Read the articleThinking Strategically About Pricing Decisions. In the article, the authors present four innovative pricing models. Choose one of the models and critique it in your initial post. Be sure to clearly identify which model you have selected and address the following in your critique (1-2 pages):

• What are the pros and cons of the model?
• How does the model differ from traditional pricing approaches discussed in the textbook?
• Think of a company that may be able to adopt the pricing model you have selected, and discuss how it could implement the model in its pricing strategy.

Journal of Business Strategy Thinking strategically about pricing decisions Nigel F. Piercy David W. Cravens Nikala Lane Article information: To cite this document: Nigel F. Piercy David W. Cravens Nikala Lane, (2010),"Thinking strategically about pricing decisions", Journal of Business Strategy, Vol. 31 Iss 5 pp. 38 - 48 Permanent link to this document: http://dx.doi.org/10.1108/02756661011076309 Downloaded on: 10 February 2016, At: 13:52 (PT) References: this document contains references to 27 other documents. To copy this document: permissions@emeraldinsight.com The fulltext of this document has been downloaded 8422 times since 2010* Downloaded by Southern New Hampshire University At 13:52 10 February 2016 (PT) Users who downloaded this article also downloaded: Andreas Hinterhuber, (2008),"Customer value-based pricing strategies: why companies resist", Journal of Business Strategy, Vol. 29 Iss 4 pp. 41-50 http://dx.doi.org/10.1108/02756660810887079 Paul T.M. Ingenbleek, Ivo A. van der Lans, (2013),"Relating price strategies and price-setting practices", European Journal of Marketing, Vol. 47 Iss 1/2 pp. 27-48 http://dx.doi.org/10.1108/03090561311285448 Kenneth N. Thompson, Barbara J. Coe, (1997),"Gaining sustainable competitive advantage through strategic pricing: selecting a perceived value price", Pricing Strategy and Practice, Vol. 5 Iss 2 pp. 70-79 http://dx.doi.org/10.1108/09684909710163629 Access to this document was granted through an Emerald subscription provided by emerald-srm:203711 For Authors If you would like to write for this, or any other Emerald publication, then please use our Emerald for Authors service information about how to choose which publication to write for and submission guidelines are available for all. Please visit www.emeraldinsight.com/ authors for more information. About Emerald www.emeraldinsight.com Emerald is a global publisher linking research and practice to the benefit of society. The company manages a portfolio of more than 290 journals and over 2,350 books and book series volumes, as well as providing an extensive range of online products and additional customer resources and services. Emerald is both COUNTER 4 and TRANSFER compliant. The organization is a partner of the Committee on Publication Ethics (COPE) and also works with Portico and the LOCKSS initiative for digital archive preservation. *Related content and download information correct at time of download. Thinking strategically about pricing decisions Downloaded by Southern New Hampshire University At 13:52 10 February 2016 (PT) Nigel F. Piercy, David W. Cravens and Nikala Lane Nigel F. Piercy is Professor of Marketing and Strategy and Associate Dean at the Warwick Business School, University of Warwick, Coventry, UK. David W. Cravens is Emertius Professor at M.J. Neeley School of Business, Texas Christian University, Fort Worth, Texas, USA. Nikala Lane is Associate Professor at the Warwick Business School, University of Warwick, Coventry, UK. Pricing as a strategic decision The global economic downturn which occurred from late 2007 to early 2010 has encouraged many companies to direct renewed attention to the use of price to maintain sales volume, or at least to protect market share as buyers reduce purchase levels and competitors slash their prices. During the downturn, most developed countries experienced an unprecedented decline in prices - although there have been different amounts of price decline in different sectors and for different companies. In fact, there is a compelling argument that the way prices are set not only inuences demand, price also shapes how buyers use the product or service, and can have a lasting impact on customer relationships (Gourville and Soman, 2002). During tough economic conditions one danger is that sellers see price as a ''quick x'' or perhaps the only way in which to add value for their customers. The result has not always been what was intended. The reliance of the auto sector on repeated price cutting campaigns was not effective in preventing hard-pressed consumers from withdrawing from the new vehicle market and buying used vehicles or retaining their existing vehicles longer. On the other hand, sizeable cash ''grants'', or ''scrappage'' allowances, from governments have been effective in stimulating consumer demand (Pearson et al., 2009). Nonetheless, the paradox remains that while some sellers see no real option other than to reduce price to stimulate demand, others