PRICING ORIENTATION IN INDUSTRIAL MARKETS: THE ORGANIZATIONAL TRANSFORMATION TO VALUE-BASED PRICING

By

Stephan M. Liozu

Submitted in Partial Fulfillment of the Requirements for the Qualitative Research Report in the Doctor of Management Program

at the Weatherhead School of Management

Advisors: Richard Boland, Ph.D., Case Western Reserve University

Andreas Hinterhuber, Ph.D., Bocconi University, Milano, Italy Sheri Perelli, D.M., Case Western Reserve University Tim Timura, D.M., Case Western Reserve University

CASE WESTERN RESERVE UNIVERSITY

December 2010

Do not Cite or Distribute Without Permission From the Author Comments Welcome

 

PRICING ORIENTATION IN INDUSTRIAL MARKETS: THE ORGANIZATIONAL TRANSFORMATION TO VALUE-BASED PRICING

ABSTRACT

Of three main orientations to pricing in industrial markets −cost-based, competition-

based and customer value-based − most marketing and pricing scholars consider the latter superior – but few firms use it. The literature is silent about how organizational and behavioral characteristics of industrial firms may affect pricing orientation and, more specifically, value-based pricing. Semi-structured interviews with 44 managers of small to medium size U.S. industrial firms yielded insights into firm pricing orientations, processes and decision making patterns. We identified five organizational characteristics common to firms implementing value-based pricing: ability to effect deep transformational change, presence of a champion, skill in diffusing organizational capabilities, organizational confidence, and center-led pricing process specialization.

Our data demonstrates that value-based pricing is not simply adopted but internalized through a long, tenuous and deep transformation process supported by an experiential and transformative learning environment. Key Words: Industrial pricing; pricing orientation; pricing process; value-based pricing; organizational structure; decision making theory; organizational change; transformative learning.

 

TABLE OF CONTENTS Abstract ..................................................................................................................................... 2 Introduction ............................................................................................................................... 4 Theoretical Foundation ............................................................................................................. 5 Methods................................................................................................................................... 13 Findings................................................................................................................................... 17 Discussion ............................................................................................................................... 30 Limitations .............................................................................................................................. 42 Implications for Practice and Future Research ....................................................................... 42 Appendices

Appendix A: Detailed Sample Information ............................................................... 44 Appendix B: Interview Protocol and Questions ........................................................ 46 Appendix C: Themes and Sub-Themes ..................................................................... 49 Appendix D: Stimulus for Change and Duration of Transformation for Firm

Which Adopted Value-Based Pricing ................................................. 52 Appendix E: Raw Understanding of Value-Based Pricing in Firms ......................... 53

References ............................................................................................................................... 57 List of Figures

Figure 1: Price Point Definition Process for Value-Based Pricing (VBP) ................ 18 Figure 2: Differences in the Decision Making Process between Firms Using Value-

Based Pricing and Those That Did Not ...................................................... 19 Figure 3: Price Point Definition Process for Cost-Based Pricing (CBP) ................... 19 Figure 4: Price Point Definition Process for Competition-Based Pricing (COBP) .. 20 Figure 5: Evidence of Decision Making Factors in Firms Using Cost-Based or

Competition-Based Pricing Orientation ..................................................... 21 Figure 6: Evidence of Role Specialization in Firms That Use Value-Based Pricing 23 Figure 7: Evidence of Expertise Centralization in Firms That Use Value-Based

Pricing ........................................................................................................ 24 Figure 8: Pricing Process Formalization by Pricing Orientation ............................... 25 Figure 9: Differences in the Training Focus among Firms with Different Pricing

Orientations ................................................................................................ 26 Figure 10: Evidence of Leader’s Decisive Influence ................................................. 28 Figure 11: Importance of Employee's Beliefs on Confidence ................................... 29 Figure 12: Importance of Courage and Pricing Heroes on Confidence ..................... 30 Figure 13: Importance of Success Stories on Confidence ......................................... 30 Figure 14: Evidence of Cost-Plus Mentality in Firm’s Culture or DNA ................... 32 Figure 15: Evidence of Firm’s DNA Transformation to Value-based Pricing .......... 32 Figure 16: Understanding of Value-based Pricing by Executive Leaders in Firms

Using it ..................................................................................................... 39 Figure 17: Conceptual Model for the Internalization of and Transformation Towards

VBP .......................................................................................................... 41 List of Tables

Table 1: Identified Value-Based Pricing Methodologies in Business Publications .. 40

  4

INTRODUCTION Of three main approaches to pricing in industrial markets ─ cost-based, competition-

based and value-based ─ the latter is considered superior by most marketing scholars

(Anderson & Narus, 1998; Cressman, Jr., 1999; Nagle & Holden, 2002; Ingenbleek,

Debruyne, Frambach, & Verhallen, 2003; Hinterhuber, 2004) and pricing practitioners,

(Forbis & Mehta, 1981; Dolan & Simon, 1996; Nagle & Holden, 2002; Fox & Gregory,

2004). Paradoxically, few industrial firms have adopted it. A meta-analysis of pricing

approach surveys between 1983 and 2006 reveals an average adoption rate of 17%

(Hinterhuber, 2008). Cost-based and competition-based approaches still play a dominant role

in industrial pricing practice (Coe, 1990; Shipley & Bourdon, 1990).

Historically, pricing has received little attention from practitioners and marketing

scholars (Malhotra, 1996; Noble & Gruca, 1999; Hinterhuber, 2004, 2008). A review of 53

empirical pricing studies conducted by Ingenbleek (2007) concluded that pricing literature is

highly descriptive and fragmented and that theoretical development on how price decisions

are made in firms is limited.

The marketing and pricing literature is silent about both the consequences of pricing

orientations on overall company performance (Cressman Jr., 1999; Ingenbleek, 2007;

Hinterhuber, 2008) and how organizational and behavioral characteristics of industrial firms

may affect pricing orientation (Ingenbleek, 2007). Specifically, the potential influence of

organizational factors on the successful and systemic adoption of value-based pricing

orientation in industrial firms has not been empirically and holistically investigated.

To address this phenomenological gap, we designed a qualitative inquiry based on

semi-structured interviews with managers in small and medium U.S. industrial firms that

  5

have successfully adopted value-based pricing as a pricing orientation and with managers in

similar firms that have not. By probing the "lived worlds" of these executives, our hope was

to generate a grounded theory about the organizational practices that contribute to or hinder

the development and implementation of value-based pricing strategies in industrial markets.

Our results reflect similarities and differences in the experiences of managers in

industrial firms using all three pricing orientations. They contrast firms and leaders with

respect to how they organize for pricing, manage the pricing process, manage the transition

to more advanced pricing orientations and develop internal capabilities to face uncertain and

ambiguous decisions.

THEORETICAL FOUNDATION  

Our work was informed by two key management theories: organizational theory and

the theory of the firm – as well as by pricing literature focused on firm pricing orientation.

Among the vast array of derivative theories and multiple schools of thought that surround

organizational theory and theory of the firm, we focused, relative to the first, on

organizational decision making theory (March & Simon, 1958; March, 1994).and, with

regard to the latter, on the behavioral theory of the firm (Cyert & March, 1992) and the

resource-based view of the firm (Wernerfelt, 1984).

Pricing Orientation

Marketing and management literature is rich in studies related to market orientation

and strategic firm orientation. Both streams of literature have taken a central role in

discussions about marketing management and firm strategy (Day, 1994). Studies on market

orientation have focused on defining its nature, antecedents and its consequences on firm

performance (Narver & Slater, 1990; Jaworski & Kohli, 1993; Slater & Narver, 1994; Kirca,

  6

Jayachandran, & Bearden, 2005). Jaworski and Kohli (1993) define market orientation as “an

organization-wide generation of, dissemination of and responsiveness to market intelligence”

while Narver and Slater (1990) describe its three components as customer orientation,

competition orientation and interfunctional coordination. Strategic orientation of the firm is

close to that of market orientation and is defined as the strategic direction implemented by a

firm to “create the proper behavior for the continuous superior performance of the business”

(Narver & Slater, 1990). Technological orientation is added as a fourth component of firm

orientation (Gatignon & Xuereb, 1997). The prolific literature on market and firm orientation

strongly influenced the advancement of the modern marketing concept by providing firms

with behavioral and organizational perspectives on how to achieve sustainable performance.

Consistent with the lack of interest by marketing scholars in researching the pricing

field (Malhotra, 1996; Noble & Gruca, 1999; Hinterhuber, 2008), the notion of pricing

orientation in firms has not been appropriately defined and explored. Only a handful of

academic papers have discussed pricing orientation in business markets. In 2008,

Hinterhuber made a strong contribution to the topic by conducting a broad and

comprehensive review of two dozen surveys conducted between 1983 and 2006. The meta-

analysis revealed the adoption rates of alternative pricing approaches (cost-based,

competition-based and value-based) in business markets and concluded that the competition-

based approach still dominated in the industrial pricing.

Managerial pricing orientation “deals with decisions relating to setting or changing

prices. It also includes price positioning and product decisions introducing new pricing points

to the business unit’s product or service mix” (Smith, 1995). Smith defined it as consisting of

four dimensions (information getting and processing, pricing objectives, policies and beliefs,

  7

organizational decision processing, and organizational responsiveness) and proposed four

distinct managerial pricing orientations - cost, sales, competition and strategy. We, however,

adopt the widely accepted three dimensions of cost, competition, and customer value

(Hinterhuber, 2008). Furthermore we consider pricing orientation from a firm’s strategic

perspective and define it as all pricing practices, methods, behaviors and processes leading to

pricing decisions with the goal of maintaining and sustaining firm competitive advantage.

Organizational Theory and Organizational Decision Making Theory

Organizational theory focuses on the internal structure of the firm and the

relationships between its units and departments (Grant, 1996). Organizations are “systems of

coordinated actions among individuals and groups whose preferences, information, interests,

knowledge differ” (March & Simon, 1958: 2). The first of two key streams in traditional

organization theory (March & Simon, 1958: 31) focuses on the basic physical activities

involved in production while the second is concerned with the problems of departmental

work and coordination. Both streams address the limitations of not exploring knowledge

about the motivational, conflict of interest, cognitive and computational constraints (March,

1978) that human beings place on organizations. Decision making theory addresses the flow

of information within organizations supporting and influencing decision making processes.

Taking into account these constraints, we have embraced organizational theory from a

decision making perspective drawing from the work of March (1994; 1999) and Simon

(1961). The critical question is how pricing decisions occur in organizations and what

organizational factors strongly influence managerial judgment when making these decisions.

Previous work by leading behavioral and social researchers covered many important aspects

of organizational theory. Below, we focus on the most relevant ones including bounded

  8

rationality (March & Simon, 1958; Simon, 1961; Cyert & March, 1992), uncertainty and

ambiguity in decision making (Daft & Weick, 1984; Spender, 1989; Brownlie & Spender,

1995; March, 1999) and organizational structure (Hall, Johnson, & Haas, 1967; Hall, 1977;

Aiken, Bacharach, & French, 1980; Miller, Droge, & Toulouse, 1988).

