New Book Review: "Pricing Done Right"

New book review for Pricing Done Right: The Pricing Framework Proven Successful by the World's Most Profitable Companies, by Tim J. Smith, Wiley (Bloomberg Press), 2016, reposted here:

As the author (founder and CEO of Wiglaf Pricing) mentions at the outset, every offering of a given firm and every transaction a given firm has with its customers has a price. Somehow, all of these offerings and transactions have prices. Either these prices are the result of lengthy deliberations consisting of market research, competitive dynamics, highly researched algorithms, intense customer negotiations, and torrid management discussions, or just numbers that popped out of someone's head. In one way or another, pricing decisions get made. But how should prices be determined? What should inform pricing decisions? And who should be engaged in those pricing decisions? While the managerial challenges of of pricing are well known, what isn't so well known is how these challenges should be addressed. The author argues that executives need a framework that will help them shape their organizations, routines, staff, information management, and analytical tools that will guide the organization toward making better pricing decisions. This book presents the Value-Based Pricing Framework as a template for executives to use in managing pricing decisions throughout the organization. This framework codifies best practices for managing prices in profit-seeking competitive businesses, and was developed through direct interviews with practicing executives, reviews of the academic literature, and implementations of this framework in numerous firms.

The five key decision areas identified in the Value-Based Pricing Framework are (1) business strategy, (2) pricing strategy, (3) market pricing, (4) price variance policy, and (5) price execution. An organizational function called pricing analysis supports these key decision areas by informing, guiding, and stewarding pricing decisions across the organization. Specific repeatable processes to inform pricing decision areas or provide informational feedback loops to improve pricing decisions are built into the framework. Business strategy consists of the choices a firm makes to differentiate itself in a manner which serves customer needs more profitably than competitors. Pricing strategy refers to the manner in which a firm will manage prices through its price positioning plan, price segmentation plan, competitive price reaction strategy, and pricing capability strategy. Market pricing is the setting of starting prices for all offerings and transactions of a firm. Price variance policy determines the rules for granting discounts and promotions. And price execution applies the appropriate prices according to the rules developed by strategic and managerial decisions, and subsequently collects these prices from customers in a timely manner with minimal error. The author walks the reader through each of these areas in the remainder of his presentation, and additionally provides appendices on the economic origins of competitive advantage, as well as one-on-one interviews with Jesse Finch Gnehm of GE Oil & Gas and Robert Smith of Eastman Chemical Company on how their respective firms get pricing done.

The author provides a very succinct, well edited presentation that could have easily stretched to twice the length and gotten sidetracked on lengthy tangents like other business texts. While the diagrams are extremely well done and immediately reminded me of the line drawings throughout a book in another subject area called "Waltzing with Bears", I would be inclined to recommend being a bit more liberal with the visual presentation (the count is just over a dozen diagrams). While I mentioned earlier that the author walks readers through the Value-Based Pricing Framework, I think it is worth mentioning that the presentation really does start from square one. Oftentimes, material presented in this manner elsewhere is labeled "introductory", but readers can get sidetracked into thinking that this label is intended to mean that content remains at an introductory level, or subsequent texts need to be reviewed to access more advanced material. But this label is really typically intended to mean that a given author seeks to make sure readers have an initial foundation, rather than running the risk of drowning the unaware in a sea of information. In much the same manner, the small amount of math that is presented is limited to chapter 2 ("Value-Based Pricing"), chapter 4 ("Pricing Strategy"), and appendix A ("Economic Origins of Competitive Advantage"), and consists of just a few variables such as product price, variable costs, fixed costs, quantity sold, and maximum customer benefits.

As a consultant, I especially found chapter 7 ("Pricing Continuous Improvement and Analytics"), chapter 8 ("Organizational Design of the Pricing Specialist Function"), appendix B ("Getting Pricing Done with Jesse Finch Gnehm of GE Oil & Gas"), and appendix C ("Getting Pricing Done with Robert Smith of Eastman Chemical Company") of interest. For example, in Appendix B the interviewee (a global pricing leader) mentions that he is not using any of "the traditional, mainstream, pricing software vendors right now", but is instead "developing some tools for pricing analytics within enterprise-level business intelligence tools". Additionally, this interviewee says that "visualization tools tend to be the place where we are seeing the most value right now", and that "statistics are great when you've got enough data to push through it…but you run into a lot of N problems…if your N is a small order of magnitude, stats aren't going to do a lot for you…so the visualization is a big and important place for us…it makes the analysis tangible for people…they can consume it in a way that makes sense to them". In chapter 8, in laying out some key areas where software is supporting pricing efforts, the author rightly points out that such software should be used to supplement efforts of the pricing talent, not instead of the pricing talent, and warns that firms too often purchase pricing software without the talent to utilize it and understand its output, leading to poor results. The author recommends that firms develop the required talent first, and then identify the software needed to accelerate the output or reduce the costs of generating the output of their pricing talent.