have been able to raise their prices in the same harsh global conditions. Nestle, for example, in the food sector has increased its prices and margins in spite of the economic downturn in its markets. Other companies have aggressively pursued ''value pricing'' approaches, by introducing lower-priced product ranges to supplement or replace existing product ranges. Discount retailers like Wal-Mart in the USA and Tesco in the UK have taken this strategic direction. Indeed, some more up-market retailers like Waitrose in the UK have decided to adopt similar new value ranges, notwithstanding the possible negative cannibalization of their existing sales. L'Oreal SA is creating a special line, Basics from Garnier, to be priced below 5 to expand market opportunity. Similarly, in the airline sector, leading European budget-airline Ryanair is pursuing aggressive price cutting approaches to undermine the position of its weaker competitors. Indeed, the slowing US economy has led P&G to reverse its long-established strategy to introduce value products like Tide Basic - to compete with low-price retailer brands, at the risk of cannibalizing sales of regular Tide (Byron, 2009). Similarly, 2009 saw the incoming CEO at Unilever reversing his predecessor's pricing strategy to drive higher volumes with lower prices, notwithstanding the lower margins achieved (Patrick, 2009). The economic downturn has underlined the competitive importance of pricing decisions for many companies where price has traditionally been seen as a largely tactical tool. Not least PAGE 38 j JOURNAL OF BUSINESS STRATEGY j VOL. 31 NO. 5 2010, pp. 38-48, Q Emerald Group Publishing Limited, ISSN 0275-6668 DOI 10.1108/02756661011076309 among the reasons is the unprecedented level of investor, public, media and regulatory scrutiny of prices. Nonetheless, what seems less clear is whether price is being fully recognized by executives as a strategic issue with substantial long-term implications and providing leverage on competitive positioning. Properly applied, price offers a powerful strategic capability. Downloaded by Southern New Hampshire University At 13:52 10 February 2016 (PT) Our objective is to examine making pricing decisions strategically, determining the role of price in strategic positioning, addressing the challenges in raising prices, and designing a value-based pricing strategy. These initiatives provide a management action agenda for making strategic pricing decisions, which is most relevant as companies come out of the recession and prepare for market recovery. The intent is to build on basic pricing principles (pricing objectives, situation analysis, and price determination), incorporate a strategic perspective to the process, address the complex challenge of determining customer value requirements, and examine other pricing strategy issues which are particularly relevant during economic declines and recovery. These initiatives provide a management action agenda for making pricing decisions, which is most relevant as companies come out of the recession and prepare for market recovery. This process for making pricing decisions is shown in Figure 1. Making pricing decisions strategically Conventionally, in the past many executives have treated price as a given - a value determined by calculation and shaped by sales negotiations with buyers, largely separated from marketing concerns with advertising, promotion and brand development. Driving forces have tended to be cost-based calculations and comparisons with competitor prices in deciding where to be positioned against alternatives. Moreover, there is long-standing concern that price is the most neglected element of marketing in spite of its major impact on protability. Only more recently has strategic thinking about price changed from seller concerns regarding costs, to critical buyer concerns with value. Locating pricing authority In the past, because pricing was largely a computational exercise, decisions were often made by junior marketing and nance executives, or largely negotiated by salespeople working with major customers. Responsibility for pricing was often split between the center and operating units, and also between marketing, sales, nance and manufacturing. Figure 1 Management action agenda for making pricing decisions Making Pricing Decisions Strategically Determining the Role of Price In Strategic Positioning Addressing the Challenges In Raising Prices Designing Value-Based Pricing Strategy j j VOL. 31 NO. 5 2010 JOURNAL OF BUSINESS STRATEGY PAGE 39 '' [. . .] there is a compelling argument that the way prices are set not only inuences demand, price also shapes how buyers use the product or service, and can have a lasting impact on customer relationships '' In particular, pricing expert Ove Jensen concludes from his extensive research in Europe that top management has given far less attention to pricing than that justied by its prot impact. Indeed, A.T. Kearney research suggests that because of the complexity of negotiated prices - volume discounts, payment terms, local