Rationality. Simon (1961: 93) posits that actual behavior of managers in firms when

making decisions or making choices falls short of objective rationality in three ways: 1) the

incompleteness of knowledge; 2) the difficulties in anticipation of the consequences that will

follow choice; and 3) the choice among all possible alternative behaviors. Managers also

suffer from possible “bottleneck of attention” that impacts their ability to deal with more than

a few things at a time (Simon, 1961: 90). Bounded rationality refers to the notion that rational

actors are significantly constrained by limitations of information and calculations (Cyert &

March, 1992: 214). These constraints create an environment of uncertainty and ambiguity

that managers in firms have to deal with on a daily basis. For example, the degree of

complexity, analyzability (Daft & Weick, 1984) and dynamics of the environment affect the

level of uncertainty and ambiguity in the decision-making process (Duncan, 1972). As the

environment becomes more and more complex, managers shift their assessments from

objective parameters to intuitive and subjective ones (Daft & Weick, 1984). The type of

uncertainty that pricing decision-makers face is mostly a function of data and information

incompleteness as well as the incommensurability of information in the areas of customer

value and competition (Spender, 1989: 188; Brownlie & Spender, 1995; Anderson, Kumar,

& Narus, 2007: 23).

According to behavioral theorists, managers in organizations simplify the decision-

making process by using various behaviors (Cyert & March, 1992: 264): satisficing (March,

  9

1978); following rules of thumb (Schwenk, 1988); and defining standard operating

procedures and organizational routines (Pentland & Reuter, 1994; Feldman, 2000). Others

will define frames of reference (March & Simon, 1958: 159) which will be determined “by

the limitations of the rational man’s knowledge”. Experienced managers will draw from their

memory, training and experience (Simon, 1961: 134). They construct and use “cognitive

heuristics” (Brownlie & Spender, 1995) or mental models (Porac, Thomas, & Baden-Fuller,

1989) to simplify complex strategic issues and engage in intuitive and judgmental responses

to decision-demanding situations (Barnard & Andrews, 1968). The resolution of uncertainty

is “to create a rationality, a recipe or an interpretative scheme” (Brownlie & Spender, 1995)

leading to a choice or a decision.

Organizational structure. Organization structure can be defined in many ways and

can take many forms in organizations. Several reviews (Hall, 1977; John & Martin, 1984;

Miller et al., 1988) have suggested that formalization, centralization and complexity are the

most common and consistent characteristics of structure. Organizational structure relates to

dimensions of organization that “cannot be reduced to or deduced from properties of the

organization’s members” (Aiken et al., 1980). We select as the level of analysis the

organizational activities and programs associated with the pricing function. We consider

structural differentiation, formalization and centralization as the critical characteristics of

organization structure.

Lawrence and Lorsh (1967) note that structural differentiation “includes differences

in attitudes and behaviors on the part of the members of the differentiated departments”. It is

defined as the differences in occupational specialties present in the organization and their

degrees of professionalism (Hage & Aiken, 1967; Hage & Aiken, 1970). The specialization

  10

of pricing experts in the organization is needed in order to perform specialized tasks

supporting a broad array of pricing-related activities in marketing, sales, R&D and

management.

The degree to which a firm is formalized is an indication of the perceived capabilities

of its members in exercising judgment and self control (Hall, 1977: 95). Formalization

involves control to make sure members follow defined and standardized rules, roles and

procedures (Hage & Aiken, 1967; Hall et al., 1967; Hall, 1977) as well as instructions and

communications (Pugh et al., 1963). We define formalization as the emphasis placed on

following defined or standardized rules, roles and procedures in conducting firm pricing

activities, making pricing decisions and implementing pricing process in a formalized way.

The notion of control and routinization associated with process formalization has a negative

connotation. However, we take the opposite position by stating that well documented,

structured and communicated sets of rules, procedures and instructions for the activities

connected to pricing might increase the level of organization commitment and confidence in

executing pricing activities as well as providing a strong message about top leadership

commitment to the pricing process. Top management should avoid over- or under-

specification of the formalized process that could lead to negative organizational

consequences (Hall, 1977: 112).

Centralization, which reflects the hierarchical nature of the organization, is one of its

most critical structural dimensions (John & Martin, 1984). Van de Ven and Ferry (1980)

define centralization as the “locus of decision making authority within an organization.”

However, for complex decision making that requires professional competencies, decisions

are often left to experts.” The notion of expertise therefore takes a central part in our

  11

definition of centralization. Locus of authority in pricing decisions is highly dependent on

locus of pricing expertise. We define pricing centralization or center-led pricing management

(Deaker & Zang, 2006) as the extent to which expertise and specialized skills related to

pricing decisions are concentrated within a few positions. Because these central positions are

non routine and highly specialized, they are likely to gain power and influence (Pfeffer,

1978) because of their expertise while not, however, having pricing decision making

authority. Center-led pricing teams might be considered as a central unit of pricing

excellence or internal consultants. Here too, how centralization is perceived greatly depends

on top leadership’s definition and its communication with the rest of the organization. The

consequences of a high degree of centralization can be positive or negative for the

organization (Hall, 1977: 125) depending on the complexity of pricing decisions and the

adopted pricing orientation. Additionally because the adoption and implementation of pricing

orientation is transformational in nature with several stages (Hall, 1977: 215), a more

centralized approach might be more appropriate for the implementation stage to ensure

organizational buy-in.

Organization structure and its defining characteristics have a strong relationship to

decision making theory and the notion of rationality. The complexity of conditions under

which decisions are made, the locus of decision making authority and the design of

organizational life all create difficulties in predicting outcomes and affect how decisions are

made (Hall, 1977). Miller (1987) and Fredrickson (1986) posit that rationality in decision

making may have a strong relationship with three aspects of formalization: controls,

specialization, and policies and procedures. Rationality may be associated with centralization

of authority (Fredrickson, 1986) or to structural integration devices such as task forces and

  12

committees (Miller, 1987). Accordingly, we conjecture that rationality and organizational

structure are central to pricing orientation and to how pricing decisions are made in

organizations.

Theory of the Firm: Behavioral Theory and Resource-Based View

Theories of the firm are “conceptualizations and models of business enterprises which

explain and predict their structure and behaviors” (Grant, 1996). There is no single multi-

purpose theory of the firm. Interest by social and behavioral scientists in the firm as an

institution has been stimulated by the question of why firms exist at all. Among the four most

influential theories of the firm (Slater, 1997), behavioral theory of the firm and the resource-

based view of the firm contribute to the development of our theoretical foundation.

Cyert and March (1992), building on the work of Barnard and Andrews (1968),

March and Simon (1958) and Simon (1961) developed their behavioral theory of the firm to

challenge the assumptions of rationality in the neoclassical theory of the firm that consists of

the firm’s access to perfect information and the firm operating to maximize profits. That

theory addresses the process of decision making in modern firms from the perspective of

organizational expectations; organizational goals; and organizational choice (Cyert & March,

1992: 162). Behavioral theory of the firm’s concerns with task specialization, role and

responsibilities, avoidance of uncertainty, problemistic search and satisficing behaviors have

been integrated in our theoretical approach.

While providing useful insights about decision making in organizations, the

behavioral theory of the firm, however, does not explain performance differences among

firms. The resource-based view of the firm (Wernerfelt, 1984), which seeks to explain and

predict why some firms are able to establish positions of sustainable competitive advantage

  13

leading to superior returns or economic rent, perceives the firm as a “unique bundle of

resources and capabilities where the primary task of management is to maximize value”

(Grant, 1996). These resources include “all assets (physical and non physical), capabilities,

organizational processes, firm attributes, information, knowledge etc. controlled by the firm

that enable a firm to conceive and implement strategies that improve its efficiency and

effectiveness” (Bamey, 1991: 101). A specific combination of these tangible and intangibles

resources and capabilities is valuable, rare and difficult to imitate or acquire by competitors

(Dierickx & Cool, 1989; Hall, 1993; Barney & Clark, 2007) and cannot be captured on a

piece of paper (Nadler & Tushman, 1990: 18). These unique capabilities are “a function of

traditions, shared values, informal patterns of interaction and careful attention to recruiting

and promoting the right kind of people” (Nadler & Tushman, 1990). Firms derive their

competitive strengths from their “small number of capabilities clusters” (Dosi, Nelson, &

Winter, 2000). Because organizations face more and more complexity, they need to

constantly “re-evaluate and re-package” the required set of capabilities (Cohen & Levinthal,

1990) making them dynamic in nature (Teece, Pisano, & Shuen, 1997). The development of

unique strategic pricing capabilities and the deployment of strategic resources to grow these

capabilities can lead to superior pricing decisions, greater organizational capital and greater

competitive advantage in the marketplace (Dutta, Bergen, Levy, Ritson, & Zbaracki, 2002;

Dutta, Zbaracki, & Bergen, 2003).

METHODS  

Methodological Approach

We conducted a qualitative study using semi-structured interviews to develop a

grounded theory (Corbin & Strauss, 2008) about how organizational factors affect the

  14

adoption of a pricing approach in industrial firms. We aimed to get a better understanding of

how managers in these firms make pricing decisions and what roles they play in the firm’s

pricing process. Grounded theory is an explorative, iterative and cumulative way of building

theory (Glaser & Strauss, 1977). The main features of this approach involve constant

comparison of data and theoretical sampling (Corbin & Strauss, 2008). Constant comparison

is a rigorous method of analysis that involves intensive interaction with the data (Maxwell,

2005) to contrast emerging with already emergent ideas and themes. Simultaneous collection

and processing of data (Lincoln & Guba, 1985: 335) leads to the generation of firmly

grounded theory. Theoretical sampling refers to ongoing decisions about who to interview

next and how. As the constant comparison of data yielded insights about our phenomena of

interest, research modifications were made to gain broader comparative and deeper personal

narratives regarding pricing experiences, and the sample was adjusted in response to

emerging ideas and themes.

Sample

Our sample consisted of forty-four managers in fifteen small and medium U.S.

industrial firms. Relying on the principle researcher’s professional network and advice by the

Professional Pricing Society, over thirty-six small and medium U.S. firms were identified in

three industries: building materials, transportation products and resins & plastics products.

Managers in each firm were contacted for initial qualification with respect to their pricing

orientation. The intention was then to request participation in the research project from small

and medium firms using the three basic pricing orientations. Fifteen of the qualified

companies agreed to participate in our study. Additional sample details are available in

Appendix A.

  15

Seven firms were small as defined by the Small Business Administration 2007 size

standards by industry (www.sba.com/size) as having between 50 and 380 employees; and

eight were medium-sized with between 900 and 2200 employees. Two divisions of large

corporations where pricing decisions were taken independently were also included in the

sample.

Six firms (providing 18 interviews) adopted cost-based pricing, five (resulting in 14

interviews) used competition-based pricing and four (yielding 12 interviews) relied on value-

based pricing. Two to four interviews were conducted at each firm. Respondents included

fifteen CEOs or top executives, eighteen sales and marketing managers with full or partial

responsibility for pricing, and eleven finance and accounting managers with decision-making

authority. The firms were geographical diverse as interviews were conducted in ten U.S.

states.

Data Collection

The primary method of data collection was semi-structured interviews conducted over

a three month period from April to June 2010. Thirty-seven interviews were conducted in

person at the respondents’ place of employment and seven were conducted by telephone. The

interviews, averaging 60+ minutes, were digitally recorded and subsequently transcribed by a

professional service.

