The Price Advantage Founded in 1807, John Wiley & Sons is the oldest independent publish- ing company in the United States. With offices in North America, Europe, Australia,andAsia,Wileyisgloballycommittedtodevelopingandmarket- ingprintandelectronicproductsandservicesforourcustomers’professional andpersonalknowledgeandunderstanding. TheWileyFinanceseriescontainsbookswrittenspecificallyforfinance and investment professionals as well as sophisticated individual investors andtheirfinancialadvisors.Booktopicsrangefromportfoliomanagement to e-commerce, risk management, financial engineering, valuation, and fi- nancialinstrumentanalysis,aswellasmuchmore. Foralistofavailabletitles,visitourWebsiteatwww.WileyFinance.com. The Price Advantage Second Edition WALTER L. BAKER MICHAEL V. MARN CRAIG C. ZAWADA John Wiley & Sons, Inc. Copyright(cid:2)C 2010byMcKinsey&Company,Inc.Allrightsreserved. PublishedbyJohnWiley&Sons,Inc.,Hoboken,NewJersey. PublishedsimultaneouslyinCanada. Nopartofthispublicationmaybereproduced,storedinaretrievalsystem,ortransmittedin anyformorbyanymeans,electronic,mechanical,photocopying,recording,scanning,or otherwise,exceptaspermittedunderSection107or108ofthe1976UnitedStatesCopyright Act,withouteitherthepriorwrittenpermissionofthePublisher,orauthorizationthrough paymentoftheappropriateper-copyfeetotheCopyrightClearanceCenter,Inc.,222 RosewoodDrive,Danvers,MA01923,(978)750-8400,fax(978)750-4470,orontheweb atwww.copyright.com.RequeststothePublisherforpermissionshouldbeaddressedtothe PermissionsDepartment,JohnWiley&Sons,Inc.,111RiverStreet,Hoboken,NJ07030, (201)748-6011,fax(201)748-6008,oronlineathttp://www.wiley.com/go/permissions. LimitofLiability/DisclaimerofWarranty:Whilethepublisherandauthorhaveusedtheir besteffortsinpreparingthisbook,theymakenorepresentationsorwarrantieswithrespectto theaccuracyorcompletenessofthecontentsofthisbookandspecificallydisclaimanyimplied warrantiesofmerchantabilityorfitnessforaparticularpurpose.Nowarrantymaybecreated orextendedbysalesrepresentativesorwrittensalesmaterials.Theadviceandstrategies containedhereinmaynotbesuitableforyoursituation.Youshouldconsultwitha professionalwhereappropriate.Neitherthepublishernorauthorshallbeliableforanylossof profitoranyothercommercialdamages,includingbutnotlimitedtospecial,incidental, consequential,orotherdamages. Forgeneralinformationonourotherproductsandservicesorfortechnicalsupport,please contactourCustomerCareDepartmentwithintheUnitedStatesat(800)762-2974,outside theUnitedStatesat(317)572-3993orfax(317)572-4002. Wileyalsopublishesitsbooksinavarietyofelectronicformats.Somecontentthatappearsin printmaynotbeavailableinelectronicbooks.FormoreinformationaboutWileyproducts, visitourwebsiteatwww.wiley.com. ISBN978-0-470-48177-6 PrintedintheUnitedStatesofAmerica 10 9 8 7 6 5 4 3 2 1 For Ashley, Nancy, and Gail Contents Preface xiii Acknowledgments xvii PARTONE PricingFundamentals 1 CHAPTER1 Introduction 3 ThePowerof1Percent 3 ThePrice/VolumeTradeoff 6 MarketForcesAddPressure 7 TheNobilityofPricingExcellence 