deals, freight and handling, service calls, and so on - the actual price paid by customers may be half the product's list price, and importantly executives in the seller organization may not know what that price is (Lester, 2005). Downloaded by Southern New Hampshire University At 13:52 10 February 2016 (PT) Unsurprisingly, there have been calls for the establishment of a central pricing function to provide expertise and a bridge between marketing, nance, and sales (Monroe, 2003). While pricing is in the forefront of executive thinking because of the economic downturn, there is an important opportunity to streamline and rationalise the pricing process to considerable advantage. Unfortunately, much of the executive attention during the recession has been on tactical pricing decisions. Achieving a more strategic perspective on price mandates clear senior management responsibility for prices. This responsibility should encompass explicit decisions on price levels and changes and close monitoring of unit revenues obtained in different segments and with different customers. From a strategic perspective, price effectiveness is a boardroom issue which cannot be delegated to lower levels in the organization. Nonetheless, involvement in the pricing process by lower levels is essential. The core issue is that the strategic role of price is often not fully recognized and understood by executives and that price is considered last, after decisions have been made on products, communications and the value chain, and is treated as a tactical issue (Cravens and Piercy, 2009). In particular, a pricing perspective concerned only with stimulating demand and securing purchase commitment neglects the important link between price and strategic positioning. Traditional pricing approaches The evidence is that pricing has traditionally been dominated by balancing costs with competitor prices - whether in complex quantitative pricing models or on ''the back of an envelope''. Even new products have too often been priced based on the price of existing products. Basic principles for determining prices have tended to be cost-oriented (e.g. ''cost-plus''), competition-oriented (e.g. meeting the competition or pricing relative to their prices), or demand-oriented (e.g. judging ''what the market will bear'') (Cravens and Piercy, 2009). The result has often been a piecemeal and fragmented approach to pricing. Indeed, the result of ad hoc price decisions for some companies has been ''confusion pricing'' when customers do not know the real price to be paid for the product or service. Traditional approaches have led to major pricing errors - Sony overpriced the PS2 in competition with Nintendo and had to quickly bring the price down to stay competitive while more recently repeating the error with the PS3 and cutting prices again; Apple overpriced the rst iPhone and very early in the cycle had to reduce the price and apologise to the existing buyers and offer refunds. In fact, important insights are gained by examining companies who have developed new pricing models to more effectively break free of cost and competition models to focus on providing superior value for customers. j j PAGE 40 JOURNAL OF BUSINESS STRATEGY VOL. 31 NO. 5 2010 Customer value challenges Making pricing decisions during economic downturns accentuates the need for examining these decisions strategically with a clear focus on meeting customers' value requirements. Delivering superior value during and after an economic downturn is a major management challenge. Importantly, pricing strategy is a signicant part of the value challenge during economic declines. The value proposition ''explains the relationships among the performance of the product, the fullment of the customer's needs, and the total cost to the customer over the customer relationship life cycle'' (Payne and Frow, 2005, p. 172). While the role and importance of price varies in the range of pricing situations which span from transactional to strategic partnerships, price becomes particularly important to buyers during demanding economic times. Determining price using the economic value model is very important during demanding economic declines. Economic value consists of the price of the customer's best competing alternative plus the value of the supplier's incremental offering over and above the best alternative (the positive differentiation value) (Smith and Nagle, 2005). The economic value perspective shifts price determination away from lower pricing to a focus on strategic value pricing. Downloaded by Southern New Hampshire University At 13:52 10 February 2016 (PT) Innovative pricing models Creative strategic approaches to pricing offer a different way of delivering value to customers which go beyond simple cost-based computations. We examine four innovative pricing strategies which are particularly appropriate during economic declines and recovery. Payment-by-results for medicines. In 2007, British drug company Janssen-Cilag, a subsidiary of Johnson & Johnson, led the way towards ''payment by