Topics

A better harvest

“Take what you want, God said to man, and pay for it.” (Spanish proverb)

Every business has to price what it sells. It is inescapable and indispensable, yet also deeply misunderstood. This session explains that most professionals characterise pricing simply as an exercise in running the numbers—a tactical, mechanical problem where creativity is superfluous. In fact, prices educate and stimulate customers as much as they mark value. And pricing questions are as much about strategy (How should we earn a profit from the value that we provide? What arguments convince customers and keep competitors at bay? Can we tailor prices without eroding goodwill?) as they are about dollars and cents. This opening session talks broadly about the “missions” of pricing and the steps that organisations must take to improve this basic business skill. Getting it right unlocks unexpected opportunities to capture, communicate and even grow value.

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Competing on outcomes

“The buck stops here.” (Harry Truman)

Customer orientation is the defining mantra of the 21st century organization. We have been trained to see the market from the eyes of those we serve, thinking in terms of solutions rather than products and services. Yet even the most customer-loving enterprise reverts to old habits when it comes to turning value into dollars and cents—rather than taking a hard look at customers and what they need and want, we take a hard look at what we make. Given today’s technologies and a growing interest in transparency and accountability, this has become a problem. The result is fascinating: albeit at different speeds, just about every industry that I can think of is heading toward a form of compensation that rewards outcomes. The session describes this reality via several examples, providing a roadmap and straightforward advice on how to orchestrate a revenue strategy fit for the modern times. Change is inevitable because organizations ultimately compete for the attention and wallet of the customer.

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The price is right!

“There are two fools for every market: one asks for too little, the other asks for too much.” (Russian proverb)

How do you know when the price is right? Before answering this tricky question, we first have to appreciate how important it actually is: when properly understood, the financial benefit of choosing the correct price dwarfs any other driver of performance. Next, we have to agree on the information that organisations need to make better decisions. There are four ingredients that matter: company, cost, competitor and customer. Most professionals recall the “4Cs” in a matter of seconds. However, they struggle with defining and combining this information properly. The session tackles this problem with the aid of a simple “two finger” framework. One lesson is that finding the perfect price implies striking a balance between looking inside and outside of the business for inspiration. The foundation is a solid understanding of how one’s offering differs meaningfully from those of competitors. More important, finding the perfect price is ultimately about one thing: gaining control over the top line.

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Asking about price

“If you have to ask how much it costs, you can’t afford it.” (John Pierpont Morgan)

The customer’s perception of value is the ultimate arbiter of price. It needs to be measured with care. Broadly speaking, managers can do this in surveys or experiments with hypothetical purchase scenarios, or using past or real-time market transactions. All else equal, the manager prefers the latter because the incentives are aligned: customers give up some of their money to obtain products, making it improbable that they “lie” in any consequential way. Reality, however, often forces trade-offs. For example, data can be noisy and incomplete, which complicates the intention of establishing statistically-significant causal relationships. Surveys and experiments, on the other hand, typically yield cleaner results, they allow greater control and they are faster to implement—all at a fraction of the cost of a thorough econometric exercise. The purpose of the session is to provide a comprehensive and critical overview of the manager’s research toolbox, discuss the merits and limitations of the traditional and more modern methods and acknowledge the obstacles that are likely to surface when data are collected and translated into practical insights.

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$$$elling value to customers

“A cynic is a man who knows the price of everything and the value of nothing.” (Oscar Wilde)

At the heart of every proper pricing strategy lies the set of actions businesses take to conceptualise, document and communicate value to their customers. Indeed, there is merit to the statement “when the value of an offering is clearly understood by both firm and customer, price is seldom a problem.” This session discusses the complications that often arise when an organisation tries to sell value in a market plagued by stubborn, cynical buyers. Specifically, it preaches to “keep calm and sell value:” a five-step framework that highlights remedies and invites several conclusions. Two stand out. First, a better understanding of what “value” means to customers, and how the business can be true to its promises, gives a sense of calibration and confidence that helps fight off the pressure imposed by clients and competitors. Second, a better process to sell value quickly improves the performance of the firm–and this improvement is enduring.

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Brand, price and the customer relationship

“A cheap price is a shortcut to being cheated.” (Chinese proverb)

Marketing professionals believe that growing a business implies cultivating brands that inspire a deep, meaningful connection with customers. When it comes to generating revenue, however, companies often implement policies that seem intent on destroying all the hard work that goes into building a strong brand. We have already seen such instance in the course: the design of the revenue model. Now we take this paradox a couple of steps further, studying how a company’s efforts to discriminate among customers or minimise the pain of high(er) prices can go awry. Knowing that pricing decisions are effective at spurring all sorts of behaviors and communicating what a company stands for, what it truly thinks of its customers and how it wants to engage them in a relationship is an important first step to formulating counter measures. The session makes this point salient and suggests practical solutions. The broader message is that, instead of using price in a way that ends up turning customers into adversaries, companies can use it as a starting point for a collaboration that is empowering and more engaging.