We focused on managers’ experiences in making pricing decisions and in

participating in the firm’s pricing process. We asked open-ended questions to elicit rich and

specific narratives and used probes when needed to clarify and amplify responses (the

interview protocol is presented in Appendix B). Informants were first invited to talk about

themselves, their backgrounds, and their work. We then asked them to describe their specific

  16

experience with the most recent pricing decision made in their firm or a very recent meeting

during which pricing was discussed or a pricing decision was made. Third, informants were

asked to focus on the most significant pricing decision made in their firm over the past 12 to

24 months and to describe that experience in great detail. For both questions we used probes

to provoke specific details about the pricing process. Finally, we asked the respondents about

their experience with pricing innovation and value-based pricing. The overall goal was to

elicit experience-based practitioner perspectives on the organizational factors that influenced

the firm’s pricing orientation.

Data Analysis

Consistent with a grounded theory approach, data analysis commenced

simultaneously with data collection. The audio recordings of each interview were listened to

several times and the transcripts of each interview read repeatedly. Three stages of rigorous

coding then ensued. First, all of the transcripts were “open-coded”, a process that requires the

researcher to identify every fragment of data with potential interest (commonly called

“codable moments” (Boyatzis, 1998)). Open coding, which can be compared to a

brainstorming process for the analysis of data (Corbin & Strauss, 2008), requires detailed

line-by-line readings of each transcript. We read each transcript four times to ensure capture

of all codable moments which were documented on index cards. Manual coding on cards

allowed the researcher to nearly “memorize” the data and to capture the essence and richness

of the general themes and trends emerging from the voice of the informants. We identified

and labeled (Boyatzis, 1998) 2554 such words, phrases, or longer sections of text in the

forty-four interviews. These “codable moments” were sorted and assigned to pre-existing or

new categories that included similar excerpts from other interviews. In a second phase of

  17

coding (“axial coding”) these categories were further refined as we compared and contrasted

them, a process that resulted in the emergence of patterns and themes. During the axial

coding phase we reduced the number of categories to 92. Finally, in the third phase of the

coding process (“selective coding”), we focused on key categories and themes that generated

our findings. The selective coding process resulted in a reduction in the number of categories

from 92 to 40 yielding 7 major themes and capturing 781 of the total “codable moments”.

Additional information relating to the definitions of themes and sub-themes is presented in

Appendix C.

FINDINGS  

Our data reveals that the decision-making process and the factors influencing price

setting and price point definition for existing and new products in U.S. small and medium

industrial firms varies dramatically by pricing orientation i.e. value, competition and cost.

We discovered stark differences in the locus of the pricing function, the nature of the pricing

process, the organizational structure, the diffusion of pricing capabilities and in leaders’

behaviors in firms with a value-based pricing orientation versus those with cost- or

competition-based orientations.

Finding 1: Firms using value-based pricing (VBP) support pricing decisions by reliance on formal market research, scientific pricing methods and “expert” recommendations while those using other orientations (cost or competition) rely on experience, prior knowledge, gut and intuition.

Three out of four firms in our sample that had adopted VBP conducted formal

quantitative market research to calculate customers’ value and to derive final pricing points.

These firms used scientific methods, such as conjoint analysis, KANO, and customer

acceptance testing, to define a range for the price point. Respondents claimed these methods

  18

reduced the level of uncertainty when managers made the final price point definition thus

increasing the level of rationality in the decision making process. Figure 1 below illustrates

the VBP price point definition process highlighting the role of internal experts and

consultants from “central” or center-led pricing teams as critical to support, test and validate

pricing decisions.

FIGURE 1: Price Point Definition Process for Value-Based Pricing (VBP)

As illustrated in Figure 3, of the six firms which used cost-based pricing (CBP), most

developed advanced cost models – and all used margin targets - to inform pricing decisions.

When faced with uncertainty, managers of all firms reported using prior knowledge and

experience and half admitted to relying on intuition and guessing to define the final price

point (see Figure 5). Most of these managers (5 out of 6 firms) characterized their pricing

process as “unscientific” despite the fact that it was based on financial data and was

formulaic in nature. Figure 2 below provides evidence of the scientific versus unscientific

nature of decision making processes in these firms.

  19

FIGURE 2: Differences in the Decision Making Process between Firms Using Value-Based Pricing

and Those That Did Not

Scientific Decision Making Process

VB1 - SM

"Basically, we give one recommendation...and we try to make this recommendation with a proof, with an evidence that this is right. And this is done in this Phase 4 (of Stage Gate), for example, within the second customer contact phase, which can be a conjoint analysis because then you have facts and data that support your recommendation."

VB1 - EL

"The large decision-making is up to the product manager, of course. He will follow the recommendation of the (functional) guy based on the controlled research."

VB4 - SM

"We try and get feedback from our testing. So whenever you have tests done and you can quantify the performance of the new product versus the other alternatives that customers have access to (and) then we try and see if we can quantify the benefit that this product will deliver based on all the benefits we think it brings. We will survey as many as many customers as we have access to, or as much test data as we have generated and have access to...We ask them to test it, test the hypothesis. Instead of saying every analysis you come up with is wrong and therefore cannot be implemented, you create an implementation plan that allows you to test."

VB2 - FA

"We do an analysis of the investment, definitely...For something like that, because it would be like a new product and we would be investing, we have a process internally where, before we finalize anything, it goes before the executive team, and we review the pricing. We review our returns on the project "

Unscientific Decision Making Process CB5 -

EL "I would love to say it’s scientific, but it ain’t, I mean, it ain’t….it’s a gut check that’s made that."

CB3 - EL

"Yeah, it’s not a highly scientific, there’s not an algorithm I could give you."

COB1 - SM

"Now what that premium is, is highly, in my mind, unscientific. That’s almost (as much) art as it is science...A quantification of the value of the system is the Holy Grail for me."

COB3 - EL

"We had information coming in from Japan. We had information coming in from China. So we knew we were in a favorable position, which I think gave us the confidence to go a little bit higher, but I can’t say at the end of the day I did a spreadsheet and put in all the factors and came out with a number and said, “That’s the number we’re going to"."

COB2 - EL

"As far as having some working formula that enables us to say that this marketplace enables us to mark up 50 percent of what we would normally do, it’s probably not as sophisticated as that. It is more a sense of understanding the marketplace and the pricing associated with the applications, and then the value add that we bring to the table to ensure that we achieve maximum pricing."

FIGURE 3:

Price Point Definition Process for Cost-Based Pricing (CBP)  

  20

All of the firms in our sample using competition-based pricing (COBP) similarly

relied on prior knowledge and experience as well as intuition and gut feeling to define the

final price point. Our data, as reflected in Figure 4, demonstrates that managers in these firms

typically considered the price of the best competitive products and added a premium to it.

While using cost models (4 out of 5 firms) and margin targets (4 out of 5 firms) to set their

minimum prices, the final price point setting was reported to be set based on “gut feeling”

and judgment call (see Figure 5). Pressed to specify how and by whom the final price point

was defined, managers of these firms as well as those in firms using CBP admitted to

reliance on “collective intuition.”

FIGURE 4: Price Point Definition Process for Competition-Based Pricing (COBP)

  21

FIGURE 5: Evidence of Decision Making Factors in Firms Using Cost-Based or Competition-Based

Pricing Orientation

Decision Making Based on Gut and Feeling

CB5 - EL

"It’s based on their gut…it’s their experience and their gut."

CB3 - EL

"Think about the person involved, but mostly, it’s got to be a gut – there’s no certainty. So there’s no analytical (process)."

CB3 - FA

"…how much do we go in compared to our competition? That’s more, you know, a feeling thing…."

COB5 - EL

"It is not structured at all, and I guess that’s one of the things that I find repeatedly through pricing discussions...there’s so much intuition around it that’s used…..to be very, very honest, at the end of it, it’s a gut thing. I said, “I wanna price it higher. I wanna go with a more premium. We’re a premium brand. "

CB4 - FA

"And it's just gut-feel experience...They pretty much took what we had...there wasn't a lot of changes – just some small tweaks. Maybe this went up a little bit. Sometimes if you're working so close to it, you don't see the forest through the trees. And then when they look at it, they have a different perspective."

Decision Making Based on Judgment Call and Guessing CB2 -

EL "Judgment call. Judgment call. Not a written down process. It’s just a judgment call…..no scientific mechanism."

COB2 - SM

"No. I mean if we know that they’re losing – one of their packs may sell for $100, you can find some of that information to get close. Some of it is good guessing. Others are you get limited information."

COB3 - EL

"We basically made a somewhat educated guess that we were going to go higher than our typical market price because we were unique in the marketplace.."

Finding 2: The locus of pricing and the organization of the pricing function in industrial firms varies greatly based on pricing orientations.

Finding 2.1: Pricing is an orphan in industrial firms using cost or competition pricing orientation. No dedicated pricing function existed in the 11 firms in our sample using cost or

competition pricing orientation. In these firms, pricing activities were highly fragmented,

followed informal pricing review processes, and focused only on margins versus prices (7 out

of 11 firms). By contrast all firms using VBP had dedicated pricing functions (involving 3 to

15 members), tracked specific pricing KPI’s and led specific weekly or monthly pricing

reviews.

  22

Finding 2.2: The locus of pricing responsibility varies based on pricing orientation. In the 11 firms using CBP and COBP, the locus of both tactical and strategic pricing

responsibility was situated in sales function. In all firms using VBP, the pricing function

reported into the marketing organization. In these industrial firms, marketing was

responsible for strategic pricing resulting in greater integration of pricing programs in the

overall marketing planning process.

Finding 3: The implementation of VBP is associated with significant changes in organizational structure and with the diffusion of pricing capability throughout the firm.

Finding 3.1: Firms using VBP designed formalized processes and established centralized or center-led pricing expertise. All firms using VBP created specialized units composed of highly skilled

professionals whose mission was to support the pricing decision-making process. These units

included, as illustrated in Figure 6, a packaging engineering group, a dedicated pricing team

acting as internal consultants or a specialized market research team dedicated to voice of the

customer projects. The role of these units was to provide project-related support to managers

who made business unit-specific pricing decisions.

  23

FIGURE 6: Evidence of Role Specialization in Firms That Use Value-Based Pricing

VB1 - EL

"We have dedicated (functional) managers. They don’t do anything else, and then just (customer research), and this is observation of the customer. It’s videotaping of the customer. It’s understanding what is the unarticulated needs of the customer, and of course, also the articulated needs."

VB3 - EL

"The way (company) works is we have the business units in (country) which are in charge of development. So they bring the products and then they bring overall pricing guidelines worldwide."

VB3 -

SM

"You've got the senior manager of pricing, which is responsible for the pricing processes; continuous improvement for (Corporation) overall...and then within that group you have a few analysts who help manage the pricing within the system: one technical person, one person who helps on the reporting..., one individual who helps out with projects like agreement review process (and) strategic business pricing. And we also have group that focuses in on day-to-day maintenance of making sure price points in the system don't go below a certain threshold."