results'' for medical treatment. The company offered to cover the cost of a 25,000 cancer drug if the patient failed to show adequate progress. The hospital only pays for the drug if the patient responds well to it. This price strategy allows the company to maintain the nominal price for the product (a global price benchmark in the sector) and receive payment only when the patient benets (Timmins, 2007). Sharing the risk makes the drug more affordable for the hospital. This value offer was so compelling it has generated a raft of new pricing models from competitors aimed at value-based pricing. This strategy is very relevant during economic declines. As well as being attractive to the purchaser, these price strategies avoid cutting prices, which risks copycat reductions by global competitors. Kodak's printer and cartridge pricing. In attempting to build a new position in the printer market, Kodak has challenged industry convention with low prices for the ink cartridges for its newest printers. This strategy presents a price opportunity for buyers. The conventional approach by printer manufacturers is a ''razor and blades'' price strategy (cheap printers but expensive cartridges), while Kodak is charging slightly more for the printer and substantially less for replacement ink cartridges. While the traditional approach means high volume users effectively subsidize low volume users, Kodak is targeting high volume printer users with a better deal based on a different pricing architecture (Taylor, 2007). The role of price is a critical element of the Kodak business model in this sector. ` A la carte pricing by airlines. Faced with more thrift-oriented passengers during economic declines and the commoditization of their product, US airlines are moving towards pricing ''extras'' separately from the price of the ticket - charging for checking baggage, selling '' Making pricing decisions during economic downturns accentuates the need for examining these decisions strategically with a clear focus on meeting customers' value requirements. '' j j VOL. 31 NO. 5 2010 JOURNAL OF BUSINESS STRATEGY PAGE 41 pillows and bottled water. The attraction of this incremental pricing strategy is a better deal for passengers who do not use these services, and it generates additional revenue from those who do (McCartney, 2008). Leading European budget airline Ryanair charges not simply for any checked baggage, but also for airport check-in (rather than online). The ancillary revenue has proven to be a very important contributor to airline nancial performance. Infosys' new pay-per-use pricing model. Infosys Technologies is pioneering a new pricing strategy which moves away from the traditional outsourcing industry model of charging clients based on the number of staff needed for the job - the ''body shop'' approach. The company is looking for new ways of driving sales growth in a ''software-assisted-services'' approach. Rather than developing software and selling it to the client, Infosys retains ownership of the software and charges the client on a pay-per-use basis. This saves the customer the cost of maintaining and hosting the software, while Infosys gets a longer-term revenue stream from the product (Leahy, 2008). This pricing strategy is very attractive during economic downturns by removing the need for organizational buyers to consider large expenditures. Downloaded by Southern New Hampshire University At 13:52 10 February 2016 (PT) Importantly, these strategies underline the creative use of price in the value offered to customers, and aim at impacting positively on sales, revenue and competitive advantage. Responding to the new competitive strategic imperatives of the post-recession era will require many more companies to develop new business models in which price plays a different type of role. Far from operating as a tactical tool, price is becoming a key part of reinvention in redesigning the process of how products are taken to market. The core issue is nding new and better ways to create superior customer value. As a result, the role of price is increasingly central to strategic positioning. Role of price in strategic positioning Strategic positioning choices aim to build defenses against competition or nd a position in the industry where competitive forces are weakest (Porter, 2008). The market turbulence and change driven by economic recession and recovery have profound effects on industry structure and competitive positioning, emphasizing the importance of renewed attention to strategic positioning. Notwithstanding cost pressures and the effect of changing customer expectations in the economic downturn, price, and particularly the visibility of price, determines how a product is positioned competitively. In particular, executives face a choice of whether price should play an active or passiveeutral role in marketing the product or brand. An active role for price means it features highly in advertising, selling and other promotional efforts. A passiveeutral strategic role for price (it is at or near the prices of