Towards value-based pricing—An integrative framework for decision making Andreas Hinterhuber*
Falkstrasse 16, 6020 Innsbruck, Austria Received 1 April 2003; accepted 18 October 2003 Available online 23 December 2003
Abstract Despite a recent surge of interest, the subject of pricing in general and value-based pricing in particular has received little academic investigation. Yet, pricing has a huge impact on financial results, both in absolute terms and relative to other instruments of the marketing mix. The objective of this paper is to present a comprehensive framework for pricing decisions which considers all relevant dimensions and elements for profitable and sustainable pricing decisions. The theoretical framework is useful for guiding new product pricing decisions as well as for implementing price-repositioning strategies for existing products. The practical application of this framework is illustrated by a case study involving the pricing decision for a major product launch at a global chemical company. D 2003 Elsevier Inc. All rights reserved. Keywords: Value-based pricing; Cost volume profit; Economic value analysis
1. Introduction Pricing is an important and largely neglected tool in industrial marketing—on average, a 5% price increase leads to a 22% improvement in operating profits—far more than other tools of operational management. On the other hand, the subject of pricing has received far less attention than other aspects of marketing, from both practitioners as well as academic scholars. In this paper, an integrative framework for pricing decisions is presented. Based on economic value analysis, cost volume profit (CVP) analysis, and competitive analysis, it is shown how to determine and implement profitable pricing decisions. Several examples illustrate how to use the pricing methodology presented in this paper to improve firm profitability.
2. Pricing in today’s theory and practice Pricing has largely been neglected by managers. Despite all laments of intensified price competition and the perceived difficulty of raising prices, empirical research by McKinsey & Company has shown that less * Andreas Hinterhuber is working as Global Product Manager with a major, diversified Fortune 500 Company. Tel.: +43-173-39-14-064. E-mail address: firstname.lastname@example.org (A. Hinterhuber). 0019-8501/$ – see front matter D 2003 Elsevier Inc. All rights reserved. doi:10.1016/j.indmarman.2003.10.006
than 15% of companies do any systematic research on pricing (Clancy & Shulman, 1993). Pricing has received little academic investigation. Not only managers, but also academics, have shown little interest in the subject of pricing: Publications on this subject are not anywhere as numerous as publications on other classical marketing instruments such as product, promotion, and distribution.1 Even marketing scholars have devoted only little effort to pricing theory and practice: An empirical study revealed that less than 2% of all articles published in major marketing journals cover the subject of pricing (Malhorta, 1996). Consumers show little interest in prices of goods purchased. Managers have a general tendency to believe that price is an important issue for customers. Research, however, has shown that customers are frequently unaware of prices paid and that price is one of the least important purchase criteria for them. Impact of price on profitability is high. Finally, the impact of even small increases in price on profitability by far exceeds the impact of other levers of operational manage1 In a recent search at amazon.com, we found 3594 books on advertising, 2371 books on promotion, 1077 books on distribution, 619 books on product management, but only 65 books on ‘‘price’’ and ‘‘pricing’’—with more than 50 of the 65 titles listed as out-of-print (see http://www.amazon.com; accessed 10 January 2003).
A. Hinterhuber / Industrial Marketing Management...