Hermann Simon Martin Fassnacht Price Management Strategy, Analysis, Decision, Implementation Price Management (cid:129) Hermann Simon Martin Fassnacht Price Management Strategy, Analysis, Decision, Implementation HermannSimon MartinFassnacht Simon-Kucher&PartnersStrategy WHU–OttoBeisheimSchoolofManagement andMarketingConsultants ChairofMarketingandCommerce Bonn,Germany Düsseldorf,Germany ISBN978-3-319-99455-0 ISBN978-3-319-99456-7 (eBook) https://doi.org/10.1007/978-3-319-99456-7 LibraryofCongressControlNumber:2018959416 #SpringerNatureSwitzerlandAG2019 Thisworkissubjecttocopyright.AllrightsarereservedbythePublisher,whetherthewholeorpart of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation,broadcasting,reproductiononmicrofilmsorinanyotherphysicalway,andtransmissionor informationstorageandretrieval,electronicadaptation,computersoftware,orbysimilarordissimilar methodologynowknownorhereafterdeveloped. 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ThisSpringerimprintispublishedbytheregisteredcompanySpringerNatureSwitzerlandAG Theregisteredcompanyaddressis:Gewerbestrasse11,6330Cham,Switzerland Testimonials “Thisbookistrulystateoftheartandthemostcomprehensiveworkinprice management.” —Prof.PhilipKotler KelloggSchoolofManagement,NorthwesternUniversity “Thisveryimportantbookbuildsanoutstandingbridgebetweenscienceand practice.” —KasperRorsted CEO,Adidas “This book provides practical guidelines on value creation, communication and management, which is an imperative for businesses to survive in the comingeraofuncertainty.” —Dr.Chang-GyuHwang ChairmanandCEO,KTCorporation(KoreaTelecom) v Preface ThetitlePriceManagementexpressesourambitiontoproduceabookwhichisboth grounded in theory and relevant in practice. The author team—an academic (Fassnacht)andapractitioner(Simon)—guaranteesthedesiredintegrationoftheory andpractice. State of the Art Thisbookisstateoftheartyetalsolooksintothefuture.Digitalizationispenetrating allphasesofthepricingprocess,fromstrategyandanalysistodecision-makingand implementation. The Internet and other new technologies (sensors, measurement, etc.)haveledtoawealthofpricemanagementinnovationswhichthisbookexplores in detail. These include flatrates, freemium,pay-per-use, pay-what-you-want, new pricemetrics,two-sidedpricesystems,negativeprices,sharingeconomy,BigData, artificial intelligence, and machine learning. Innovative paymentsystems and even cryptocurrenciesarealsohavingeffectsonpricemanagement. The Integration of Theory and Practice Using Case Examples Weusereal-worldcasesthroughoutthebooktoensurethelinkbetweentheoretical rigorandpracticalrelevance.Thatispossiblebecausewecoulddrawonthevastand diverseexperienceofSimon-KucherandPartners,theglobalmarketleaderinprice consulting. We have anonymized these examples whenever necessary to protect confidentiality. vii viii Preface Industry Orientation It is easy to see price management as a basic discipline, similar to accounting or controlling andgenerallyapplicableacrossallsectors.Butourdecades ofinvolve- ment in price management have taught us that the ways of framing and solving pricingproblemsareoftenindustry-specific.Consumergoods,forexample,aresold primarily through intermediaries (retailers), while industrial products are predomi- nantly sold directly. The resulting pricing issues, strategies, and tactics in these sectors are very different. For this reason, we devote separate chapters to the respective price management issues in the consumer goods, industrial goods, ser- vice,andretailsectors. Global Approach This is the global book on pricing! We committed ourselves to a global approach throughoutthebook.Globalcompetitionmeansthatcompaniesaroundtheworldare confronted with similar price management challenges. In line with this global approach, we selected representative case studies and practical examples from aroundtheworld. Target Audience Theintegrationoftheoryandpracticemakesthisbookequallyrelevantforstudents and academics as for entrepreneurs and managers. Price management is becoming more and more professionalized in companies around the world, with stronger engagement from senior management, all the way up to the CEO. We not only covertheroleofpriceasashort-termprofitdriverbutalsoshowhowcompaniescan usepriceasameanstodrivesustainedincreasesinshareholdervalue. Pricemanagementistakingupalargerportionofbusinessstudies.Thisisduein part to the Internet, which has massively increased price transparency, intensified price competition, and triggered more price wars. But at the same time, the Internetalsoincreasesvaluetransparency.Thisdichotomyresultsinsomesurprising andhighlyasymmetriceffectsforthemarketinginstrument“price.” We have many people to thank for their contributions to this book, and we call attention to them individually in the acknowledgments. But we are especially thankful to Anna-Karina Schmitz for her outstanding work as our project leader andtotheassociatesofSimon-KucherandPartnersfortheirvaluablesupport. The preoccupation with price management dates all the way back to Ancient Rome.TheLatinlanguageusestheidenticalwordfor“price”and“value,”namely, theword“pretium.” Preface ix Pretium¼Price¼Value Thatisthecoreequationofpricemanagement! HermannSimon MartinFassnacht Bonn,Germany HermannSimon Düsseldorf,Germany MartinFassnacht Contents 1 FundamentalsofPriceManagement. . . . . . . . . . . . . . . . . . . . . . . . 