near competitors), places greater emphasis on non-price competitive factors. The passiveeutral pricing strategy seeks to remove price as the basis for choosing among competing products or brands. Also important in strategic positioning is the price level relative to competitors (high versus low). How is a rm's price to be positioned compared to its key competitors? Figure 2 illustrates the strategic alternatives which are available to management. A discussion of each strategy follows. High-active price strategy This approach aims to tell the buyer that the expensive brand offers superior value. Though used only on a limited basis, the high-active pricing strategy has been used to position products like high-end alcoholic beverages, high-end fashion apparel and cosmetics. Making the high price visible and active can appeal to the buyer's perceptions of quality, image, and dependability of the product. The strategy may also offer some protection from competitive retaliation, particularly if the product is highly differentiated. Louis Vuitton handbags and accessories are another illustration of a successful high-active price strategy. The strategy does expose the company to attack by brand copies and counterfeiting. j j PAGE 42 JOURNAL OF BUSINESS STRATEGY VOL. 31 NO. 5 2010 Figure 2 Price and positioning Role of Price Active Passive Price Level High High-Active e.g. based on superior value Low-Active e.g. discounters, Low market sharedriven competitors High-Passive e.g. competing on non-price factors Low-Passive e.g. avoid price comparisons Downloaded by Southern New Hampshire University At 13:52 10 February 2016 (PT) Source: Cravens and Piercy (2009, p. 363) Moreover, during economic declines convincing buyers of value offered is unusually challenging. High-passive price strategy A different high price positioning ts situations where high prices are essential to enhance margins in small target markets, cover the costs of high quality, or to fund new product development. These high price products require emphasis on non-price competitive factors. Economic value model analysis is particularly important when using this strategy during unfavourable economic conditions. Stress is placed on product functionality, quality, features, or performance. Expensive Swiss watches are marketed using a high-passive price strategy. Illustrative of the importance of vigorously defending this positioning is that manufacturers of the world's most expensive watches are paying record prices to buy back their own watches at auction - which allows the launch of higher price new lines without competition from the used watch market where prices have been pushed up (Bourne, 2007). Low-active price strategy This price strategy characterizes the behavior of discounters in all elds: Wal-Mart and Dollar General in retail, Southwest Airlines in air travel, and so on. When a large segment of buyers is sensitive to price, a low-active price strategy may be highly effective - underlined by the performance of discounters in the economic downturn. Of course, a rm using the strategy must have costs low enough to be protable with low prices. It is a more attractive option when a company has a strong position in the product-market, has cost advantages, or competition for the target market is not strong. Interestingly, when ConAgra Foods passed on rising costs and drove the retail price of Banquet dinners from $1 to $1.25, the consumer stopped buying the product, and the company has cut costs to get back to a $1 dinner, because this price is its value positioning in the customer's mind (Weber, 2009). Low-passive price strategy This strategy can be used by small producers who have lower-cost features than competitors, but whose brands are not familiar to buyers. By not emphasising low price, the company runs less risk potential buyers will equate low price with low quality. For example, minor brands participating in conventional distribution channels may spend little on marketing their products, so they can offer low prices because of their lower marketing costs. One variation on this positioning is the ''secret sales'' held by retailers. Customers receive special price offers by e-mail or similar means, thus allowing price cuts without alerting the market to this happening. j j VOL. 31 NO. 5 2010 JOURNAL OF BUSINESS STRATEGY PAGE 43 The Figure 2 framework emphasizes that when executives consider price from a strategic perspective, there should be active search and analysis for real strategic positioning alternatives, which may have previously been neglected. Nonetheless, while under unfavorable economic conditions buyers are constantly pressing for lower prices and are unlikely to object to price cuts. This leaves the key question of whether prices can be increased under these conditions or those that follow. The price rise issue is becoming increasingly urgent as companies in different sectors look at the prospects of economic recovery in their markets. Challenges in raising prices Downloaded by Southern New Hampshire University At 13:52 10 