VB4 - EL

"In a development group...there’s three people like (name) who are development managers. We’ve got hundreds of development people in the world...That’s all they do. They don’t sell a thing......So they’re doing the advanced design, advanced development."

VB2 -

SM

"We have engineering services, our project managers...(who) can put together is a cost justification analysis…The department is called Engineering Services...they’ll bring in all the formulas/cost justifications from our customer’s end."

VB2 - EL

"We have a pricing department. It's four people that are split by market segment, and they're responsible for doing quotes for new business or large – anything that's not under contract should come to them for pricing, to do a quote."

In these firms, pricing responsibility was center-led and the department provided

pricing support to the entire organization. Our findings (see Figure 7) suggest a definition of

centralization in which knowledge and capabilities were concentrated to create the concept of

a center of excellence for pricing. Five out of six sales and marketing respondents in firms

using VBP indicated that this central pricing function acted as a strong resource to improve

managerial pricing management. None of the firms using CBP (0 out of 6 firms) reported the

existence of a centralized pricing function.

  24

FIGURE 7: Evidence of Expertise Centralization in Firms That Use Value-Based Pricing

VB1 - EL

"...we have three full-time equivalents for voice of the customer studies. We have that centrally. So whenever we develop a product for this market, we get them here and they set the whole system because it’s a very formal thing."

VB3 - SM

"The overall team supports all of the (Company) North America...the profit desk underneath the pricing team can look to see whether or not the price points are too low."

VB3 - FA

"Pricing is actually at the corporate level here, it's marketing that has that pricing team underneath. So marketing is responsible for defining the price points."

VB4 - SM

"I am a corporate function, I go from business to business."

VB4 - EL

"When we wanna do something different and new, we hooked up with them (Central Team) (and) when we said, “You know, on our mature business, we got too many price points. We need to simplify this thing. How do you help us simplify?”...there’s this group out there that knows (and) consults on this all the time. Why don’t we tap into them, and let’s start a project. (That) group is kinda looking for the best of the best in (Company) and in cross-training."

VB4 - SM

"We tap into our corporate sales and marketing (team) (and) say, “Hey, they’ve got professionals that know the terminology, the theory, and the strategy associated with pricing in general.” And you do a little bit of negotiation role-playing and that sort of thing. So that’s probably once a year or once every year and a half."

All firms using VBP reported greater formalization of their pricing process as well as

other related activities (see Figure 8). Respondents declared using stage gate processes for

new product introduction, very elaborated voice-of-the-customer management processes, and

automated price deviation processes embedded in the firms’ ERP systems. Three out of four

of these firms implemented formal pricing review processes and claimed the need for strong

pricing discipline to improve the robustness of the pricing process.

  25

FIGURE 8: Pricing Process Formalization by Pricing Orientation

Formal Pricing Process

VB3 - EL

"...there’s a time to money process. From product development to product launch, there’s a gate system...in Gate 3 or 4 is where the finalized product along with the defined marketing plan of the market organization has to come together. And in that model you’ll have seen this customer work that has been done with prototypes and you’ll see our pricing models that we’ll put together in order to go after our piece of the marketplace."

VB3 - SM

"We have the prices structured in the system, the what we call the profit desk underneath the pricing team can look to see whether or not the price points are too low, or are at least profitable and value-based enough to go, regardless of what business or trade it is. It's all set up, up front in the system."

VB3 - SM

"We'll have monthly reports that show the trends...on a monthly basis, (CEO's Name) along with other individuals get a report to see how has our NSP (Net Sales Price) along with (our) template utilization...But it's basically seeing how consistent are we with our pricing to customers."

VB2 - EL

"...there will be a general price list that will have a high and low on it. And if somebody tries to price outside of that high and low, that will automatically trigger what we call a workflow, which will require an approval from a higher-level marketing manager."

VB1 - EL

"this process is not just a nice book. This is standard. That (is) one of the key elements that...a cross-functional internal team has come up with. So that’s embedded internally (and) deployed internally, and that’s (a) very critical success factor..."

Informal Pricing Process

COB5 - EL

"More (of) the formality is around costing and the stage gates are you either proceed or don’t proceed based on costing (and) cost targets. We set a cost target based on the margin expectations...So we put more formality around costing analysis, and there’s less formality around the pricing...it’s funny how this works."

COB3 - EL

"We look at programs we thought we would get and didn’t get and do an autopsy on why did we not get them...But honestly, once we get a business, we don’t review the pricing on a regular basis."

CB2 - EL

"It’s not reviewed formally. I guess I would call it informal. It’s a process, but it’s not something we sit down and have a meeting to review all the quotes...I’d say that’s a little more informal."

CB5 - FA

"The pricing was decided among sales and the CEO. There really wasn’t a formal meeting that took place with finance related to the pricing. There was no real formal meeting that involved finance at least. "

CB4 - EL

"I mean I apply those principles and disciplines personally. I don’t think we embrace that (pricing) philosophy necessarily formally here."

CB6 - EL

"...somewhat formalized...There wasn’t a formal...formula that I recall ever having to go to say, “Okay, if it does this give that a factor of 10 percent. Or this gives a factor of 30 percent.” Nothing like that. I’m sure that exists, but that was nothing we ever used."

Finding 3.2: Firms using VBP – but not those using COBP or CBP – purposefully diffused pricing capability throughout the firm by training and designing proprietary tools. All firms using VBP in our sample emphasized the importance of training and

designed specific formalized training programs for both existing and newly hired personnel.

Only one in six firms using CBP, however, did so despite recognizing the importance of

training (Figure 9).

  26

FIGURE 9: Differences in the Training Focus among Firms with Different Pricing Orientations

 

Firms That Conduct Specific Pricing Training

VB4 - SM

"We do a lot of training on to get ready for a specific price increase because every single one (price increase)..is a little bit different. So there is some specific training on this one."

VB4 - SM

"Specific (pricing) training for price is probably done in three ways. One way is probably once every year or so, we tap into our corporate sales and marketing.....“they’ve got professionals that know the terminology, the theory, and the strategy associated with pricing in general.” And you do a little bit of negotiation role-playing. So that’s probably once a year or once every year and a half. And then our own team does training about every year and a half on sales basics."

VB4 - SM2

"As corporate marketing we've launched a number of initiatives which train people at multiple levels. So you have the everyday practitioners...(trained) not just pricing but general aspects of marketing. We are doing training for senior leaders. We are also trying to train people who are running important projects...I am very focused on the pricing. I do it as sessions in seminars. I do it on the project kind of work."

VB3 - SM

"Every account manager learns how the pricing is done through the BTS which is three weeks of training when an account manager (or) a sales rep starts. And so that's been one of the main ways to train the individuals on how to price, what the value is for selling trade templates."

VB1 - EL

"train, train, train, train...we are just making a contract with a training company in the U.S…. to really teach them value selling, strategic selling and distribution management...that’s a program for the next 18 month."

Firms That Do Not Conduct Specific Pricing Training

CB3 - SM

"Not a lot. We are very lean on all of our expenses, and so you won’t see us spend a lot of money on training. It’s expected that I try and convey that to the RVPs, and they convey it to their people. So we just do it by doing it."

CB3 - EL

"You know I don’t think we’re going to do formal training on it."

CB2 - SM

"As a company, we used to be really, really good at training. We’ve lost that over the last six years or so, and ...we probably don’t train 15 percent of what we used to. And that’s a little disheartening."

COB4 - EL

"...training hasn't been as big an impact or driver. We haven't spent as much in training or done as much training as I guess we probably could have."

COB4 - SM

"No, we haven’t done (training) and honestly that’s probably something that you know we should be doing."

COB5 - EL

"No, not so much. We haven’t (done training), not as formal. Now they have training, certainly, that’s specific to their areas, but we’ve not done pricing training or anything like that."

Firms using VBP also focused on developing internal capabilities in the areas of

market research (4 out of 4 firms), pricing research (3 out of 4 firms) and the development of

proprietary tools (4 out of 4 firms) to capture and quantify customer value that were more

sophisticated than those described by firms using CBP and COBP. Top executives (4 out of

4) and sales and marketing respondents (4 out of 6) in these firms using VBP were among the

respondents who reinforced the importance of these proprietary tools to support the

implementation of the total cost of ownership and value-in-use pricing methodologies.

  27

Finding 4: VBP requires firm-wide internalization and the decisively influence of champions

The role of top executives in firms using CBP and COBP was reported to be limited

to approval of unusual pricing deviations, input on large contract negotiations, and

clarification of uncertain and ambiguous pricing opportunities and the conduct of general

business reviews. Top management in these firms were described by managers as involved

only in to day-to-day and tactical pricing. All of the executives in firms using VBP, in

contrast, were actively engaged in championing its implementation (see Figure 10).

Managers characterized these executives as driving the internalization of VBP throughout the

firm and motivating organizational changes required to support it. Sales and marketing

managers (5 out of 6) reported that support and conviction from top leaders was essential to

the VBP adoption.

  28

FIGURE 10: Evidence of Leader’s Decisive Influence

Leadership Emphasis

VB4 - SM

"they (top executives) end up being sponsors of the projects I lead and they understand full well what the issues are and why that kind of a project is required. The project is periodically reviewed by the leadership people...they look at our results...they understand why our results are what they are and then they look at our strategy recommendations and approach. They are big partners in that because if they don't bless it, implementation will never happen."

VB1 - EL

"Make sure that top management does support the initial rollout (of the VOC process) because the rollout is critical."

VB3 - SM

"The fact that top management was behind (VBP implementation) – and that was probably the critical piece that made it successful - that top management was willing to go through the pain of making this change because not everybody was on board...Again, I go back to the top management buy-in."

VB3 - FA

"You have to have a compelling idea or concept that you want to rally the troops behind...And you need to I would say buy in from top executives."

Executive Commitment

VB4 - EL

"(We) really did stand behind (VBP strategy)…It is a commitment we are not gonna change next year....But in the last, I would say, the last 10 we’ve been pretty consistent in terms of our (pricing) strategy. Very consistent."

VB3 - EL

"Look, we’re a (Country) based company. ..We believe in long term (and) sustainable management based on a well-defined (VBP) strategy, which needs to be executed over a large group of people. There’s nothing else to be said."

VB1 - SM

"(Value strategies) are our core strengths in the company, and it’s highly supported. So that’s why I’m not facing too much resistance."

COB5 - SM

"…executive commitment to the (service and value model) initiative (is)….made it the No. 1 strategic initiative for (Company)...and from that stemmed everything else."

Driving Force

VB3 - SM

"What made (VBP) work was, looking back,..was definitely the fact that top management helped sell it, helped, honestly, push it along as well. And over time, it's proven that they were correct. But without the top management, it wouldn't have happened."

COB4 - EL

"I'm a very big driver (of value strategies). I'm the biggest pain."

Respondents in all firms using VBP described its implementation as a long and

difficult process triggered by a specific stimulus (e.g. customer pressure, an acquisition, a

product launch failure or a desire to escape a cyclical industry pattern), purposefully

championed by top executive and requiring organizational transformation. As one manager

observed, “the biggest barrier was the change itself – (overcoming) the belief that this will

not be positive for (Company) and going from complete field control to corporate

helping…by giving suggestions on pricing. And it was not easy at all”.