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It takes 3 to tango

“There is no victory at bargain basement prices.” (Dwight D. Eisenhower)

How can you stop a costly price war or, better still, avoid it altogether? What does it take to become a price leader? These questions are pertinent in many markets, and the answers lie in understanding that the “fight” unfolds on three fronts. Part of the blame certainly rests on the actions of the rival, and your task here is to influence behavior by sending unequivocal, credible–and legal–signals. However, price is not the weapon of choice unless there are enough customers in the market who emphasise it. As such, you must also try to mitigate customer habituation. This is what I call the “commodity mindset.” We can do this by leveraging recent findings in cognitive psychology. Third, you may be too proud (or lack the right insight) to see that your actions trigger a price response from the rival. The tendency to be self-serving is harder to treat because it operates below the level of consciousness, but again there are some corrective measures. This session presents these three perspectives on competition and suggests ways to gain the upper hand.

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One customer, one price

“If everyone is equal before God, then everyone is equal before price.” (John Wanamaker)

Not all customers are created equal. Certain groups find more value in a given good than others do. A smart professional spots this and realises that pushing the same sticker price across the whole market is inefficient: in some cases it leaves a good chunk of money in the pockets of customers rather than the coffers of the business, in other cases it prevents sales that are still profitable at some lower price. This session explores the fascinating challenge of tailoring prices to customer valuations. One lesson is that, paradoxically, proper price discrimination requires some input from customers–as they are the one’s who ultimately decide whether something is cheap or expensive. The traditional “take-it-or-leave-it” does not suffice. Second, while there are many forms of discrimination, they belong to one of three categories: observation, offering or mechanism. The session explains these labels and proposes many examples and possible actions.

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The promotion of things

“You can’t put a price tag on love. But if you could, I’d wait for it to go on sale.” (Jarod Kintz)

Discounting is often likened to a potent, dangerous drug. Many businesses “give it a try” in response to external pressure. The immediate bump in sales gives great pleasure. However, the drop that ensues just as quickly once the deal is retracted is agonising. As time goes by, the concessions get deeper and more frequent to satisfy a customer who is increasingly accustomed to—and, frankly, bored with—receiving offers. One interesting aspect is that, for the most part, the downward spiral is predictable. This begs the questions: Are organisations discounting intelligently? Is there a healthier way to entice customers—a way to motivate the purchase without mortgaging the brand? This session provides answers and a useful checklist. First, we have to understand that “discounting” is not synonymous with “tactics.” Quite the opposite, the strongest sign of a clever campaign is its ability to serve the broader objectives of the business. Second, there are steps that managers can take to ensure that their investments in price cuts are, indeed, investments. The overarching goal is to put an end to the all-too-familiar “can’t live with them, can’t live without them” feeling that hounds discounting.

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Anchors, nudges and charms: the psychology of price

“We want to educate leaders who make a decent profit decently.” (Wallace B. Donham)

Perceptions of value are not only measurable, with some degree of error, but also malleable. Indeed, customer preferences are not as clear, accessible and stable as the classic economics textbooks predicate. Rather, one’s needs and wants can shift across situations and time in ways that researchers in psychology and sociology have been mapping for years, and that business people are only now starting to grasp. A practical means to understand how customers deviate from rationality is to challenge established assumptions at each step of their engagement with a company—at each step of the “customer journey.” This popular lens helps us understand how the nuances of human thought and behaviour (should) influence even the most mechanical of pricing decisions. Importantly, while it is true that organisations can exploit anchors, nudges and charms to sway people into buying something that perhaps is not in their interest, a more satisfying strategy in the long term is to use these concepts to motivate and empower. This ability is critical when the organisation continues to invest in innovation, quality and differentiation but faces customers who appear disinterested in anything but a lower price.

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Housekeeping

A fresh start is always made with dirty laundry.” (Teri Louise Kelly)

What does a well-oiled pricing organisation look like? We explore three questions. First, and perhaps most important, there is the issue of structure. In particular, management needs to decide how far down the company to push responsibility, and how many different job profiles to involve in the process. Clearly, there is no “one-size-fits-all” solution. The second question is one of incentives. What is the best way to compensate those who are responsible for the “health” of the prices we actually achieve in the market? In the session, I present several possible schemes and discuss their strengths and weaknesses. Third, remember that pricing decisions exist at three levels of abstraction. At the highest point, that of the industry, the goal is to gauge the tone of a particular market: significant fluctuations in demand or supply, new regulation, changes in customer sentiment or economic wellbeing, changes in the competitive landscape and so on. At the product level, monetisation is focused on the goal of capturing value from customers, keeping in mind that differences in valuation are expected and should be exploited. Finally, at the transaction level the management team needs to ensure that the pricing protocol does not result in costly leaks: there needs to be a logical argument for each and every deviation from list prices.