February 2016 (PT) Perhaps the most signicant challenge facing executives looking to change their price positioning (moving from one alternative to another in Figure 2), or seeking to rebuild price levels as economic recovery occurs, is how to increase price without disrupting customer demand and setting off adverse and hostile distributor reactions. In fact, there is growing evidence that falling prices only partly reect the credit crunch and loss of consumer condence - oversupply is at least as important a factor. Prices have fallen most dramatically in sectors plagued by an excess of factories and ways to get goods to consumers (Coy, 2009). Importantly, the impact of price increases on protability is favorably disproportionate - McKinsey Consultants estimate that a 1 percent increase in price improves operating prot by 11 percent (Cram, 2004). Yet, in recessionary times, and even during economic recovery, executives may struggle to identify opportunities to earn higher prices. Moreover, even when products are in short supply, it is rare for companies to increase prices to balance supply and demand. Indeed, under very tough market conditions there may be no choice for companies other than to cut prices - notwithstanding the fact that even for non-premium industries it takes three to ve years to get consumers to pay the full price again (Gapper, 2009). Important insights for the future come from identifying which companies have been able to raise their prices during the recession. One approach to an insightful analysis suggests that executives examine product differentiation from the customer's perspective (ranging from a commodity to a product which is completely unique), and how strongly the customer feels the need for the product (from considering it a ''must-have'' to seeing it as totally discretionary) (Colvin, 2009). The previously discussed economic value model provides a framework for the analysis. Products can be positioned on the Figure 3 matrix as: 1. Unique necessities - the customer has to have the product and there are no close substitutes, e.g. the customer's favorite toothpaste (few people stop brushing their teeth Figure 3 Price, needs and differentiation Perceived Product Need Product Differentiation Necessity Discretionary Unique Unique Necessities e.g. favourite brand of toothpaste Unique/ Discretionary e.g. expensive cars and gadgets Commodity Commodity/ Necessity e.g. soap, lightbulbs Discretionary Necessities e.g. air travel, household appliances Source: Colvin (2009, p. 19) j j PAGE 44 JOURNAL OF BUSINESS STRATEGY VOL. 31 NO. 5 2010 '' [. . .] when ConAgra Foods passed on rising costs and drove the retail price of Banquet dinners from $1 to $1.25, the consumer stopped buying the product. '' because of economic recession and personal-care brand preferences are deeply ingrained). Accordingly, Colgate has been able to raise its prices during the recession. 2. Discretionary commodities - customers see one competitor as much like another, and they don't particularly need any of them, e.g. major airlines, mass market autos - consumers can postpone the trip and make do with an existing auto. Prices are falling. Downloaded by Southern New Hampshire University At 13:52 10 February 2016 (PT) 3. Commodityecessity - customers will not stop buying these products, but brands do not matter that much, e.g. toilet paper, lightbulbs. Retailers readily discount these products. 4. Unique/discretionary - products like a Ferrari sports car are unique but no-one really needs one. Price is a very small part of the purchase decision. Determining the value proposition (unique value offered to the customer) is a sound basis for addressing the challenge of raising prices. The Figure 3 analysis provides a way to evaluate customers based on their perceptions of products and suppliers, as a basis for creating different value propositions in which price plays a greater or lesser role (positioning on the basis of price visibility). Value proposition analysis also suggests the gains that may be made by attempting to change customer perceptions of how differentiated products are and how necessary they are. The iPod and iPhone could be seen as Unique/Discretionary products, but have quickly moved into the Unique Necessities position for many groups of consumers. The analysis is also important in identifying important differences in price sensitivity in different market segments, and the opportunities which may exist for higher prices in selected segments. Indeed, while price has fallen into disuse in an era of never-ending demands from customers for lower and lower prices, it remains a prime criterion for reaching market segments whose buyers are prepared to pay more for the product or service that meets their value requirements. The pricing of travel by air at different levels remains a prime example of price-based segmentation - some people will pay substantially more for the trip if they get the exclusivity and extra services of a premium class (even if those additional services are minimal). The search