The Price Advantage, 2nd Edition
A comprehensive look at creating pricing strategies that work in both good economic times and bad
Written by three preeminent pricing experts at McKinsey & Company, the Second Edition of The Price Advantage is a practical pricing guide for the executive or pricing practitioner who wants to identify, capture, and sustain substantial pricing gains in their business.
Pricing is by far the most powerful profit lever that managers can influence. Yet few companies approach pricing in a way that fully capitalizes on its value. This Second Edition, a major revision and extension of the first book, shows you what it takes to achieve the price advantage in today's competitive and complex business environments. Based on in-depth, first-hand experience with thousands of companies, this book provides managers with a pragmatic guide through the maze of pricing issues. It reinforces why pricing excellence is more critical than ever today and then explains state-of-the-art approaches to analyzing and improving your own pricing strategy and execution.
- Explores the fundamental role of pricing infrastructure in achieving the price advantage
- Includes new topics such as software and information products pricing, lifecycle pricing, custom-configured products pricing, pricing of high-count product lines, pricing in distributed sales environments, "razor/razor blades" pricing, and tiered products and services pricing
- Revisits the full range of classic McKinsey pricing tools, including the pocket price waterfall and value maps
Engaging and informative, the Second Edition of The Price Advantage will put this essential discipline in perspective.
PART ONE: Pricing Fundamentals.
CHAPTER 1: Introduction.
The Power of 1 Percent.
The Price/Volume Tradeoff.
Market Forces Add Pressure.
The Nobility of Pricing Excellence.
Why the Price Advantage Is So Rare.
CHAPTER 2: Components of Pricing Excellence.
An Integrated Approach.
An Interdependent Hierarchy.
Applying to Your Company—Pinpointing the Opportunity.
PART TWO: Exploring the Levels.
CHAPTER 3: Transactions.
The Pocket Price Waterfall.
The Pocket Price Band.
The Soundco Radio Company Case.
Pocket Margin Waterfall and Band.
Alen Glass Company Case.
CHAPTER 4: Customer Value.
Creating a Value Map.
Making Moves on the Value Map.
Putting Customers on the Value Map.
CHAPTER 5: Market Strategy.
Profiting from Better Price Predictions.
Planning for an Expected Price Change.
Maintaining Optimal Production and Capacity.
Improving Pricing Conduct.
Influencing the Elements of Pricing Conduct.
A Word on Followership.
CHAPTER 6: Pricing Infrastructure.
Processes—What Are the Most Critical Types of Pricing Decisions for Your Business?
Organization—Who Is Running the Pricing Profit Center?
Performance Management—How Should We Recognize and Reward Pricing Performance?
Systems and Tools—No Magic Bullet Exists.
PART THREE: Unique Events.
CHAPTER 7: Postmerger Pricing.
A Temporary Window of Opportunity.
Tremendous Opportunities at Each Pricing Level.
Avoiding Common Postmerger Traps.
CHAPTER 8: Price Wars.
Why Price Wars Should Be Avoided.
What Really Causes Price Wars.
Staying Out of Price Wars.
Getting Out of Price Wars.
When a Price War Might Make Sense.
PART FOUR: Expanding the Boundaries.
CHAPTER 9: Legal Degrees of Freedom.
Pricing Decisions That Raise Red Flags.
Minimizing Risks While Meeting Pricing Objectives.
Calling in the Attorneys.
CHAPTER 10: Lifecycle Pricing.
What Makes Lifecycle Pricing Tough.
The Three Phases of Product Lifecycle Pricing.
Sustaining Returns Across the Lifecycle.
CHAPTER 11: Pricing Architecture.
Managing Price Perception.
Influencing Customer Behavior.
Price Architecture Based on Supplier Role.
PART FIVE: Advanced Topics.
CHAPTER 12: Complexity Management.
Section One: Custom-Configured Products.
Section Two: High-Count Product Lines.
Section Three: Distributed Sales Models.
CHAPTER 13: Tailored Value.
Section One: Price Segmentation.
Section Two: Tiered Products and Services.
Section Three: New Products.
Section Four: "Razor/Razor Blades" Offerings.
Section Five: Solutions.
CHAPTER 14: Software and Information Products.
Unique Characteristics That Impact Pricing.
Exploring the Elements of Pricing.
PART SIX: Making Change Happen.
CHAPTER 15: Pricing Transformation.
Designing a Clear Change Program.
Accelerating and Embedding Change.
CHAPTER 16: The Monnarch Battery Case.
The Monnarch Battery Company.
Capturing the Monnarch Pricing Opportunity.
Hard-Wiring the Change.
APPENDIX 1: Pocket Price and Pocket Margin Waterfalls.
APPENDIX 2: Antitrust Issues.
U.S. Pricing Law.
EU Pricing Law.
Antitrust Information Sources.
