Thomas Nagle - The Strategy and Tactics of Pricing (5th Edition)

Fifth Edition

A GUIDE TO GROWING MORE PROFITABLY

Thomas T. Nagle

Monitor Group

John E. Hogan

Monitor Group

Joseph Zale

Monitor Group

Editorial Director: Sally Yagan
Editor in Chief: Eric Svendsen
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Credits and acknowledgments borrowed from other sources and reproduced, with permission, in this textbook appear on appropriate pages within text.

Copyright 2011, 2006, 2002, 1995, 1987 Pearson Education, Inc., publishing as Prentice Hall, One Lake Street, Upper Saddle River, New Jersey 07458. All rights reserved. Manufactured in the United States of America. This publication is protected by Copyright, and permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise. To obtain permission(s) to use material from this work, please submit a written request to Pearson Education, Inc., Permissions Department, One Lake Street, Upper Saddle River, New Jersey 07458.

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Library of Congress Cataloging-in-Publication Data
Nagle, Thomas T.
The strategy and tactics of pricing / Thomas T. Nagle, John E. Hogan,
Joseph Zale.5th ed.
p. cm.
ISBN-13: 978-0-13-610681-4
ISBN-10: 0-13-610681-1
1. Pricing. 2. MarketingDecision making. I. Hogan, John E., Ph.D.
II. Zale, Joseph. III. Title.
HF5416.5.N34 2010
658.816dc22

2009047553

10 9 8 7 6 5 4 3 2 1

ISBN 13: 978-0-13-610681-4
ISBN 10: 0-13-610681-1

One purpose of this book is to change the common misperception that pricing is simply about calculating the right price for a product or transaction. In the years since the first edition was published in 1987, we have learned that pricing, if it is to be effective, cannot be so reactive and simplistic. Profitable pricing requires looking beneath the demand curve to understand and manage the monetary and psychological value that is a primary determinant of the purchase decision. Mastering the value proposition enables a firm (1) to segment prices to reflect differences in value and cost, (2) to communicate the value of offers to customers unfamiliar with the market, and (3) to create pricing policies for managing pricing issues fairly and consistently. In short, this book shows managers how to move from tactically optimizing prices in markets where they seemingly exercise little control to managing their markets strategically. When that happens, pricing becomes an integral part of a profitable growth strategy, rather than a blunt instrument to drive sales and market share.

The principles of strategic pricing, which were foreign to most business practitioners more than two decades ago, are now more widely accepted in principle. But most companies still struggle with the application. The changes in this fifth edition of our book reflect our attempts to address this need:

A completely new chapter on Pricing Strategy Implementation identifies the challenges involved in embedding strategic pricing principles within an organization and describes how managers can lead a structured change process to build a commercial organization more consistently focused on value creation.

The revised chapter on Pricing Policy provides a theoretically grounded framework to describe specific policies for managing price changes for a variety of situations, including raw material cost increases, demand recessions, and new product launches.

The chapter on Value Creation for the first time addresses explicitly how to deal with value differently when it is driven by subjective psychological drivers (such as doing the right thing for the environment) rather than by tangible monetary drivers (for example, saving money on fuel).

The chapter on Value and Price Communication has been substantially revised to describe how to communicate value in a wide variety of product and customer contexts. It demonstrates how to target communications to affect specific behaviors throughout the customers buying process.

The chapter on Price Setting has been expanded to provide a robust process for setting prices that can be widely applied both to consumer and business markets.

Throughout the book, we have updated examples with more topical illustrations of current pricing challenges (such as iPhone pricing, new models for pricing music, and services pricing).

To complement this edition, we also introduce software from LeveragePoint Innovations Inc. for creating and communicating economic value estimations systematically. The trial software can be accessed at http://demo.leveragepoint.com/strategyandtacticsofpricing . While versions of the software that enable sharing require corporate contracts for access, versions for individual student and practitioner use are available without charge for three months. This software puts theory into practice and allows the reader to explore real-world scenarios.

Over the years, this book has benefited from the influence and efforts of individuals too numerous to mention here. Nevertheless, we would be remiss in not acknowledging a few whose contributions have been either very large or new to this edition. Professor Gerald Smiths contributions to three prior editions of this book and the instructors manuals are still reflected in the current ones. Michael Goldberg of Monitor Group was a diligent researcher, copy editor, and administrator without whose incessant prodding this edition would still be in process. Georg Muller and Tony Seisfeld of Monitor Group and Paul Boni of Grail Research drew from their experience in pricing research to update our chapter on Measurement of Price Sensitivity. Eugene Zelek of Freeborn and Peters once again shared his knowledge of pricing and the law to keep that chapter current. We would also like to thank our colleagues at Monitor Group who, since the previous edition, have taught us the concept of the buying process and the importance of aligning interventions at the most appropriate point in it. Our administrative assistant, Vivi Camin, diligently sought reprint permissions and recreated versions of diagrams and tables. Last, but certainly not least, we want to thank our colleagues at Monitor Group for their indulgence while we closeted ourselves to complete this edition, and to thank our families, which we neglected and to whom we now hope to make amends.