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Courses
Case studies

When It’s Time to Expand Beyond the Base

Harvard Business Review

The new CMO of an extreme-race company is on the hook to come up with a way to further monetize the underexploited brand while also fixing customer pain points related to the registration process. She and the COO propose a premium membership that allows die-hard fans to buy early access to race registration, but tests on social media reveal strong animosity toward the program among some racers. Should the company pull the plug or move forward, potentially upsetting the company’s most loyal customers? This fictional case study features expert commentary by Michael Bolingbroke and Huib van Bockel.

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Can one business unit have two revenue models?

Harvard Business Review

Peter Noll, a pharmaceutical company division chief, ponders the varying business models of two units that have just merged. Both have for years employed flexible, inventive strategies to good effect, but Noll is inclined to impose a single model on the combined entity. The two unit heads, however, make compelling arguments for being left to do their business as usual. What choice should Noll make? Expert commentary comes from Bodo Eickhoff, of Roche Diagnostics Deutschland, and Eric Achtmann, a tech investor and corporate adviser to Costa Coffee.

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Revenue Model Innovation at Roche Diagnostics

London Business School

This case study involves the merger of Roche Diagnostics’ Molecular Diagnostics and Applied Science business areas in Germany. The merger, which was initially motivated by a combination of converging needs among commercial diagnostic laboratories and research hospitals, product-portfolio synergies, operational efficiencies, improved customer management, and an increasingly competitive marketplace, brought to light potentials in the way Roche Diagnostics generated revenue from its products and services. While these go-to-market-strategies may have well existed for a number of years, the move to a single sales force calling on customers across the two business areas required the need for a sustainable, integrated pricing approach. One of the key questions occupying Doctor Bodo Eickhoff (Senior Vice President of Sales and Marketing for Applied Science and Molecular Diagnostics in Germany) and his team concerned the appropriate revenue model under the revised organizational structure.

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Do Social Deal Sites Really Work?

Harvard Business Review

The stream of customers who visit Flanagan Theme Parks has started to dwindle. The fictional Australian company must decide, with the help of consultant Allie James, whether to try to attract a whole new crop of customers using DailyDilly, a fast-growing social-coupon venture. Allie and Ruth Davison, Flanagan’s marking director, take a lunchtime tour of the marketing landscape to answer a key question for any company that is considering such an initiative: “Are daily deal seekers the right kind of customers for our business?” Expert commentary comes from Gideon Lask, the founder of BuyaPowa, a UK-based social media business; and Al Bhakta, CEO of Genghis Grill, a Dallas-based restaurant chain. HBR’s online readers also weigh in.

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What’s the Deal with LivingSocial?

Harvard Business School

Tim O’Shaughnessy, the 29-year-old CEO of LivingSocial, is growing a revolutionary worldwide business of “daily deals”-in which retailers offer a heavily-discounted product or service available for purchase for brief (often 24-hour) windows. The case explores the complicated sharing of risks and rewards between LivingSocial, participating retailers, and customers, focusing on the return on investment in both the short- and longer-term for LivingSocial’s retail partners. In addition, given the rapid growth of the daily deals space and the accompanying proliferation of competitors including Groupon and Amazon.com, the case focuses on the need for constant innovation in product offerings to maintain differentiation from copycats.

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Time for a Unified Campaign?

Harvard Business Review

Alegre, a leading hotel group in Central and South America, is suffering under the troubled economy, and its newest property, the flagship Palma Cay in Cozumel, is hurting most. Beatriz Soto, Palma Cay’s manager, has a plan to boost bookings, but she doesn’t have the money to carry it out. Should corporate headquarters grant her additional funds, despite the company’s traditionally decentralized operations? Or should Alegre think about launching its very first portfolio-wide campaign? With commentary by Raul Gonzalez, the CEO of Barcelo Hotels & Resorts for Europe, the Middle East, and Africa; and Kevin Lane Keller, the E.B. Osborn Professor of Marketing at Dartmouth’s Tuck School of Business.

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Barceló Hotels and Resorts (A)

Harvard Business School

Barcelo Hotels and Resorts must decide whether to allow its many hotels to continue to undertake separate promotional campaigns or to run, for the first time, a broad corporate-level promotion. Complicating the decision is the fact that the many hotels in its portfolio vary greatly in their character, clientele, positioning, and locations.