  29

Finding 5: The internalization of VBP requires a high level of organization-wide confidence.

All firms using VBP reported that confidence of employees in their organization was

increased when they strongly believed in the team’s ability to implement VBP as well as if

they shared strong beliefs in the firm’s products, technologies and values (see Figure 11).

These beliefs gave sales staff greater courage to stand firm to customers’ pricing objections

and to be, as one respondent stated, “superman for one second” when facing customers’

objections (see Figure 12). CEO’s and top executives in these firms seemed to be most aware

of the criticality of developing these internal beliefs (4 out of 4) and implemented specific

programs and activities to boost organizational confidence. Three out of four firms using

VBP focused on specific people development activities such as coaching sales staff,

designing specific performance management programs and targeted talent development plans

around value orientation. This phenomenon was not observed in firms using CBP and was

observed to a lesser extent in firms using COBP.

FIGURE 11: Importance of Employee's Beliefs on Confidence

VB4 - SM

"…you have to look (customers) in the eye and say, “Ours (product) costs more. This costs more, and it’s worth it. You should pay more for that. You have to be pretty confident to do that."

VB4 - SM2

"We have to look people in the eye and say “we deserve to be paid more for our products.” We have to look them in the eye and you have to have confidence...and say “we got engineers, we got scientists...and so ours do cost more".”

COB1 - EL

"I think it’s more a belief that you actually do have a premium product. You have to have a culture that the people inside believe that what you’re doing is better than the next guy, that you’re using better ingredients, that you have better technology behind the product formulation, that you can – the product consistently has to be there."

COB5 - SM

"I think the top three factors to (value strategies) success: getting our people to believe in it, No. 1. Getting the customer to see value in it. Those are clearly the two (because) if you don't have your people in alignment, going after it, and understanding it, and believing in it, they're not gonna sell it. And they didn't at first. There was a few people that adopted it – when I mean "few," less than a handful. But they were very successful with it…and people started to pay attention."

  30

FIGURE 12: Importance of Courage and Pricing Heroes on Confidence

 VB4 - SM2

"Constant interaction. Every week...we give examples of how this worked…celebrating (Name) as a hero because he implemented that price."

VB3 - EL

"The confidence of the sales force is to walk in and display the innovation that we have. And when it gets to the pricing objection because we will always be above our competition, (having) the ability to stand firm and explain why the price is correct."

VB3 - SM

"That gets people courage when you start having a lot of success in areas that they might have viewed as, “That’ll never happen"."

COB5 - EL

"...this was a great little quote: “You only need to be brave for one second, and it’s when the guy asks for a discount and you say no. And then you justify it. That takes bravery.” So how do you get salespeople in a mindset to justify the price? You don’t have to go in there and be Superman for two hours. You have to be Superman for one second."

Firms using VBP (3 out of 4) also reported that they consistently communicated internal

wins as well as market challenges in order to accelerate the organizational buy-in and to

facilitate the internalization of VBP. Our findings (see Figure 13) indicate that success stories

in the area of pricing increased organizational confidence and created “organizational

heroes” with respect to successful pricing activities.

FIGURE 13: Importance of Success Stories on Confidence

 

VB4 - EL

"And you try to get people allied around the success stories that we have. That gets people courage when you start having a lot of success in areas that they might have viewed as, “That’ll never happen.” Holy mackerel. We’re being very successful with this thing? We’ve had so many price increases recently that it’s very contagious...".

VB4 - SM2

"So we try to show people examples of "here’s more value". In these meetings, we’ll have some success stories".

VB3 - SM

"But the marketing and the pricing team constantly giving feedback....And here are some account managers whom we converted. They're a believer in this. This helps out. They have to spend less time on pricing now. They don't have to worry about which price point, or what was the price point in the past."

VB1 - EL

"No. 2 (key success factor to VBP), create success stories and proven track records before you implement the process."

Finally, three out of four firms using VBP emphasized the criticality of getting teams

energized in order to promote its implementation. Two out of four CEO’s working in these

firms engaged in specific activities and behaviors in order to energize teams and to create

emotional contagion in their organization.

DISCUSSION

  31

 

Our data contradicts the widely held assumption (Ingenbleek, 2007; Hinterhuber,

2008; Cressman, Jr., 2010) that value-based pricing (VBP) can simply be “adopted.” Rather,

they strongly suggest that implementation and internalization of VBP requires deep

organizational changes that transform the fabric of the firm. We expected to find significant

differences in how small and medium industrial firms organized their pricing functions and

how pricing decisions were made – and our findings proved us right. But stark contrasts

among firms with different pricing orientations were uncovered and were related to

organizational characteristics and leaders’ behaviors in these firms.

We begin by discussing the deep transformational change required to implement

VBP; then we examine the transformation to VBP from a learning theory perspective. Next

we discuss the essential role of champions in this organizational transformation; and we

conclude by reviewing the current position of the pricing dimension in the industrial

marketing concept. Finally, we propose a conceptual model for the internalization of and the

transformation towards value-based pricing.

Value-Based Pricing Requires Deep Transformational Change

Marketing and pricing studies concerned with the adoption of the three main pricing

orientations in business markets recommend VBP as a modern and advanced pricing

approach (Monroe, 1990; Nagle & Holden, 2002; Hinterhuber, 2004; Ingenbleek, 2007;

Hinterhuber, 2008; Cressman, Jr., 2010). However, we argue that the implementation and

internalization of VBP requires deep organizational change that transforms the firm’s

organizational life and identity as well as the identity of actors within it. This transformation

is manifested by a slow “mutation” of what our informants called their firm DNA from cost

  32

or competition to customer value. The respondent excerpts in Figure 14 illustrate how cost

mentality is engrained in firm DNA while Figure 15 suggests that the transformation process

does not happen swiftly.

FIGURE 14: Evidence of Cost-Plus Mentality in Firm’s Culture or DNA

 

COB5 - EL

"Our DNA is manufacturing ... I’m very used to standard cost....the very traditional cost plus. It just comes from being a manufacturing company.... I think we’re dynamic and moving in the service models but we’ve dragged along this cost plus kinda pricing model."

COB3 - EL

"We really do need to break away from the cost plus mentality and really look at what can we really get for this business. I do challenge that, but maybe if the starting point is cost plus, you’re never really breaking away from that thinking."

CB5 - SM

"I’m responsible for all costing…. in the way our business runs today, that’s the foundation of all pricing….in essence, most of our pricing is a cost plus mentality."

CB5 - FA

"The COO had put in these measures to increase sales by discounting, filling up the plant, and he had convinced the people underneath him...that absorption was the name of the game. so now that’s imbedded in the culture."

CB3 - SM

"So we were given a target that was very aggressive, so then since we had a target we had to decide do we come below...at...(or) above. And in the end because of the importance of the business and we have this mentality, you can’t miss, we came in slightly below and we eventually won the business."

FIGURE 15: Evidence of Firm’s DNA Transformation to Value-based Pricing

 

VB1 - EL

"As soon as (customer process management/VBP) is rolled out... it becomes part of your DNA, and that’s when you’re over the hill, when you’ve really passed the barrier. And then, that’s an integrated part of your company contract."

VB3 - SM

" We've realized that if you adjust a price up or down, you may also have to adjust cost because that's typically what happens. And so since this cost is more based on management accounting, we've held it steady throughout the years. So this idea that we have to be more dynamic is very much a culture shift, and to be honest, we're still going through it."

VB4 - SM

"I couldn't say that (it is yet in the DNA). I don't think it happens overnight. It's a journey. It's a journey with multiple, multiple small steps, and (we have) been on this journey for a while. A lot of progress was made, but the journey is not complete. We've got a ways to go, but there's a lot of energy behind it."

The implementation and internalization process of VBP is a long, tenuous, and

sometimes painful journey of change for the organization and its actors. The process

requires intense and sustained organizational mobilization to transform established structure,

culture, processes and systems. Marketers, sellers and developers have to change their

business mentality and their frames of reference and embrace new value-related concepts

which are expected to become a new “way of life” (Forbis & Mehta, 1981). They also must

  33

learn a new language in order to carry the value message internally and externally. As a

result, people change and become “organizational heroes” or leave the organization. The

following quote from a VP of Global Sales and Marketing illustrates the difficulty in the

transformation of people:

“We put people on performance reviews….the guy who was No 1 in targeted attainment three years ago.. was No. 3 in sales target attainment last year…And he's on performance plan right now. The reason he's on a performance plan is because he's at the bottom of the barrel on (value selling)…We said to him, "This isn't acceptable. I can get anyone to look after the (equipment) side. What I need someone is to change the market"…We've released a couple of people who haven't been able to make the transition which has been difficult…That kind of performance management alignment is key.”

Our findings suggest that firms engaging in the transformation to VBP intentionally

designed programs focused on building organizational confidence to accelerate members’

buy-in and boost motivation levels to accept change. When confidence is high, people share

beliefs in their “collective power” to produce desired outcomes and ends (Bohn, 2001).

Bandura (1997: 476) posits that “an organization’s beliefs about its efficacy to produce

results is undoubtedly an important feature of its operative culture”. A meta-analysis

conducted by Gully, Incalcaterra, Joshi, & Beauien (2002) showed that the relationship

between collective efficacy and team performance was positive and significant supporting

the idea that efficacy is “a primary determinant to the extent to which individuals or teams

are likely to put the efforts required to perform successfully” (Bandura, 1986: 392). Our

findings support this notion of effort. Confidence consists of “positive expectations” for

favorable outcomes (Hoover & Valenti, 2005). It influences the individual member’s

willingness to invest money, time, reputation and emotional energy to shape the ability to

perform (Kanter, 2006: 7). Organizational confidence is a generative capacity of an

organization to cope effectively with the demands, challenges, stresses and opportunities it

encounters within the business environment. It exists as an aggregated judgment of an

  34

organization’s individual members about their (1) sense of collective capacities, (2) sense of

mission or purpose, and (3) a sense of resilience. In its most basic form, organizational

efficacy is a sense of “can do” (Bohn, 2001, 2002).

We suggest that organizational confidence acts as the “fuel” that feeds the engine of

change and generates required organizational mobilization when organizations engage in the

transformation process towards VBP.

Value-based Pricing: at the Nexus of Experiential and Transformative Learning

The implementation and internalization of VBP requires a strong knowledge

foundation in pricing in the organization. Prior knowledge confers “an ability to recognize

the value of new information, assimilate it, and apply it to commercial ends” (Cohen &

Levinthal, 1990). As previously observed, pricing knowledge and capabilities are developed

over time (Dutta et al., 2003), are incrementally accumulated, and are dependent on

organizational absorptive capacities (Cohen & Levinthal, 1990; Szulanski, 1996; Zahra &

George, 2002) of the pricing process actors.

