Pricing as a Strategic Capability - MIT Sloan Management ...

A pricing capability isn't just a “nice to have,” something to think about “when we have the resources” in some far-off time that never quite ... Topics Marketing MarketingStrategy subscribe-icon Subscribe Buy Share Twitter Facebook Linkedin Email WhattoReadNext TheTopMITSMRArticlesof2021 ExecutiveGuide:ConnectingWithCustomersintheAgeofAcceleration Winter2022Issue Podcast:Me,Myself,andAI Alreadyamember? Signin Notamember? Signuptoday Member Free 5freearticlespermonth,$6.95/articlethereafter,freenewsletter. Subscribe $75/Year Unlimiteddigital content, quarterlymagazine,freenewsletter,entirearchive. Signmeup Fortoolong,mostpeoplewhoruncompanieshavemadeavarietyofunwarrantedbutdetrimentalassumptionsaboutpricing.Changingprices,forexample,hasbeenlookeduponasaneasy,quickandreversibleprocess,andnewtechnologieshaveonlyreinforcedthiswayofthinking.Similarly,extractingvaluefromaproductbypricingitcorrectlyhasbeenseenasrelativelyuncomplicated;thehardpartiscreatingthevaluableproductinthefirstplace.Butthesedismissiveattitudestowardpricingmissthemark.Asanyexecutiveofacompanywiththousandsofproductsandhundredsofcustomerswilltellyou,pricechangesarenoteasy:Starttinkeringinanadhocwayandyouendupwithirrationalpricesandangrycustomers.Andasanymanagerofaninnovativeorganizationwillexplain,it’sawfullydifficulttosetapriceforaradicallynewproductinanuntestedmarket.Setthewrongpriceinthatcaseandyousquanderanopportunitythatacompetitorissuretoseize. Theproblemwithtypicalassumptionsisthattheyreducepricingdecisionstomeretactics,andtacticsaren’tenough.Ifpricingisn’tastrategiccapability—acontributortoacompany’sabilitytodeviseandimplementitsstrategy—it’sprobablyastrategicliability.Pricingiscomplex,andit’sonlygrowingmoresoasnewtoolsandtechniquesbecomeavailable.Inordertobeabletosettherightpriceattherighttime,anytime,companiesneedtoinvestinresources,infrastructureandprocesses.Theseinvestmentsallowacompanytocreateapricingstrategybybuildingthecapabilitiesitneedstoroutinelysetpricesforallitsgoodsandservicesthatfitwithitspositioning,withitscustomers,withitssuppliersandwithevolvingmarketconditions. Formanycompanies,pricingcapabilitiesareincreasinglycriticaltotheirabilitytoimplementtheirstrategies.WeinterviewedoneCEOinthecomputerbusiness,infact,whocalledpricingtheessentialcapabilityforsurvivalinthatindustryandhasmadeinvestmentsinhisorganizationthatshowthathiscommentisn’tjustanidleremark. Inthecourseofworkingwithdozensofcompaniesinthepastcoupleofyears,wehavespokenwithseveralotherexecutiveswhohaveasimilaroutlook.1Theirfocusisondevelopingorganization-widecapabilitiesbyinvestinginthreeareas:humancapital,systemscapitalandsocialcapital. ReadtheFullArticle Create Account BuyasaPDF Alreadyasubscriber?Signin Topics Marketing MarketingStrategy AbouttheAuthors ShantanuDuttaisanassociateprofessorattheUniversityofSouthernCalifornia’sMarshallSchoolofBusinessinLosAngeles.MarkBergenisanassociateprofessorattheUniversityofMinnesota’sCarlsonSchoolofManagementinMinneapolis.DanielLevyisanassociateprofessoratBar-IlanUniversityinRamatGan,Israel.MarkRitsonisanassistantprofessoratLondonBusinessSchool.MarkZbarackiisanassistantprofessorattheUniversityofPennsylvania’sWhartonSchoolinPhiladelphia.Contactthematsdutta@marshall.usc.edu,[email protected],[email protected],[email protected]@wharton.upenn.edu. References 