for opportunities to earn additional revenue from customers who are willing to pay more may take various forms: B a unique target strategy, which treats each customer as an individual and charges according to how much they are willing to pay - these are the skills of the used car salesperson, the realtor, and the antiques seller; B a group target approach offers different prices to members of different groups - Disney offers admission discounts to local people in Florida to get them to visit the theme parks more regularly, knowing they are more price-sensitive than are tourists; and B a ''self-incrimination strategy'' in which customers give themselves away - prepared, for example, to pay more for Fairtrade coffee (Harford, 2005). Setting aside the corporate social responsibility aspects of the Fairtrade movement, it is illustrative to note that supermarkets prot more from the higher price of Fairtrade goods than do the developing world farmers, taking around a third of the consumer spend on Fairtrade products, and only a fth of produce grown on Fairtrade-approved farms is actually purchased at its guaranteed fair price (Adam Smith Institute, 2008). Fairtrade achieves substantial price premiums in many consumer markets. j j VOL. 31 NO. 5 2010 JOURNAL OF BUSINESS STRATEGY PAGE 45 The critical issue is determining what drives value for different customers and accordingly how price-sensitive they are, as the basis for identifying price increase opportunities. Designing value-based price strategy The last stage in the action agenda for making pricing decisions is strategically designing a value-based pricing strategy. The decision situation confronting executives is designing the strategy and over time adapting the strategy to competitor and market changes. Increasingly the focus has to be on value in customer terms rather than price alone. Importantly, customer value must be assessed in terms of existing economic conditions. The earlier discussion has indicated several pricing issues relevant during and after economic declines. Ove Jensen's research suggests that the ''price champions'' are those rms who educate customers to value services and to be prepared to pay for them in higher prices. Certainly, sellers who do not analyze customer value requirements and focus on value are likely to lose out on the price they can achieve. Downloaded by Southern New Hampshire University At 13:52 10 February 2016 (PT) In the business-to-business context, James Anderson and his colleagues have articulated a compelling case for companies to be ''value merchants'' (Anderson et al., 2007). Their approach to customer value management relies on salespeople using hard data to demonstrate superior value to purchasing managers who are conventionally focused on price. The core logic is that if salespeople have a better idea of what constitutes value for a customer they can use analytics to sell on the basis of value instead of price. This is far superior to making vague promises without hard value data. Too often salespeople play the role of ''value spendthrifts'', giving value away through price concessions, rather than value merchants who achieve protable growth by stressing the superior value of the rm's offerings. Otherwise, despite offering superior value, salespeople are forced to compete as offering a commodity, so the company does not get a return for its investment in superior value. The powerful impact of value innovation and value-based pricing is also illustrated in consumer markets by companies like P&G. For example, a recent P&G innovation is Olay Pro-X - a range of clinical anti-ageing products that sell for around twice the price of its regular Olay creams. Pro-X is aimed at a more prosperous consumer who is accustomed to paying much more for similar products in department stores rather than in drug stores. P&G sees Pro-X as one of its ''big ideas'' that represent superior value to the specic target consumer. Pro-X has taken around 5 percent of the anti-aging clinical market (Birchall, 2009a). With its established products P&G is pursuing ''performance-based value messaging'', communicating to frugally-minded customers that it is worth paying more for products like Tide and Bounty towels because they save money by doing a better job in the customer's terms. The company is responding to the challenge of differentiating products to prove to customers that they are ''better'' than alternatives (Birchall, 2009b). However, value-based pricing depends heavily on customer and market knowledge and insight which go beyond conventional market research information. Making smart decisions on price levels and changes depends on a thorough and deep understanding of the customer and the competition. While conventional market research is often backward-looking and descriptive, superior ''market IQ'' comes from a deeper immersion in the marketplace to identify customer perceptions and feelings about value and to better predict the emergence of new value-creating opportunities (Day, 2005). Superior market sensing and the