Experimentation is an important requirement for the internalization of VBP concepts,

frames of reference, language and forms of interaction. The transformational nature of VBP

requires that the organization learn through a process of experiential learning (Kolb, 1984;

Kolb, Boyatzis, & Mainemelis, 2001) or through trial-and-error experiments (Pfeffer &

Sutton, 2006). Experimentation matters because “it fuels the discovery and creation of

knowledge and thereby leads to the development and improvement of products, processes,

systems and organizations” (Thomke, 2003: 1). Experiments yield information that comes

from understanding what works and does not work. Learning from past failures can be rich in

findings (Thomke, 2003: 213). But, the most important advantage of experiential learning

  35

through experiments is that it provides a valid way for managers to observe and interpret past

experiences (Green & Taber, 1978). Consistent with experiential learning theory (Kolb,

1984), the learning process related to VBP requires both assimilation and accommodation

learning styles. The organization and its members incrementally assimilate knowledge which

will “stick” (Szulanski, 1996) to existing pricing knowledge. However, because of the

innovative, subjective and sometimes contentious nature of VBP, organizational actors will

modify their frames of reference, learning patterns or schemas (Stein, 1995) to accommodate

the integration of unexpected and novel knowledge.

Experiential learning alone is not enough to assure the successful transformation to

VBP. In combination with transformative learning, it represents a powerful foundation that

can help the organization and its members face deep changes and uncertain frames of

reference. Transformative learning refers to the process of “effecting changes in a frame of

reference” or in “the structures of assumptions through which we understand our

experiences” (Mezirow, 1997) . Transformative learning relies on the use of prior

interpretation to “construe a new or revised interpretation of the meaning of one’s experience

in order to guide future action” (Mezirow, 1996, 2000). Our findings suggest that in firms

using CBP or COBP, frames of reference are very powerful in guiding pricing decisions as

they include habits of mind, routines, legacy practices and mentality or mind-sets (Mezirow,

2000) that are deeply engrained in the firm’s culture. Transformative learning refers to the

process of transformation of these frames or references, routines, norms, and schemas to

make them more inclusive, open and “emotionally capable of change” (Mezirow, 2000).

These changes have implications for both the organization and its individual members.

Change requires awareness of how knowledge is created and how information is processed

  36

and what values lead us to perspectives. This process of transformation is equivalent to a

reformulation of the structure of meanings (Mezirow, 2000) that requires critical reflection

and a possible higher level of mindfulness (Langer, 1997). Mezirow has identified ten phases

of transformation (Mezirow & Welton, 1995: 50) that encompass factors revealed in our data

as critical in VBP internalization - experimentation with new roles, acquisition of skills and

knowledge and the building of confidence in new roles and relationships. Mezirow’s

conception of transformative learning touches on two critical elements of a successful

transformation to VBP- the enduring nature of change over time and the irreversibility of the

transformation (Taylor, 2007). Both are needed to transform the culture from cost to value

and to take the organization to a sustained process of transformation putting customer value

at the center of the firm’s reason to exist (Slater, 1997).

Champions Lead the Organizational Transformation

The organizational champion is a critical driver of VBP internalization as well as the

organizational transformation. Champions mobilize the organization by energizing teams,

making resources available, providing continuous emphasis and focus on the pricing

orientation, and by being willing to learn from failures to break down organizational and

behavioral barriers.

The literature on organizational champions from a technological innovation

perspective is rich. Forty seven years ago, a seminal article on radical military innovation

(Schon, 1963) identified the role of a champion and proposed a first definition. Faced with

resistance and indifference to major technological changes, organizations need champions to

“promote ideas actively and vigorously through informal networks and to risk his or her

position and prestige to ensure the innovation success” (Schon, 1963). Schon argues that a

  37

new idea “either finds a champion or dies.” Chakrabarti (1974) further observed that

champions play a critical role at all stages overcoming technical and organizational obstacles

and succeeding by the “sheer force of his will and energy.”

While much of the work on champions has focused on innovation leadership

(Deschamps, 2008), some scholars and practitioners investigated the role of champions from

a leadership and managerial perspective. Organizational champions were defined as

charismatic leaders (Nadler & Tushman, 1990), transformational leaders (Bass, 1985:22;

Wang & Huang, 2009) or champions of change (Nadler & Nadler, 1997: 98). Championing

behaviors emerged from the literature (Howell & Higgins, 1990) and included

“communicating a clear vision of what innovation could be or do, displaying enthusiasm and

demonstrating commitment to it, and involving others in supporting it”.

Finally, academic researchers focused on the relationship between charismatic

leadership and perceived collective efficacy and organizational confidence. Charismatic

leaders increase followers’ self worth by leading to increase in self-efficacy (Shamir, House,

& Arthur, 1993). By doing so, they enhance followers’ perceived self-efficacy defined as “

the judgment of one’s capability to accomplish a certain level of performance” (Bandura,

1986: 351). Charismatic leaders increase “effort-accomplishment expectancies” by

reinforcing collective efficacy. Thus they increase both self-efficacy and collective efficacy

by expressing positive evaluations (Tasa, Taggar, & Seijts, 2007), by showing confidence in

people to perform effectively and to meet challenges (Nadler & Tushman, 1990), by

awakening spirits to “rouse up the troops” (Hacker & Roberts, 2003), and by energizing

members of the organization (Nadler & Tushman, 1990; Thompson, 2009: 100). This focus

by champions on energizing teams in organizations creates organizational excitement which

  38

leads to a sort of “emotional contagion” (Hatfield, Cacioppo, & Rapson, 1994: 7) that is

necessary for the transformational journey.

The Position of the Pricing Dimension in Industrial Marketing

Previous marketing research suggests pricing is a neglected area in industrial

marketing (Noble & Gruca, 1999; Shipley & Jobber, 2001; Hinterhuber, 2004; Lancioni,

2005; Hinterhuber, 2008; Cressman, Jr., 2009) as well as an under-researched and under-

published field compared to other elements of the marketing mix (Malhotra, 1996; Noble &

Gruca, 1999). Our findings confirm this phenomenon. In 11 out of the 15 companies

comprised in our sample, the pricing function did not exist and was not managed. In these

firms, pricing activities were highly fragmented and pricing strategies were not clearly

defined. In small and medium industrial firms, the traditional 4 P’s of the marketing concept

was limited to 3 P’s (product, place and promotion) as pricing was only performed at the

tactical level and mostly delegated to the sales force.

These findings ring as a warning bell to marketing scholars and the pricing profession

in general. There is a need for more professionalization and promotion of the pricing function

in industrial markets. The pricing profession should tackle the perception that pricing is a

complex function that is too often associated with finance and accounting. Marketing leaders

should be equipped with the best and most advanced pricing knowledge. Pricing should

become an integral and systematic part of the marketing curriculum in order to, in the long

run, regain his position as one of the 4P’s of the industrial marketing concept.

Informants were asked to share their understanding of VBP (see the interview protocol in

Appendix B). Our intention was to stay away from theoretical definition and to give them

the latitude to create their own conceptualization. Our findings show that conceptualizations

  39

vary from firm to firm as well as within firms. Figure 16 illustrates this phenomenon by

presenting the understanding of VBP from the executives in firms that use it. A full list of

conceptualizations is presented in appendix E. The following conclusions can be drawn:

None of the respondents proposed a methodological understanding of VBP. Most respondents proposed a definition of the concept based on how they used VBP in their firm or based on academic knowledge acquired during training.

While none of the definition was identical, we noticed the use of common vocabulary and concepts especially with the respondents in firms using VBP and COBP e.g. willingness to pay, maximum economic value, differential value versus competition, conjoint analysis, etc.

Respondents working in firms that used COB tended to confuse the concept of VBP with other concepts such as value-added strategies, business model value, augmented services.

FIGURE 16: Understanding of Value-based Pricing by Executive Leaders in Firms Using it

VB1 – EL

"It’s understand your value of the product compared to the best competitor, and then put a price tag on that specific value, which is delivered by a feature, and find out what – how valuable that specific feature is…a very good tool for that is conjoint analysis."

VB2 – EL

"It means to take the product and break it down in terms of the value that it's providing for the customer, and determining what is ….. the cost of this benefit and what is the value that the customer will give us, i.e. the price, for that particular thing."

VB3 - EL

"Value base pricing for me would be the combination of understanding the level of innovation and productivity that I bring to the customer versus his alternative. That would be value base pricing. And… if I can calculate the significance of the innovation (and) the level of productivity that it allows the customer, then I can explain the value of my product and the pricing that comes along with it."

VB4 - EL

"What does it mean to me?... what is the maximum economic advantage you can bring and still drive that change versus the next best alternative….Drive the change through the supply chain, and yet keep as much as possible to be successful in both of those. Drive the change and keep the rest."

A standard conceptualization of VBP in small and industrial firms does not exist.

Rather, firms using VBP construct their own definitions by assembling various foundational

components of VBP and by embracing an orientation based on their individual notions of

customer value. Some of these components include segmentation processes, VBP pricing

  40

strategies, scientific value assessment methods, communication strategies, etc. It is unclear if

the absence of a commonly accepted VBP definition affects its low rate of adoption or if the

low rate of adoption deters the development of a well defined standard definition.

An analysis of pricing literature identified 12 VBP methodologies proposing step-by-

step approaches for its implementation (see Table 1).

TABLE 1: Identified Value-Based Pricing Methodologies in Business Publications

 

Conceptualization of VBP is delegated to pricing practitioners and consulting firms

that promote their methodologies in practitioners’ publications. While only a few of these

methodologies resulted from empirical research, most proposed frameworks are silent about

the transformational nature of VBP implementation and do not reinforce the criticality of

organizational and behavioral drivers that lead to a successful VBP internalization. Because

of the unique nature of each transformational experience, we posit that it is not valuable nor

necessary to create of a well defined and standard conceptualization of VBP that could

simply be copied and pasted across organizations.

  41

Conceptual Model for the Internalization of and Transformation towards VBP

We identified critical organizational and behavioral characteristics common to firms

implementing value-based pricing as displayed in our conceptual model in Figure 17. Three

of these characteristics are the ability to face deep transformational change, the role of

champions as transformational leaders, and the building of organizational confidence to fuel

the transformation. These characteristics are inter-related and highly connected to form a

“wheel” of internationalization of and transformation towards value-based pricing.

FIGURE 17: Conceptual Model for the Internalization of and Transformation Towards VBP

 

With this model, our research demonstrates that value-based pricing is not simply

adopted but internalized through a long, tenuous and deep transformation process supported

by an experiential and transformative learning environment.

  42

LIMITATIONS  

The findings presented in this paper should be considered in light of several

limitations that may impact their generalizability. Our sample of small and medium industrial

firms was small (15) and not randomly selected. The sample included only firms in three

industrial sectors − building products, transportation products and plastics and chemicals. A

larger sample and one including other sectors such as IT or pharmaceuticals may have

yielded different findings.

Although special attention was given to the potential risks of researcher bias, it is

important to mention that the principal researcher has significant experience in and

knowledge about industrial pricing, in particular, value-based pricing. However great effort

was made to remain self-reflective about these risks (Corbin & Strauss, 2008) by using open-

ended questions to elicit rich, unstructured narratives of respondents’ experiences (Maxwell,

2005: 22), interpretations and understanding of pricing events and firm activities.

