Pricing Done right The Bloomberg Financial Series provides both core reference knowl- edge and actionable information for financial professionals. The books are written by experts familiar with the work flows, challenges, and demands of investment professionals who trade the markets, manage money, and analyze investments in their capacity of growing and protecting wealth, hedging risk, and generating revenue. Since 1996, Bloomberg Press has published books for financial professionals on investing, economics, and policy affecting investors. Titles are written by leading practitioners and authorities, and have been translated into more than 20 languages. For a list of available titles, please visit our website at www.wiley .com/go/bloombergpress. Pricing Done right The Pricing Framework Proven Successful by the World’s Most Profitable Companies tim J. Smith BLOOMBERG PRESS An Imprint of Cover image: © mitza/iStockphoto Cover design: Wiley Copyright © 2016 by Tim J. Smith. 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Description: Hoboken : Wiley, 2016. | Series: Bloomberg financial | Includes bibliographical references and index. Identifiers: LCCN 2016014285 | ISBN 978-1-119-18319-8 (hardback) | ISBN 978-1-119-19115-5 (ePDF) | ISBN 978-1-119-26989-2 (epub) Subjects: LCSH: Pricing. | Management. | BISAC: BUSINESS & ECONOMICS / Management. Classification: LCC HF5416.5 .S584 2016 | DDC 658.8/16—dc23 LC record available at https://lccn.loc.gov/2016014285 Printed in the United States of America. 10 9 8 7 6 5 4 3 2 1 Yvette Kaiser Smith Together we continue to discover our full selves. Contents Preface xi Acknowledgments xvii ChAPter 1 the Value-Based Pricing Framework for Getting Pricing Done right 1 Embedding the Culture of Value-Based Pricing 3 Overarching Pricing Decision Areas 3 Analytical Routines 7 Decision Teams 8 ChAPter 2 Value‐Based Pricing  11 The Purpose of Firms: Serve Customer Needs Profitably 11 Value Engineering 15 Value‐Based Pricing 17 Differential Benefits 20 Differential Price 26 Exchange Value to Customer 28 Design Costs against Price to Profit 32 References 34 ChAPter 3 Business Strategy Alignment  35 Business Strategy 36 Customers 39 Competitors 47 vii viii Contents Company 51 References 53 ChAPter 4 Pricing Strategy  55 Price Positioning 56 Price Segmentation 62 Competitive Price Reaction Strategy 65 Pricing Capability 74 References 76 ChAPter 5 Price Management  79 Market Pricing 82 Price Variance Policy 87 Price Execution 92 Pricing Analysis 95 ChAPter 6 Defining the Pricing Decision team  99 Marketing 103 Sales 107 Finance 112 Pricing 114 References 116 ChAPter 7 Pricing Continuous Improvement and Analytics  119 Continuous Improvement Process 120 Offering Innovation and Pricing Decisions 123 Price Variance Policy Continuous Improvement 131 Market Pricing Continuous Improvement 135 References 138 ChAPter 8 Organizational Design of the Pricing Specialist Function  139 Pricing Community Distribution 140 Pricing Reporting Structure 143