APPENDIX 3: List of Acronyms and Abbreviations.
APPENDIX 4: About the Web-Based Tool: Periscope.
About the Authors.
MICHAEL V. MARN is a partner in the Cleveland office of McKinsey & Company. He joined McKinsey in 1977 and has developed some of the most widely used analytic approaches for identifying and capturing opportunities in pricing. He has written articles on pricing that have appeared in publications including the Wall Street Journal, the New York Times, and the Harvard Business Review.
CRAIG C. ZAWADA is a partner in the Calgary office of McKinsey & Company. Since joining McKinsey in 1997, he has worked with companies across multiple industries, helping them to identify and capture improvements in pricing. He is widely published in the area of pricing strategy, with articles appearing in the Harvard Business Review, Mergers & Acquisitions, and the McKinsey Quarterly.
“Pricing right is the fastest and most effective way for most businesses to grow profits,” explain Walter L. Baker, Michael V. Marn, and Craig C. Zawada, partners at McKinsey & Company, who have extensive experience in pricing strategies. It is also a key source of long-term competitive advantage. However, doing it correctly has proven illusive – and even high performing companies often fail to capitalize on the greater profits they could achieve by managing prices more skillfully. In the new, completely updated edition of THE PRICE ADVANTAGE, Baker, Marn, and Zawada provide a logical and structured approach for identifying where the most precious sources of untapped pricing opportunity reside in a business, along with practical, case-illustrated guidance on how to capture and sustain that opportunity.
Expert Insight Into How Companies Can Sharpen Their Focus On Pricing
With the continued growth of discount retailers, ever-increasing consumer access to price information, and Generation Xers exhibiting more price sensitivity than their predecessors, today’s economy faces unprecedented downward pressure on prices – making a rigorous focus on pricing more important now than ever before. The key to achieving the “price advantage” in this environment, the authors say, is taking an integrative approach that incorporates all three levels of price management they have identified – Market Strategy, Customer Value, and Transactions. In THE PRICE ADVANTAGE, they lay out these levels, and explain how to develop the high-performing pricing infrastructure necessary for fully realizing pricing opportunities.
Market Strategy -Understanding Shifts in Industry-Wide Prices
Excellence at the Market Strategy level demands that managers constantly watch for changes in costs, supply, and demand. “You must know market price levels, predict them better, and, if possible, independently influence them in a positive direction,” say the authors. Understanding how market structure, microeconomics, and conduct affect overall market price levels is essential.
Customer Value -Obsession with Customer Perceptions is Key
The primary issue at the Customer Value level is price positioning relative to competitors. “Companies that shine at this level obsess about customers’ perceptions of both their products and their price,” write the authors.
Transactions -Managing Prices Customer-By-Customer, Deal-By Deal
The Transactions level of price management examines the exact price to assign to each transaction – taking into account discounts, allowances, payment terms, volume bonuses, and other inducements. Too often, accounting systems fail to consider many off-invoice discounts, frequently leading companies to perceive unprofitable customers to be profitable, and vice versa. Aided by tools like McKinsey’s “Pocket Price Waterfall,” which details the on-and off-invoice discounts that impact the actual revenues ultimately left in a company’s “pocket,” the authors show how businesses can better manage transaction economics.
Pricing Infrastructure -How to Capture Pricing Opportunities
Ultimately, understanding the three levels of pricing is crucial – but insufficient. In THE PRICE ADVANTAGE, the authors explain what it takes for companies to develop the pricing infrastructure required to deliver and sustain pricing excellence. This infrastructure includes the processes, organization, performance management, and tools that support the pricing function. The authors detail where the pricing function should sit within the company, how it should be staffed, how to recognize and reward pricing performance, and how to collect and use pricing data.
From Mergers to Price Wars, From Lifecycles to Legal Issues
Perhaps the most up-to-date book explaining how to make pricing a cornerstone for ongoing success, THE PRICE ADVANTAGE also addresses such crucial issues as:
•How to manage prices over a product’s lifetime in order to sustain returns;
•How to handle the complexity of pricing custom-configured products, and tailor value to specific customers and markets – including segmenting price, pricing product line tiers, and dealing with “razor/razor blades” offerings;
•How to tackle the unique challenges of pricing software and information based products;
•How to capitalize on the brief post-merger opportunity to review and change pricing without
the usual internal and external resistance;
•Why price wars are almost universally destructive, what causes them, and how to avoid them;
•What legal issues commonly arise when implementing pricing programs, including how pricing rules and the global legal landscape have evolved in the past five years.
Comprehensive and cutting edge, THE PRICE ADVANTAGE shares the unsurpassed knowledge the authors and their team have developed, showing how any company can take the transformational steps necessary to harness the power of pricing, and gives today’s CEOs, marketers, and general managers a competitive advantage in any economy.