IMPLICATIONS FOR PRACTICE AND FUTURE RESEARCH  

Our findings have implications for both industrial pricing practice and for future

research about it. Results support previous observations that the pricing function in business

markets is often neglected, under-utilized and under-managed (Cressman, Jr., 1999; Noble &

Gruca, 1999; Shipley & Jobber, 2001; Hinterhuber, 2008). Managers in industrial firms may

find our findings useful particularly with respect to designing and organizing pricing roles

and responsibilities, and how to reinforce their firm’s level of pricing sophistication by

adopting modern and more scientific pricing methods. CEO’s and top executives of industrial

firms should adopt a more mindful approach to pricing by paying more attention to it, by

allocating more resources to the pricing process and by leading the organization in the

  43

development of robust pricing capabilities. We provide examples of how top executives have

successfully championed the intentional transformation of their firm’s pricing orientation

once a stimulus for change was detected in the external environment. The role of CEO’s in

the internationalization of VBP is critical and our work presents specific leader’s

characteristics that can facilitate this long and difficult journey.

Our findings point to the need for more research on industrial pricing preferences and

practices. First, the dimensions of the three pricing orientations (cost, competition and

customer value) need to be articulated and empirically validated. Second, while the

marketing literature has documented the relationship between market orientation and firm

performance, little has been said about the consequences of pricing orientation as they relate

to firm performance. Marketing scholars and practitioners claim the superiority of the VBP

orientation but have failed to provide data supporting such claims. Finally, the roles and

responsibilities of teams in the internalization of VBP begs inquiry.

Less than 2% of all articles published in major marketing journals focus on pricing

(Malhotra, 1996). Recent articles from renowned practitioners and researchers still report

major failures in pricing strategies (Hinterhuber, 2008; Cressman, Jr., 2009). There is much

to be researched and published to enhance the visibility and credibility of the pricing

profession in industrial markets.

  44

APPENDIX A: Detailed Sample Information

Criteria Characteristics FirmsFirm Size Small 8

Medium 7Industry Building Products 4

Transportation Products 5Resins and Plastics Products 6

Pricing Orientation Cost-based Pricing 6Competition-based Pricing 5Value-based Pricing 4Total Firms 15

Criteria Characteristics RespondentsFunctions Executive Leadership 15

Sales and Marketing 18Finance and Accounting 11

Nature Face-to-face Interviews 37Phone Interviews 7Total Interviews 44

States Pennsylvania, North Carolina, South Carolina, Oklahoma, Michigan,

Massachusetts, Georgia, Wisconsin, Delaware and Kentucky

  45

  46

APPENDIX B: Interview Protocol and Questions

 

Step 1: Introduction and Explanation

Introduction (Interviewer): “Hi (name). I just want to thank you for taking the time to meet with me today. I appreciate the time and attention. Before getting started, there are a couple of things I would like to cover up front about why we are doing this interview.”

Purpose and Format for the Interview (Interviewer): “As you know from the letter you have received from me, I am interested in how pricing decisions are made in industrial firms and how the pricing process works. To make sure we are on the same page, I am not interested in the technical aspect of pricing, the actual pricing and costing data or any proprietary information about your company or the markets you operate in. These are confidential information that we do no need to discuss. I am more interested in what influences the pricing process in your firm and how that process works. That is really the focus on what we are going to talk about today”.

Confidentiality (Interviewer): “Everything you share in this interview will be kept in strictest confidence, and your comments will be transcribed anonymously – omitting your name, anyone else you refer to in this interview, as well as the name of your facility. Your interview responses will be included with all the other interviews I conduct.”

Audio Taping (Interviewer): “To help me capture your responses accurately and without being overly distracting by taking notes, I would like to record our conversation with your permission. Again, your response will be kept confidential. If at any time, you are uncomfortable with this interview, please let me know and I will turn the recorder off.”

“Any questions before we begin?”

Step 2: Opening Icebreaker Question

Interviewer: “(Name) tell me about yourself and your role here at (company name).”

Probing questions to ask only if respondent does not provide responses to:

Interviewer: - “Where are you from?” -“How long have you been with this company?” -“How long have you been in this role?” -“How did you get to this position?”

-“What is your educational background?”

Step 3: Experiential Questions on Pricing

Introduction: “I am going to ask you a few questions regarding your experience with the pricing process at (company name). Please be as specific as you can and provide me with as much detail as you can remember. If I have a clarifying question, I will ask you.”

  47

Interviewer: “First, let us focus on the most recent pricing decision that was made in your company? Please tell me about that decision and the process that led to it.”

Clarifying questions that will be asked if needed to engage specifics from the respondent, or to add detail to their story:

Interviewer: - “What was the decision?” - “How was the process?”

- “How did the process start?...what happened next?” - “Who was involved?” - “What was your role in that process?”

- “What made the process successful?” -“ Can you give me specific details?” Interviewer:

FOR TOP MANAGEMENT: “Thank you for that. I would now like to ask you to think back 12 to 24

months. I am sure you have experienced many pricing decisions. Please think of one that was most significant to you”

FOR OTHER MANAGERS: Thank you for that. I understand that your company (reference most

significant pricing decision mentioned by TOP MANAGEMENT) in the last 12 to 24 months.

Interviewer: “ I would like to ask you to describe to me in great detail the experience of

that pricing decision. Please give me as much details as you can. I am interested in the “nitty gritty”.

Clarifying questions that will be asked if needed to engage specifics from the respondent, or to add detail to their story:

Interviewer: - “What was the decision about? Why was it significant?” -“ How did the decision process start?...what happened next?” - “How did the process work? How often did the decision makers meet?”

- “Who was involved in the decision? What functions?” - “Please tell me more about the role of each participant!” - “Was the group working well together? How so?” - “What was your role in that process?” - “What types of information were used?” - “Where did the information come from?” - “How was information put together to support the decision?” -“ Who made the final decision? How did that work?”

- “Was the decision successful?” - “What made it successful?” - “Can you give me specific details?” - “Tell me more about this!” Interviewer: “Please tell me about experience when your company introduced an

innovative pricing method and please describe that experience to me”.

  48

Clarifying questions that will be asked if needed to engage specifics from the respondent, or to add detail to their story:

Interviewer: - Why did you do it?

- How was this method introduced? - Who was involved in the process? - What was your role in that process?

- What made the method different? - Can you give me specific details? - What was the outcome/result?

- What types of information were used in this method? - Where did the information come from?

Step 4: Value-Based Pricing Questions

Introduction: “ Thank you very much for sharing so many details with me. Now I would like to switch gear and move on to the next question”.

Interviewer: “How do you understand value-based pricing”

Clarifying questions that will be asked if needed to engage specifics from the respondent, or to add detail to their responses:

Interviewer: - Have you experienced such a process in your organization? - Tell me about it! - Did you like the process? - If Yes or No, why? - How do you understand value in your company?

Step 5: Closing

Interviewer: “That concludes our interview. Do you have any additional comment you would like to make regarding the pricing process at (company name).”

“Thanks very much for your time and for sharing your experiences with me. In the event that I have a need to clarify some of your responses, would it be ok for me to give you a short follow up phone call? Thank you again.”

  49

APPENDIX C: Themes and Sub-Themes

Definitions

Themes DefinitionSub-themes (Derived from Informant's Interview Data)

Organizational ConfidencePeople Development Firm's people development activities (coaching, performance review, etc) used to build confidence.Internal Beliefs Employee's beliefs in the firm's products, technology, value and business model. Communication Communication systems and techniques used to promote change management and build confidence.Success Stories Firm's use of business wins and success stories to build momentum, increase buy-in and build confidence.Resilience Sales and marketing employees 's resistance to customers' pricing objections, courage to stand firm and stay the course.Data Accuracy Data accuracy as decision making support to provide confidence in the pricing decision.Energy Energizing team to increase confidence level.

ChampionsVision Champions providing vision to the organization about pricing and value strategies.Emphasis Champions providing emphasis and support throughout the organization.Commitment Champions committing to the strategy and the change management initiative.Driver Champions being the driver of initiatives and programs.

ChangeChange Management Adoption of pricing approach requires management of change.Learning Curve Adoption of pricing approach is a leaning curve.Journey/Transition Adoption of pricing approach is a transitional process also characterized as a journey.Mindfulness Realization of organizational gaps, learning from failures, being opened to new concepts.Stimulus Stimulus within the organization for change.Lessons Learned Lessons learned in the areas of change management and difficult transitions.

CapabilitiesTraining Firms' training programs and activities.Pricing Training Firms' specific pricing training programs.Lack of Training Respondents' declared lack of training.Sales Force Skills Respondents' declared level of capabilities of the sales force with pricing and value selling.Market Research Firms' capabilities in conducting formal market research programs.Pricing Research Firms' capabilities in conducting formal pricing research.Proprietary Tools Firms' capabilities in the development of proprietary tools and models.

Organizational StructureFirm Size & Resources Respondents' mention of size and resources as a factor influencing pricing approach.Role Specialization Firms' team specialization in strategic areas (pricing, market research, value engineering).Centralization Centralization of expertise and centers of excellence.Pricing Responsibilities Locus of responsibility in organizations.Process Formalization Firms' declared level of process orientation and formalization.Informal Pricing Review Respondents' characterizing of the pricing review process.Pricing Process Discipline Respondent's characterization of the pricing discipline.

RationalityMargin Targets Use of margin targets and mark-ups to generate pricing decisions.Cost Models Use of costs models and costing activities to generate pricing decisions.Gut Feeling & Intuition Respondents' declared factor used in making the final price point decision (gut feeling, intuition, collective intuition).Guess & Call Respondents' declared factor used in making the final price point decision (guess, judgment call).Knowledge & Experience Respondents' declared factor used in making the final price point decision (market knowledge, historical pricing, experience).Scientific Pricing Process Respondent's characterizing of the organization's pricing process.Unscientific Pricing Process Respondent's characterizing of the organization's pricing process.

Exogenous FactorsCompetitive Intensity Level of competitive intensity and threat impacting pricing strategies and tactics.Market Turbulences Recessions and economical crisis impacting pricing strategies and tactics.

