Pricing Games
Information Sources
Market Characteristics
Market Forces
Organization
Pricing Approaches
What game should you be in?
What types of data inform your price?
What pricing approaches do you use?
What type of market are you in?
What market forces impact your business?
How should you distribute roles and responsibilities?
EXPLORE THE INTERACTIVE
Overview
Value
Uniform
Cost
Power
Custom
Choice
Dynamic
aligning prices of unique solutions with customer value optimizing the same price for all customers setting prices to drive efficiency in commoditized markets negotiating high-stakes deals in concentrated markets customizing offers and discounts to beat competitors shaping customer behavior with segmented offers managing floating prices based on real-time dynamics
Pricing Games: Overview
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Pricing Games: Value
Value Game: aligning prices of unique solutions with customer value
A seller's price is determined by how much value they want to share with customers.
Price
Pricing Games: Uniform
Uniform Game: optimizing the same price for all customers
Pricing is based on an elasticity measurement within a tight band that is determined by narrowly differentiated competitors.
Elasticity based Price
Narrow band
Pricing Games: Cost
Cost Game: setting prices to drive efficiency incommoditized markets
Prices are mostly determined by costs and markups, with pricing mechanisms incentivizing mutual efficiencies.
Markup
Pricing Games: Power
Power Game: negotiating high-stakes deals in concentrated markets
Prices are determined by a cascading balance of power between competing sellers, as well as buyers and sellers.
Influence
Pricing Games: Custom
Custom Game: customizing offers and discounts to beat competitors
Prices are determined by discretionary discounts that are set through individual negotiations and are influenced by customer buying power.
Highest price
Customer Deal
Lowest price
Pricing Games: Choice
Choice Game: shaping customer behavior with segmented offers
Prices of products in a well structured lineup are determined in relation to each other to optimize profit across all.
Pricing Games: Dynamic
Dynamic Game: managing floating prices based on real-time dynamics
Prices are determined based on real time balance between supply and demand.
Elasticity
Game Theory
Competition
Differentiation
Supply Demand
Information Sources: Overview
All pricing decisions rely on three fundamental types of data:
Cost and financial information, such as margin Demand curves based on subjective value determined by customers Supply curves based on competitor prices for similar offers
These three sources combine into four main economic frameworks:
Price elasticity of demand Game theory and the optimum response to competitor behavior Price differentiation between products and against competition, informed by behavioral science Supply and demand equilibrium
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Information Sources: Value
Customer value is inherently subjective
Value is determined by customers and therefore varies according to their needs, personality, social relationships, and history. Value also varies over time depending on the context of purchase or usage of a product or service.
Jewelry is an excellent example of a product that assumes very different values depending on the emotional connection a person has with it.
Information Sources: Elasticity
Elasticity requires both demand and cost data in order to produce a price recommendation
Estimating elasticity is a complex statistical task that requires assessing many factors like seasonal variations, volume displacements over time, a substantial range of price variations, and stable average competitor prices. Elasticity is also most useful if offers are well defined and narrowly differentiated between competitors.
Consumer services—such as mortgages—can use elasticity because substantial data samples are available for a given customer profile as well as clear, stable product definitions.
Information Sources: Cost
Costs are an objective data source that need careful definitions
Costs are the easiest source of information to access when it comes to pricing decisions, but they can still be challenging:
Pricing in construction businesses depends on very precise estimates of future costs that vary tremendously by project.
Costs require rigorous management to ensure accuracy Costs can be variable or fixed, depending on the pricing metric used For pricing purposes, future costs are what matter and are affected by inflation and risks
Information Sources: Game Theory
Game theory equilibria depend on cost and competition
Game theory provides a framework to make high-stakes pricing decisions when fixed costs are high, and the value propositions of competitors is similar because they must meet technical standards imposed by a few large customers. Large fixed costs constitute barriers to entry that limit the number of competitors. In this context, small differences in variable costs or product performance can have a dramatic impact on negotiations.
Computer chips are a great example of this because of the compatibility standards imposed on products by a small number of customers and the high fixed costs in product development and capacity.
Information Sources: Competition
Competitor prices can be elusive
Market prices are often more a myth than a reality:
In B2B capital equipment markets like heavy duty trucks, customers have specific requirements and sellers use discounts to beat their competitors' offers.
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Gathering large volumes of publicly available prices can quickly become overwhelming, as prices vary by channel, geographic location, time, and more
When negotiated directly with customers, prices are impossible to know and hard to estimate
Product and service customization make it even harder to assess and compare prices
Information Sources: Differentiation
Price differentiation is at the intersection of value and competition
Price differentiation requires a keen understanding of how value varies by customer segment in order to define offers across a range of prices points. It also requires a constant monitoring of market alternatives to ensure these offers stay competitive.
