Introduction

The purpose of any business is to create some value, in some way, to someone or something outside of itself. However, a business cannot survive—little own thrive—unless it is also able to earn a return commensurate with the value it establishes in the market.

With this mind, Pricing Strategy helps students understand how organizations of all shapes, sizes, and vocations can better capitalize on their efforts to stand out and serve customers. The course studies the “back end” of a firm’s relationship with its customers, if you will. It is exactly at this moment, when a business asks the market to trade good money for the products and services it dispenses, that ineffective practices tend to creep in and value “leaks out” of the exchange—which regrettably makes the business, customers, and often also society worse off.

Career Focus

Pricing Strategy is designed for students who will be responsible for the revenue policies and top-line growth of a product or service business. It also suits students who anticipate starting their own enterprise or seek a career as external advisors or investors.

Educational Objectives

In my experience, senior leaders in organizations appreciate the importance of getting prices right, yet they tend to act without the proper mindset and frameworks in place. Rather, you often witness collections of tactics held together by questionable assumptions and crude heuristics that, by shunning customers and obsessing over just about everything else, put financial and brand health in jeopardy.

To counter this predicament, Pricing Strategy equips students with the logic, skills, and confidence necessary to tackle contemporary pricing issues and craft sound strategies. In particular, the course addresses questions such as:

• How should we think about prices and pricing? How can one tell a good strategy from a bad one?
• Are we making the most of the competitive advantage we worked so hard to establish? Are we squandering it?
• What is the impact of technology on the way we earn revenue? Are we behind the times?
• What is the best revenue model for our business? Should we launch a subscription or encourage sharing? Are there options that we are neglecting?
• Are we selling at the right price? What information do we need to make this judgment with confidence?
• How should we estimate and act on valuations and willingness to pay information? Can we trust the data?
• Are there opportunities to serve different prices to different customers? How can we exploit this chance without damaging our image or incite backlash?
• How do we stand our ground against demanding customers and sell value with confidence? If it comes to it, how should we discount our offerings without mortgaging the brand?
• What is best way to act against pesky competitors? Can we delay the forces of commoditization?

• · What does a sophisticated pricing organization and internal structure look like?

Content and Organization

Pricing Strategy pushes well beyond the mechanics of setting a price, and the approach that I favour is much more one of general management than conventional marketing. While pricing certainly involves an element of “running the numbers,” there is much more that I want to cover.

In fact, the theory driving the course can be construed as a pyramid. We start at the tip with one irrefutable fact: you cannot improve the pricing performance of any business, or even judge its current performance for that matter, unless your decisions center on customers—what they value, why they value it, when and how they value it, and so on. The reason for this is that customers drive demand in a market, and demand marks the opportunity. If you do not grasp the opportunity, then you are essentially making decisions with a blindfold. This logic is relatively simple, yet most organizations produce prices starting from—and ending with—internal considerations of costs, risk, and acceptable returns. They also fail to understand that a proper pricing strategy is part economics, part sociology, and part psychology. These are the roots of all the problems we discuss in the course.

Next, we want to understand how value flows froms customers to organizations. We are particularly interested in mapping the different steps along this journey and identifying the leaks that may occur. I call this process “cakeonomics.” It is an important exercise because without this insight we simply do not know what needs fixing, and in which order. This is not a situation you want to find yourself in when every improvement, no matter how small, can have a disproportionate effect on the success of the business or on the satisfaction of customers.

Finally, we take each of the steps identified above and, in turn, work hard to stop the leaks. To give a few examples, I will ask students to reflect on the choices businesses make with respect to communicating and selling value to customers, and with respect to defending one’s position in the face of competitors. We will also question what an efficient (i.e., cake-maximizing) revenue model looks like. Should an organization earn revenue simply by selling what it makes, or should it earn revenue from ensuring access, upon actual consumption, or conditional on performance? Third, students are going to examine the process of integrating information on costs, customers, competitors, and the company itself to settle on the right sticker price. Finally, we will delve into the delicate task of tailoring prices to fit a heterogenous customer base. To the extent that the market features customers with different attitudes and beliefs, sticking with a single price is a poor compromise, yet it is exactly what most customers insist on. It turns out that there are several ways to solve this sticky problem.

From a practical standpoint, the 14 sessions comprise case study discussions (roughly 60% of class time), exercises (25%), interactive lectures, and contributions from guest speakers (15%). The goal of the case discussions and exercises is to examine important concepts in different managerial settings, and to sample making decisions based on both qualitative and quantitative data. The lectures and guest speakers complement this effort by presenting frameworks, analytical techniques, practical insights, and pertinent examples.

Grading

Grading is based on class participation (40%) and a final paper (60%). The assignment, called “Pricing Audit,” gives students the opportunity to apply the concepts introduced in the course in a setting they find personally stimulating. Specifically, students are asked to (a) review the pricing performance of an organization or business unit and (b) formulate thoughtful recommendations.

The first part of the assignment looks to the past. Students need to read the article How do you know when the price is right? and use the diagnostic tool therein to critique the current pricing performance of the target company. Students should address the 10 dimensions described in the article. The second part of the assignment looks to the future. Students now take the lessons from the course and turn them into clear, meaningful, and practical recommendations for the organization.

I will share with students my grading template ahead of time, so that they can prepare their work accordingly. I follow these criteria religiously when assessing one’s work. In addition, I am not going to impose a page limit, as in my mind the point of the exercise is not to write or edit until an arbitrary constraint is met. I leave this decision to students and their better judgment. That said, please keep in mind that it’s relatively easy to spot reports that, for the sake of brevity, do not provide sufficient information to make a compelling argument or, conversely, reports that are excessively long and contain information that is irrelevant or redundant.