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The Upstart’s Assault

Harvard Business Review

TelZip, a small mobile-network operator, has decided to shake up the European telecommunications market by offering “free forever” broadband service to customers who sign a long-term contract with the company. Meridicom, the dominant industry player, must decide how to respond. Joe Ulan, the incumbent’s new chief marketing officer, gets conflicting advice: The product division heads don’t like the idea of discounting their products or even of working together; the sales director wants to kill the competition with a price war. How can Joe turn this attack into an opportunity? Marco Bertini and Nirmalya Kumar, of London Business School, present this fictional case to explore the question, “What do you do when one of your small competitors pulls out its big gun?” Two experts comment on the case in R1007R and R1007Z. Georg Tacke, of Simon-Kucher & Partners, argues that simply matching a small competitor’s prices is the worst reaction. Anne Gro Gulla, of Telenor Group, suggests creating offshoots of the main firm that might cannibalize the mother brand but avoid the greater evil of allowing it to be eaten alive by outsiders. HBR’s online readers also offer their two cents. You can, too.

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Global Graphics: Pricing in a New Market

London Business School

It is October 2009 and Gary Fry, chief executive officer of Global Graphics, is faced with a tough decision. Global Graphics — a technology expert with 20 years experience in developing and selling printing equipment and software exclusively to original equipment manufacturers — is about to release a revolutionary desktop PDF application targeted directly at office workers. With less than two months before the official launch, however, there is still considerable debate on what the actual price of the product should be. Fry is adamant that the “right” price will help Global Graphics achievethe ambitious sales and customer acquisition objectives set by the management team. In addition, he understands the importance of establishing Global Graphics as a viable alternative to Adobe, the undisputed leader in the end user market for business software. What is the price point that best serves these seemingly conflicting goals?

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The London 2012 Olympic Games

Harvard Business School

It’s 2009 and Paul Williamson, Head of Ticketing, must finalize ticket prices for the 2012 London Olympic Games. Yet, there are many criteria to consider. First, given the importance of ticketing to the Games’ bottom line, he has a strong incentive to maximize revenues. Second, because the entire world will be watching, he wants to maximize attendance – not just at the Opening Ceremony and swimming finals, which are easy sells, but also at events such as handball and table tennis, which are not. Third, he wants to fill seats with the right people – knowledgeable fans who add to the energy and atmosphere of the event. Finally, tickets had to be accessible not only to the world’s elite but also to average Londoners, many of whom lived around the corner from the Olympic Park.

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BT Business: Responding to ‘Free Forever‘

London Business School

This case describes the actions taken by British Telecom’s business unit (BT Business) in response to the radical ‘free broadband forever’ offer introduced by The Carphone Warehouse (TCW) in April 2006. At the time of the campaign, BT Business held a dominant share of the lucrative (and fast growing) broadband market in the UK. TCW’s bold move clearly threatened that position. More important, BT Business was concerned that larger competitors (Vodafone, BSkyB, O2, etc) would follow suit, therefore initiating a price war that in all likelihood would erase profitability in the industry. The main learning points from this case involve pricing and competitive strategy. In particular, BT Business’ problem touches on a number of important questions, including: (1) maintaining price leadership; (2) managing price competition and the threat of customisation; and (3) designing product bundles that capture customer value and act to discourage competition. In addition, this case provides a good example of the challenges often faced by large firms (especially former monopolies) attempting to improve customer orientation. Prior to ‘free broadband forever’, BT had tried unsuccessfully on a number of occasions to shift its organisational structure away from product lines (fixed telephony, mobile voice and data, broadband, etc). Interestingly, they succeeded only in the face of a significant and immediate competitive that ‘helped’ generate the necessary motivation and momentum.

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Viagogo (A) (B)

London Business School

This is two-case series discusses some of the key marketing decisions faced by Eric Baker and the rest of his management team immediately before and after the launch of viagogo in the United Kingdom and other European markets. viagogo is an on-line marketplace where sellers and buyers can exchange live event tickets (sports, entertainment, etc) in a legal and secure manner. The underlying business model replicated the one introduced by StubHub in the United States, a company founded by Eric Baker and a fellow Stanford MBA a few years earlier. The first part of the case is set in June 2006, just two months before the official launch of the website. At that time, the case protagonists faced important decisions with respect to the company’s revenue model. In particular, they had to determine what level of commission to charge, how to split this commission across sellers and buyers, and what pricing mechanism(s) to use (ie, fixed price, auction, and / or declining price). Eric was also considering a potential partnership with a major football club in the UK. A deal was expected to generate considerable exposure for viagogo but, on the other hand, required significant investment and likely constrained the company’s promotional options. The second part of the case takes place in early 2008. Following a brief review of viagogo’s initial performance, a series of new challenges are introduced: (1) how to deal with increasing competition; (2) how to improve the general perception of secondary ticketing in the marketplace; and (3) how to scale the business up from start-up to middle-sized enterprise. Overall, the case highlights common challenges when launching a new business venture. It also questions the common belief that a successful business model in one country can be easily replicated in another. Finally, the case allows for a discussion of how business models tend to change as industries ‘mature’ and new opportunities arise.

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