capability to learn from markets is a priority in a world of thrifty consumers, scarred by the credit crunch, and looking for new types of value. Value-based strategies also require metrics that parallel the value proposition. For example, General Electric wrong-footed aero engine competitors by changing its pricing metrics. Instead of pricing a new line of engines based on greater efciency and power delivered, GE charged a user fee based on ying time, charging more to customers realizing the greatest value. Similarly, pharmaceutical gas is sold to hospitals using a traditional per-liter metric. However, elderly patients use the gas sporadically but in large quantities, while infants in j j PAGE 46 JOURNAL OF BUSINESS STRATEGY VOL. 31 NO. 5 2010 intensive care use the gas continuously but in small quantities. Although each unit of gas has a greater value to the hospital in intensive care, the manufacturer's price was constrained by the much lower value per unit realised in the geriatric ward. By changing the price metric to duration of use, prices charged to the hospital were better aligned with the criticality of patient need (Donath, 2007). A strategic view of price Downloaded by Southern New Hampshire University At 13:52 10 February 2016 (PT) It is very important that business executives recognize pricing decisions as a strategic responsibility with long-term implications. Addressing a management agenda that emphasizes a creative review of prices, which encompasses the role of price in strategic positioning and the potential for higher prices, is urgently required in many companies looking at the potential for economic recovery in their markets. The key objective is a value-based pricing strategy built around opportunities to deliver and prove superior customer value. We start from basic pricing foundations to develop a strategic perspective, because many existing pricing processes are essentially tactical in nature. We believe that executives should give explicit attention to moving from tactical pricing to strategic pricing decisions. The impact of the harsh economic conditions experienced during economic downturn, and the major new opportunities emerging in economic recovery, make such moves timely and relevant. Keywords: Pricing, Strategic management, Pricing policy Our decision process emphasizes the need for executives to adopt a strategic perspective on price and to approach decisions from this perspective - notwithstanding the short-term pressures to meet the demands of recession and recovery with price cuts. In particular, we focus on the role of price in strategic positioning to support this perspective, and in addressing the challenges of raising prices. The underlying logic is to argue the case for designing a value-based pricing strategy, where delivering superior customer value is pivotal in developing new business models, occupying a desirable position in the market, and achieving higher prices. References Adam Smith Institute (2008), Unfair Trade, Adam Smith Institute, London. 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About the authors Nigel F. Piercy is Professor of Marketing and Strategy, and Associate Dean, at Warwick Business School. Nigel F. Piercy is the corresponding author and can be contacted at: Nigel.Piercy@wbs.ac.uk David W. Cravens is Emeritus Professor in the M.J. Neeley School of Business at Texas Christian University. Nikala Lane is Associate Professor in Marketing and Strategy at Warwick Business School. To purchase reprints of this article please e-mail: reprints@emeraldinsight.com Or visit our web site for further details: www.emeraldinsight.com/reprints j j PAGE 48 JOURNAL OF BUSINESS STRATEGY VOL. 31 NO. 5 2010 Downloaded by Southern New Hampshire University At 13:52 10 February 2016 (PT) This article has been cited by: 1. Fengyan Cai, Rajesh Bagchi, Dinesh K. Gauri. 2016. Boomerang Effects of Low Price Discounts: How Low Price Discounts Affect Purchase Propensity. Journal of Consumer Research 42, 804-816. [CrossRef] 2. Alcina G. Ferreira, Filipe J. Coelho. 2015. Product involvement, price perceptions, and brand loyalty. Journal of Product & Brand Management 24:4, 349-364. [Abstract] [Full Text] [PDF] 3. Tessa Christina Flatten, Andreas Engelen, Timo Mller, Malte Brettel. 2014. How Entrepreneurial Firms Profit From Pricing Capabilities: An Examination of Technology-Based Ventures. Entrepreneurship Theory and Practice n/a-n/a. [CrossRef] 4. Einar Iveroth, Alf Westelius, Carl-Johan Petri, Nils-Gran Olve, Mathias Cster, Fredrik Nilsson. 2013. How to differentiate by price: Proposal for a five-dimensional model. European Management Journal 31, 109-123. [CrossRef] 5. Anna Codini, Nicola Saccani, Alessandro Sicco. 2012. The relationship between customer value and pricing strategies: an empirical test. Journal of Product & Brand Management 21:7, 538-546. [Abstract] [Full Text] [PDF] 6. Nick K T Yip. 2012. Making qualitative decisions from quantitative cues: Understanding the customers' willingness to pay. 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