1.Thisarticleistheoutgrowthoftheauthors’yearsoffieldstudiesonpricinginconsumer-goodsandindustrialmarkets.OtherpapersrelatedtothissubjectincludeD.Levy,M.Bergen,S.DuttaandR.Venable,“TheMagnitudeofMenuCosts:DirectEvidenceFromLargeU.S.SupermarketChains,”QuarterlyJournalofEconomics112(August1997):791–825;D.Levy,S.Dutta,M.BergenandR.Venable,“PriceAdjustmentatMultiproductRetailers,”ManagerialandDecisionEconomics19(February1998):81–120;S.Dutta,M.Bergen,D.LevyandR.Venable,“PostedPrices,MenuCostsandMultiproductRetailers,”JournalofMoney,CreditandBanking31(November1999):683–703;S.Dutta,M.ZbarackiandM.Bergen,“PricingProcessasaCapability:ACaseStudy,”ReportNo.01–117(Cambridge,Massachusetts:MarketingScienceInstitute,2000);M.Zbaracki,M.Ritson,D.Levy,S.DuttaandM.Bergen,“ManagerialandCustomerDimensionsofCostofPriceAdjustment:DirectEvidenceFromIndustrialMarkets,”workingpaper2000–14,WhartonSchool,Philadelphia,2000. 2.Forseminalviewsontherelationshipbetweencapabilitiesandcompetitiveadvantage,seeB.Wernerfelt,“AResource-BasedViewoftheFirm,”StrategicManagementJournal5(April–June1984):171–180,andM.A.Peteraf,“TheCornerstonesofCompetitiveAdvantage:AResource-BasedView,”StrategicManagementJournal14(March1993):179–191. 3.ExamplesofrecentworkonhumancapitalandpricingincludeK.Ailawadi,D.LehmannandS.Neslin,“MarketResponsetoaMajorPolicyChangeintheMarketingMix:LearningFromProcter&Gamble’sValuePricingStrategy,”JournalofMarketing65(January2001):44–61;D.Bell,T.HoandC.Tang,“DeterminingWhereToShop:FixedandVariableCostsofShopping,”JournalofMarketingResearch35(August1998):352–369;R.BlattbergandS.Neslin,“SalesPromotion:Concepts,MethodsandStrategies”(EnglewoodCliffs;NewJersey:PrenticeHall,1990);R.DolanandH.Simon,“PowerPricing:HowManagingPriceTransformstheBottomLine”(NewYork:FreePress,1996);S.Hoch,B.Do-Kim,A.MontgomeryandP.Rossi,“DeterminantsofStoreLevelPrice,”JournalofMarketingResearch32(February1995):17–29;V.Kadiyali,N.VilcassimandP.Chintagunta,“EmpiricalAnalysisofCompetitiveProductLinePricingDecisions:Lead,FolloworMoveTogether?”JournalofBusiness69(1999):459–487;R.Lal,“ManufacturerTradeDealsandRetailerPricePromotions,”JournalofMarketingResearch27(1990):428–444;T.NagleandR.Holden,“TheStrategyandTacticsofPricing”(EnglewoodCliffs,NewJersey:PrenticeHall,1997);K.Monroe,“Pricing:MakingProfitableDecisions”(McGraw-Hill,1990). 4.FormoreonhowtothinkaboutsystemscapitalanditsroleinbusinessstrategyseeG.HeimandK.Sinha,“AProduct-ProcessMatrixforElectronicB2COperations:ImplicationsfortheDeliveryofCustomerValue,”JournalofServiceResearch3(2001);G.HeimandK.Sinha,“ServiceProcessConfigurationsinElectronicRetailing:ATaxonomicAnalysisofElectronicFoodRetailers,”ProductionandOperationsManagement11(2002);R.BucklinandS.Gupta,“CommercialUseofUPCScannerData:IndustryandAcademicPerspective,”MarketingScience18(1999):247–273;IndianaUniversity-KPMG,“RetailTechnologyintheNextCentury:What’s‘In-Store’forConsumers,”IndianaUniversityKelleySchoolofBusiness,CenterforEducationandResearchinRetailing,Bloomington,1999. 5.FormoreonsocialcapitalseeR.Burt,“TheNetworkStructureofSocialCapital”inResearchinOrganizationalBehavior,ed.R.SuttonandB.Staw(Greenwich,Connecticut:JAIPress,2000);R.Burt,“StructuralHoles”(Cambridge,Massachusetts:HarvardUniversityPress,1992);J.Coleman,“FoundationsofSocialTheory”(Cambridge,Massachusetts:HarvardUniversityPress,1990);A.Portes,“SocialCapital:ItsOriginsandApplicationsinModernSociology,”AnnualReviewofSociology24(1998):1–24. 6.M.KristoffersonandR.Lal,“ValuePricingatProcter&Gamble,”HarvardBusinessSchoolcaseno.M-284AandM-284B(Boston:HarvardBusinessSchoolPublishingCompany,1996). Tags: CompetitiveStrategy,Pricing,StrategicPlanning Reprint#: 4336 MoreLikeThis AddacommentCancelreplyYoumustsignintopostacomment.Firsttimehere?Signupforafreeaccount:Commentonarticlesandgetaccesstomanymorearticles. Comment(1) Noah June14,2010 Itisobviousthateachproductorservicehavealowerlimitunderwhichyoumaynotgo.what'sveryimportantinthisequationisthereturningspeedofthecash.asmallerincomereturnedfastmaybepreferabletoabiggeronethattakesalongertimetobecomeavailable.