences. If you are working in a business or a nonprofit organization, we assume that you can articulate your answers to Question 1 in a few sentences. If you are a student, pick a business you are familiar with. This is the starting point of your journey.
Question 1: How do you create and share value?
1a.
What do you do to create
measurable value
for your customers?
1b.
What are the main
drivers of value
and the
limitations
to value creation?
1c.
How well do your
differentiation and growth objectives
justify how you share value with your customers?
Try to keep your answers simple and pragmatic, perhaps no longer than what you could scribble on a small sheet of paper. The most challenging part of the question is probably the one about value sharing. Please keep that piece of paper handy and see how your answers evolve as you proceed through the book.