1 1.1 ProfitandPrice. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.2 DefinitionofPrice. . . . . . . .. . . . . . . .. . . . . . . .. . . . . . . . .. 5 1.3 PriceandManagement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 1.3.1 PriceasaMarketingInstrument. . . . . . . . . . . . . . . . . 6 1.3.2 UnderstandingtheRoleofPrice. . . . . . . . . . . . . . . . . 10 1.3.3 PriceManagementasaProcess. . . . . . . . . . . . . . . . . . 14 1.4 KnowledgeSourcesforPriceManagement. . . . . . . . . . . . . . . . 16 1.4.1 MacroeconomicPriceTheory. . . . . . . . . . . . . . . . . . . 16 1.4.2 Microeconomics. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 1.4.3 MarketingScience. . . . . . . . . . . . . . . . . . . . . . . . . . . 16 1.4.4 BehavioralEconomics. . . . . . . . . . . . . . . . . . . . . . . . 17 1.4.5 BrainResearch. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 1.4.6 PriceConsulting. . . . . . .. . . . . . . . . . . . . . . . . .. . . . 17 1.4.7 SoftwareforPriceManagement. . . . . . . . . . . . . . . . . 18 1.4.8 PricingInnovators. . . . . . . . . . . . . . . . . . . . . . . . . . . 18 1.4.9 PopularLiterature. .. . . . .. . . . .. . . . .. . . . .. . . . .. 18 1.5 TheLegalFrameworkofPriceManagement. . . . . . . . . . . . . . . 19 1.5.1 UnitedStates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 1.5.2 EuropeanUnion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 1.5.3 Worldwide. . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . 20 1.5.4 ActivitiesoftheAntitrustAgencies. . . . . . . . . . . . . . . 20 1.6 CurrentTrendsinPriceManagement. . . . . . . . . . . . . . . . . . . . 21 1.6.1 PricesArePenetratingManagementThinking. . . . . . . 21 1.6.2 PriceandPower. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 1.6.3 PriceandTopManagement. . .. . . . . . . .. . . . . . . .. . 24 References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 2 PriceStrategy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 2.1 Goals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 2.2 PriceManagementandShareholderValue. . . . . . . . . . . . . . . . 35 2.3 ValueandPrice. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 2.4 Positioning. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 xi xii Contents 2.5 Approach. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 2.6 PricePositions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 2.6.1 LuxuryPricePosition. . . . . . . . . . . . . . . . . . . . . . . . . 46 2.6.2 PremiumPricePosition. . . . . . . . . . . . . . . . . . . . . . . 53 2.6.3 Medium-PricePosition. . . . . . . . . . . . . . . . . . . . . . . . 59 2.6.4 Low-PricePosition. . . . . . . . . . . . . . . . . . . . . . . . . . . 64 2.6.5 Ultra-LowPricePosition. . . . . . . . . . . . . . . . . . . . . . 70 2.6.6 TheDynamicsofPricePositioning. . . . . . . . . . . . . . . 75 References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 3 Analysis:TheEconomicsofPrice. . . . . . . . . . . . . . . . . . . . . . . . . . 85 3.1 Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 3.2 AnalysisofPrice-RelevantInformation. . . . . . . . . . . . . . . . . . 86 3.2.1 Cost-PlusPricing. . . . . . . . . . . . . . . . . . . . . . . . . . . . 87 3.2.2 Customers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88 3.2.3 Competition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 3.3 ThePrice-ResponseFunction. . . . . . . . . . . . . . . . . . . . . . . . . . 92 3.3.1 ClassificationofPrice-ResponseFunctions. . . . . . . . . . 92 3.3.2 Price-ResponseFunctionsandPriceElasticity. . . . . . . 93 3.3.3 AdditionalFormsofthePrice-ResponseFunction. . . . 99 3.3.4 EmpiricalFindingsonPriceElasticity. . . . . . . . . . . . . 102 3.4 EmpiricalDeterminationofthePrice-ResponseFunction. . . . . . 108 3.4.1 Surveys. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108 3.4.2 Observations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128 3.4.3 SynopsisofInstruments. . . . . . . . . . . . . . . . . . . . . . . 136 References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139 4 Analysis:ThePsychologyofPrice. . . . . . . . . . . . . . . . . . . . . . . . . . 143 4.1 Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143 4.2 TraditionalPsychologyofPrice. . . . . . . . . . . . . . . . . . . . . . . . 145 4.2.1 PrestigeEffectsofPrice. . . . . . . . . . . . . . . . . . . . . . . 145 4.2.2 GiffenParadox. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146 4.2.3 ThePriceasaQualityIndicator. . . . . . . . . . . . . . . . . 146 4.2.4 SpecialCases. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149 4.3 BehavioralPricing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150 4.3.1 TheoreticalBasis. . . . . . . . . . . . . . . . . . . . . . . . . . . . 151 4.3.2 BehavioralPricingEffects. .. . . . .. . . . .. . . .. . . . .. 157 4.3.3 Neuro-Pricing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 166 4.3.4 OverallAssessment. . . . . . . . . . . . . . . . . . . . . . . . . . 167 References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169 5 Decision:One-DimensionalPrices. . . . . . . . . . . . . . . . . . . . . . . . . . 173 5.1 Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 173 5.2 CategorizationofOne-DimensionalPricingProcesses. . . . . . . . 174 5.3 RigidPricingProcesses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175