Coffee shops are a great example of the power of differentiation because they offer choices to customers at varying price points, while still differentiating themselves from their competition.
Information Sources: Supply Demand
Dynamic pricing adjusts prices and offers in real time
Dynamic pricing combines all three sources of information in real time: demand curves capture subjective value determined by customers, and supply curves aggregate internal costs with competitor prices. The interplay between these sources of data can create wide fluctuations in actual prices, which need to be communicated to customers who are seeking price stability.
Airlines have applied dynamic pricing techniques, such as yield management, to maximize revenues per flight and simultaneously make air travel more accessible. Hotels and other industries with fixed capacity and fluctuating demand in the short term have also adopted dynamic pricing.
Pricing Approaches: Overview
quantifying the value ladder optimizing price points adding a markup on top of costs anticipating competitor moves in negotiations customizing offers and discounts to beat competitors differentiating offers to guide customer choices dynamic balancing of supply and demand in real-time
Customizing to Win
Cost-based Pricing
Value-based Pricing
Pricing Approaches: Value-based Pricing
Quantifying the value ladder
Sellers need to quantify the value ladder to decide how much value they should capture based on their long term goals.
Customer value
Chosen price
Competitive reference value
Pricing Approaches: Elasticity
Optimizing price points
Price elasticity and cost data can be used together to estimate how profits vary with price, and to derive optimum price points.
Optimal Price (P*)
Narrow range of optimum prices
Pricing Approaches: Cost-based Pricing
Adding a markup on top of costs
All variable costs and a markup are added together to define prices. Lower prices are offered to customers who lower your costs, to drive efficiencies.
Pricing Approaches: Game Theory
Anticipating competitor moves in negotiations
Nash equilibrium is determined by the payoffs matrix for price negotiations, which is similar to the prisoner's dilemma.
Pricing Approaches: Customizing to Win
Customizing offers and discounts to win deals
Individual negotiations provide a sense of how offers and discounts need to be adjusted to win against competition. It's critical to maintain consistent customization rationales.
Pricing Approaches: Differentiation
Differentiating offers to guide customer choices
Having a good-better-best product lineup is a proven approach to offer choices. There are a variety of other offer structures to guide customers as well.
Pricing Approaches: Supply Demand
Dynamic balancing of supply and demand in real-time
Many different statistical techniques and algorithms can be used to determine prices in real time. All of them illustrate the irony of instant equilibria turning into fluctuating prices.
Market Characteristics: Overview
Offer
Level of differentiation
From commoditized
To differentiated
Customer Base
Level of concentration
From concentrated
To fragmented
Competitor Base
Market Characteristics: Value
Typical Value Game market characteristics
Offers
Unique differentiated offer with a far superior value proposition
buyers
Fragmented customer base
sellers
Clear leader
Market Characteristics: Uniform
Typical Uniform Game market characteristics
Narrowly differentiated
A broad base of small customers with similar needs
Fragmented competitors of similar sizes
Market Characteristics: Cost
Typical Cost Game market characteristics
Commoditized offers with a high proportion of variable costs
Major customers with specific needs
Extremely fragmented competitors with no clear leader
Typical Power Game market characteristics
Technical standards that are imposed by customers' limit differentiation
Concentrated, sophisticated customers with similar needs
Few concentrated competitors with similar market share
Market Characteristics: Power
Market Characteristics: Custom
Typical Custom Game market characteristics
Common core offers are highly customized with a large set of options
A broad customer base of very different sizes
Highly concentrated sellers that are competing on most deals
Market Characteristics: Choice
Typical Choice Game market characteristics
Broad offer lineup often with low marginal cost
Fragmented customer base with diverse needs
Concentrated, often with a clear leader
Market Characteristics: Dynamic
Typical Dynamic Game market characteristics
Perishable inventory or unpredictable and fluctuating demand
Broad customer base with different and fluctuating needs
Can be concentrated, but not necessarily
Innovation
Fragmentation
Commoditization
Consolidation
Customization
Digitalization
Market Forces: Overview
through breakthrough offers introduced in the market of the competitor base with new entrants to enable followers to match leaders' offers of competitors due to market exits or mergers
of offers and pricing enabled by new technologies
through new digital offers with no marginal costs
through seller's ability to provide increasingly customized offers
Market Forces: Innovation
Innovation positions companies toward the top right of the hex
Innovations create more value to share with customers,and therefore give companies more options on how much to share and how to share it. Sellers focus on defining and managing the value ladder instead of focusing on margin.