10 WhythePriceAdvantageIsSoRare 10 CHAPTER2 ComponentsofPricingExcellence 13 AnIntegratedApproach 15 AnInterdependentHierarchy 18 ApplyingtoYourCompany—PinpointingtheOpportunity 19 PARTTWO ExploringtheLevels 23 CHAPTER3 Transactions 25 ThePocketPriceWaterfall 26 ThePocketPriceBand 29 TheSoundcoRadioCompanyCase 32 PocketMarginWaterfallandBand 39 AlenGlassCompanyCase 40 vii viii CONTENTS CHAPTER4 CustomerValue 45 MappingValue 46 CreatingaValueMap 46 MakingMovesontheValueMap 57 PuttingCustomersontheValueMap 67 ValueProfiling 69 CHAPTER5 MarketStrategy 75 ProfitingfromBetterPricePredictions 77 PlanningforanExpectedPriceChange 78 MaintainingOptimalProductionandCapacity 79 ImprovingPricingConduct 80 InfluencingtheElementsofPricingConduct 82 AWordonFollowership 89 CHAPTER6 PricingInfrastructure 93 Processes—WhatAretheMostCriticalTypesof PricingDecisionsforYourBusiness? 95 Organization—WhoIsRunningthePricing ProfitCenter? 99 PerformanceManagement—HowShouldWe RecognizeandRewardPricingPerformance? 103 SystemsandTools—NoMagicBulletExists 107 PARTTHREE UniqueEvents 113 CHAPTER7 PostmergerPricing 115 ATemporaryWindowofOpportunity 116 TremendousOpportunitiesatEach PricingLevel 119 AvoidingCommonPostmergerTraps 127 AntitrustLaws 130 Contents ix CHAPTER8 PriceWars 133 WhyPriceWarsShouldBeAvoided 133 WhatReallyCausesPriceWars 136 StayingOutofPriceWars 141 GettingOutofPriceWars 144 WhenaPriceWarMightMakeSense 145 PARTFOUR ExpandingtheBoundaries 149 CHAPTER9 LegalDegreesofFreedom 151 PricingDecisionsThatRaiseRedFlags 153 MinimizingRisksWhileMeetingPricingObjectives 156 CallingintheAttorneys 162 CHAPTER10 LifecyclePricing 165 WhatMakesLifecyclePricingTough 166 TheThreePhasesofProductLifecyclePricing 168 SustainingReturnsAcrosstheLifecycle 179 CHAPTER11 PricingArchitecture 183 ManagingPricePerception 183 InfluencingCustomerBehavior 185 PriceArchitectureBasedonSupplierRole 191 PARTFIVE AdvancedTopics 197 CHAPTER12 ComplexityManagement 199 SectionOne:Custom-ConfiguredProducts 199 SectionTwo:High-CountProductLines 207 SectionThree:DistributedSalesModels 212 x CONTENTS CHAPTER13 TailoredValue 221 SectionOne:PriceSegmentation 221 SectionTwo:TieredProductsandServices 226 SectionThree:NewProducts 230 SectionFour:“Razor/RazorBlades”Offerings 236 SectionFive:Solutions 240 CHAPTER14 SoftwareandInformationProducts 247 UniqueCharacteristicsThatImpactPricing 247 ExploringtheElementsofPricing 250 PARTSIX MakingChangeHappen 265 CHAPTER15 PricingTransformation 267 DesigningaClearChangeProgram 268 AcceleratingandEmbeddingChange 276 CHAPTER16 TheMonnarchBatteryCase 287 TheMonnarchBatteryCompany 287 Transactions 289 CustomerValue 293 MarketStrategy 296 CapturingtheMonnarchPricingOpportunity 298 Hard-WiringtheChange 302 Epilogue 305 APPENDIX1 PocketPriceandPocketMarginWaterfalls 307 Contents xi APPENDIX2 AntitrustIssues 327 U.S.PricingLaw 327 EUPricingLaw 335 AntitrustInformationSources 342 APPENDIX3 ListofAcronymsandAbbreviations 353 APPENDIX4 AbouttheWeb-BasedTool:Periscope 355 AbouttheAuthors 357 Index 359