Market Forces: Fragmentation
Fragmentation positions a company toward the top of the hex
As the number of competitors increases, it is harder to keep track of what each competitor is doing and easier to adopt a uniform pricing approach with elasticity as the primary pricing framework.
Market Forces: Commoditization
Commoditization positions a company toward the top left of the hex
In this position, offers have less and less value differentiation. Cost advantage thus becomes the only sustainable source of price advantage, because at some point, competitors can no longer match the lower prices of the cost leader without endangering their own margins.
Market Forces: Consolidation
Consolidation a company positions toward the bottom left of the hex
Changes that increase concentration of suppliers or customers can reshape markets and compel companies to adopt the Game Theory as their pricing framework ensuring they steer clear of unfavorable Nash equilibria.
Market Forces: Customization
Customization positions a company toward the bottom of the hex
Customization represents the tailoring or slight modification of a core offering to meet the needs of an individual customer. This results in unique deals for each customer, and negotiations to beat competition. Firms can look to accelerate this trend when the economics are feasible to generate higher customer loyalty and value.
Market Forces: Digitalization
Digitalization positions a company towards the bottom right of the hex
Digitalization reduces marginal costs and confers companies' data-driven abilities to create experiences and prices that are unique to each customer. It gives companies a precise and customer-specific understanding of usage value and creates the opportunity for innovation pricing models based on consumption, usage, or outcomes.
Marketing
Pricing
Finance
Senior Executives
Sales
Product
Data Science
Organization: Overview
The role that each function plays in pricing decisions is different in each game because they all control different types of information. For example, Finance controls cost and margin information while Sales and Marketing have a deeper understanding of customers and competitor dynamics. Simultaneously each function tends to have specific business goals that require a healthy collaboration and balance of power to make good long term pricing decisions. Therefore, best practices for pricing processes require adjusting roles and responsibilities to each game.
Finances
Organization: Marketing
The Marketing function holds the primary responsibility for pricing decisions in the Value Game
The marketing organization naturally leads the process of understanding customers' needs and communicating with customers the superior value proposition. The focus must be on creating, communicating, and reinforcing the value proposition, especially for new offers, as doing so is critical for establishing value-based pricing.
Organization: Pricing
The Pricing function holds the primary responsibility for pricing decisions in the Uniform Game
The pricing function, also known as revenue management, optimizes uniform prices for all customers. Profitability is highly sensitive to price levels, making precise pricing critical. The pricing team handles strategic pricing, offer management, and tactical pricing implementation, sets optimal prices, and manages promotions and discounts.
Organization: Finance
The Finance function holds the primary responsibility for pricing decisions in the Cost Game
The finance organization oversees the approval of most deal structures, ensuring that the markup—the “plus” in the cost-plus pricing method—is aligned with the company’s pricing strategy and fixed cost structure. The pricing team under Finance establishes price corridors for each offer, and the sales team operates within these corridors when quoting prices to customers or bidding on projects.
Organization: Senior Executives
Senior executives hold the primary responsibility for pricing decisions in the Power Game
Senior leadership takes charge of pricing decisions, even tactical ones, as negotiations demand full internal coordinationand discipline. The high stakes involved mean that any lost deal can significantly harm the company. Maintaining the delicate equilibria that enable long-term success in the Power Game is essential, and losses often arise from actions like exclusive price concessions.
Organization: Sales
The Sales function holds the primary responsibility for pricing decisions in the Custom Game
Salespeople customize a price and an offer simultaneously, rather than concede on price for a fixed offer until the customer is satisfied. The company needs to establish a pricing structure that absorbs most of the effects of price variation, rather than giving salespeople full discretion to make ad-hoc adjustments. The Custom Game requires the most intricate system of personal checks and balances of any of the seven games.
Organization: Product
The Product function holds the primary responsibility for pricing decisions in the Choice Game
The focus lies in maintaining the right product portfolio and architecture. Rather than the exact price of individual offerings, what truly matters are the interrelationships between features, benefits, and prices. These conditions should enable customers to easily trade up or down across segment-specific offerings based on their needs.
Organization: Data Science
The Data Science function holds the primary responsibility for pricing decisions in the Dynamic Game
Given the high volume of automated pricing decisions made daily, robust and reliable algorithms are essential. The data science teams bear broad responsibility for all dynamic pricing decisions. The sophistication of pricing analytics required for this game is significantly more advanced than any other game, making data science crucial for successful pricing strategies.