  50

Themes and Sub-Themes Number of Mentions of Codable Moments

Themes Total

Sub-themes Small Medium Plastics Transport BuildingCost-based

Competition-based

Value-based Leadership Sales Finance

Organizational EfficacyPeople Development 16 6 10 11 0 5 0 2 14 13 3 0Internal Beliefs 20 6 14 11 2 7 2 5 13 9 9 2Communication 11 8 3 3 5 3 0 5 6 5 6 0Success Stories 20 7 13 15 2 3 0 5 15 10 10 0Resilience 10 4 6 4 5 1 0 2 8 6 3 1Data Accuracy 8 1 7 2 4 2 1 0 7 4 4 0Energy 5 2 3 3 1 1 0 1 4 2 3 0

ChampionsVision 7 0 7 2 0 5 0 2 5 3 3 1Emphasis 15 5 10 8 3 4 0 4 11 6 8 1Commitment 5 0 5 4 0 1 0 2 3 4 1 0Driver 5 0 5 0 2 3 0 2 3 3 1 1

ChangeChange Management 8 1 7 2 1 5 1 0 7 3 2 3Learning Curve 9 3 6 9 0 0 1 7 1 2 4 3Journey/Transition 19 3 16 9 4 6 2 6 11 6 9 4Mindfulness 22 9 13 15 5 2 4 9 9 10 11 1Stimulus 17 5 12 5 4 8 2 7 8 7 7 3Lessons Learned 10 5 5 3 2 5 5 4 1 4 5 1

CapabilitiesTraining 40 14 26 28 4 8 1 12 27 18 21 1Pricing Training 8 0 8 4 1 3 1 1 5 2 6 0Lack of Training 9 4 5 2 4 3 7 3 0 5 4 0Sales Force Skills 53 27 26 33 9 11 17 14 22 21 22 10Market Research 24 7 17 11 3 10 3 4 17 9 12 3Pricing Research 16 9 7 9 0 7 0 3 13 6 10 0Proprietary Tools 33 9 24 17 10 6 5 10 18 13 10 10

Organizational StructureFirm Size & Resources 18 9 9 7 4 7 8 4 6 3 10 5Role Specialization 26 5 21 11 10 5 0 2 24 12 13 1Centralization 9 2 7 7 0 2 0 0 9 2 6 1Pricing Responsabilities 31 7 24 15 9 7 15 3 13 13 10 8Process Formalization 45 9 36 14 13 18 0 12 33 23 18 4Informal Pricing Review 18 8 10 8 2 8 10 8 0 11 3 4Pricing Process Discipline 8 2 6 4 4 0 1 2 5 4 3 1

RationalityMargin Targets 36 22 14 16 9 11 24 10 2 17 9 10Cost Models 21 10 11 10 9 2 11 9 1 8 6 7Gut Feeling & Intuition 24 8 16 9 11 4 12 11 1 18 3 3Guess & Call 9 8 1 3 4 2 3 5 1 5 4 0Knowledge & Experience 52 20 32 25 16 11 18 25 9 25 15 12Scientific Pricing Process 16 6 10 13 3 0 0 2 14 4 10 2Unscientific Pricing Process 30 19 11 7 13 10 10 16 4 16 9 5

Exogenous FactorsCompetitive Intensity 26 8 18 13 9 4 13 6 7 4 17 5Market Turbulences 22 9 13 8 7 7 12 5 5 7 8 7

Totals 781 287 494 380 194 207 189 230 362 343 318 120

Firm Size Industry Pricing Approach Function of Respondents

 

  51

Themes and Sub-Themes Number of Mentions by Firm and Respondent

Themes TotalSub-themes (n=15) Sm. Med. Plas. Trans. Build. CB COB VB Lead. Sales Fin, CB COB VB CB COB VB CB COB VB

(n=7) (n=8) (n=6) (n=5) (n=4) (n=6) (n=5) (n=4) (n=15) (n=18) (n=11) (n=6) (n=5) (n=4) (n=6) (n=6) (n=6) (n=6) (n=3) (n=2)

Organizational EfficacyPeople Development 4 1 3 3 0 1 0 1 3 3 1 0 0 0 3 0 1 0 0 0 0Internal Beliefs 8 3 5 4 2 2 2 2 4 5 5 2 0 1 4 1 2 2 1 1 0Communication 6 4 2 2 2 2 0 3 3 3 5 0 0 2 1 0 2 3 0 0 0Success Stories 7 3 4 3 2 2 0 4 3 4 5 0 0 1 3 0 3 2 0 0 0Resilience 6 1 5 2 3 1 0 3 3 3 3 1 0 1 2 0 2 1 0 0 1Data Accuracy 6 1 5 2 2 2 1 1 4 3 3 1 0 1 2 0 0 3 1 0 0Energy 4 2 2 2 1 1 0 1 3 2 3 0 0 0 2 0 1 2 0 0 0

ChampionsDriver 2 0 2 0 1 1 0 1 1 2 1 1 0 1 1 0 0 1 0 0 1Emphasis 7 3 4 4 2 1 0 3 4 3 6 1 0 1 2 0 1 5 0 0 1Commitment 3 0 3 2 0 1 0 1 2 3 1 0 0 1 2 0 1 0 0 0 0Vision 2 0 2 1 0 1 0 1 1 2 1 1 0 1 1 0 0 1 0 1 0

ChangeChange Management 4 1 3 1 1 2 1 1 2 3 2 2 0 1 2 0 0 2 1 0 1Learning Curve 4 3 1 4 0 0 1 2 1 2 3 2 1 1 0 0 2 1 0 2 0Journey/Transition 8 2 6 4 1 2 1 3 4 4 5 4 0 2 2 0 2 3 2 2 0Mindfulness 7 4 3 4 1 2 2 2 3 3 6 1 1 0 2 1 3 2 1 0 0Stimulus 8 4 4 3 2 3 2 3 3 5 3 3 0 2 3 0 2 1 2 0 1Lessons Learned 5 3 2 2 1 2 2 2 1 3 4 1 2 0 1 1 3 0 0 1 0

CapabilitiesTraining 7 2 5 4 2 1 1 2 4 6 10 1 0 2 4 1 3 6 0 1 0Pricing Training 4 0 4 1 1 2 1 1 3 2 3 0 1 0 1 0 0 3 0 0 0Lack of Training 6 2 4 2 2 2 4 2 0 5 4 0 3 2 0 3 1 0 0 0 0Sales Force Skills 13 5 8 5 4 4 5 4 4 8 8 5 3 2 3 1 4 3 4 1 0Market Research 9 3 6 3 3 3 2 3 4 6 6 3 1 2 3 1 2 3 1 0 2Pricing Research 5 3 2 3 0 2 0 2 3 4 5 0 0 2 2 0 2 3 0 0 0Proprietary Tools 11 4 7 4 4 3 4 3 4 8 6 3 3 1 4 1 1 4 2 1 0

Organizational StructureFirm Size & Resources 9 4 5 3 3 3 5 1 3 3 6 3 1 0 2 3 1 2 2 0 1Role Specialization 7 2 5 4 2 1 0 3 4 7 7 1 0 3 4 0 1 6 0 0 1Centralization 3 1 2 2 0 1 0 0 3 2 4 1 0 0 2 0 0 4 0 0 1Pricing Responsabilities 13 4 9 6 4 3 5 4 4 7 9 5 3 2 2 3 2 4 4 0 1Process Formalization 7 3 4 3 2 2 0 3 4 6 7 2 0 2 4 0 3 4 0 0 2Informal Pricing Review 9 5 4 4 2 3 5 4 0 6 3 3 3 3 0 2 1 0 2 1 0Pricing Process Discipline 6 2 4 4 2 0 1 2 3 2 4 1 1 1 0 0 1 3 0 0 1

RationalityMargin Targets 11 5 6 4 3 4 6 4 1 8 6 6 4 3 1 4 2 0 5 1 0Cost Models 10 5 5 4 5 1 4 4 2 7 6 5 3 3 1 3 3 0 2 2 1Gut Feeling & Intuition 6 2 4 1 4 1 3 2 1 5 3 2 3 2 0 1 2 0 1 0 1Guess & Call 6 4 2 2 2 2 3 2 1 5 3 2 2 2 1 1 2 0 2 0 0Knowledge & Experience 14 7 7 5 5 4 6 5 3 9 8 4 3 4 2 3 4 1 2 1 1Scientific Pricing Process 6 2 4 4 2 0 0 3 3 2 4 1 0 1 1 0 2 2 0 0 1Unscientific Pricing Process 14 7 7 5 5 4 5 5 4 9 5 5 4 4 1 0 3 2 2 2 1

Exogenous FactorsCompetitive Intensity 13 5 8 4 5 4 6 4 3 3 10 5 1 0 2 4 4 2 3 1 1Market Turbulences 10 4 6 4 3 3 5 2 3 4 6 6 2 0 2 3 0 3 3 2 1

Sales & Marketing

Finance & Accounting

Firm Size Industry

Pricing Approach

Function of Resp Leadership

  52

APPENDIX D: Stimulus for Change and Duration of Transformation for Firm Which Adopted

Value-Based Pricing

  53

APPENDIX E: Raw Understanding of Value-Based Pricing in Firms

Firms Using Value-based Pricing

VB1 - EL "It’s understand your value of the product compared to the best competitor, and then put a price tag on that specific value, which is delivered by a feature, and find out what – how valuable that specific feature is. Again, a very good tool for that is conjoint analysis."

VB1 - SM

"(Company) is a company that is normally – believe it’s high quality and premium products, but there’s a market for products that, of course, need a high quality, but also a good price and also lower functionality. And to address this market, we address the value-based market.... for different regions and also different requirements in the same applications."

VB1 - SM2

"Well, I mean value-based pricing I think is, in my mind, is simple. It's what the customer is prepared to pay based on what the product does for the customer, and that they perceive it will do for them. Okay? So if – let me give a simple example. If I'm a downhill skier, I could buy 230 centimeter skis. I could have a really good price on 'em. And I may be a skier, but you know what? I don't downhill race. So that product doesn't meet my needs, so it doesn't matter how low the price is; I'm not gonna buy it. Right? "

VB2 - EL "It means to take the product and break it down in terms of the value that it's providing for the customer, and determining what is – like for example, sometimes I've seen people take what is the cost of this benefit and what is the value that the customer will give us, i.e. the price, for that particular thing."

VB2 - SM "The term “value-based pricing” to me would be based on any value added, things we’re doing over our competitors. What are we adding to our floor price or our standard price."

VB2 - FA

"I guess I would say that you would – to arrive at a price for your customer, it would be based on the value that you're providing 'em, not on any internal-cost data. And you would look at – probably go through the value that you're bringing to their business and the savings that they're gonna realize, and that would probably be the key driver as to how you price the opportunity."

VB3 - EL

"Value base pricing for me would be the combination of understanding the level of innovation and productivity that I bring to the customer versus his alternative. That would be value base pricing. And how, if I can calculate the significance of the innovation, the level of productivity that it allows the customer, then I can explain the value of my product and the pricing that comes along with it."

VB3 - SM

"Would be in your customer’s mind, the value of what you bring to them with that product and brand. So if Macintosh, to use consumer products, Macintosh comes in and says, “I’ve got this phone. It’s got a few really cool Macintosh things.” To me as a consumer, the brand carries more value. The product carries a little bit more value, and so there’s a premium that they can charge. Now what that premium is, is highly, in my mind, unscientific. That’s almost art as it is science. Now I’m sure they can measure that art by charging different amounts on different things and seeing the response rate."

VB3 - FA

"I think you would take the side of the customer and you would assess as a customer what value do you get from this supplier? And value means it's, you know, the equation between here's the things that I get that I have an appreciation for and how much is this worth for me? So I have a certain judgment to that. And that's what it would mean for me."

VB4 - EL

"What does it mean to me? It is what’s the economic – what is the maximum economic advantage you can bring and still drive that change versus the next best alternative. Okay, so it’s always a next best alternative kind of thing. Drive the change through the supply chain, and yet keep as much as possible to be successful in both of those. Drive the change and keep the rest."

VB4 - SM "My own definition of value-based pricing is to understand the value that you deliver to your customers through your products and services, and having a pricing strategy that captures a part of that value that you deliver, which under the competitive environment, you can sort of maximize."

VB4 - SM2

"We talk about value-based pricing a lot, so for us what that means is we price based on several different factors that aren’t related in any way to the cost of the material. It’s more related to how is the plastic being used? What value is that plastic – instead of as a plastic pellet, as a plastic part that’s holding bearings? And so if this plastic can go into this part, which is a bearing housing, that might be worth $4 a pound. If it goes into this simple tape dispenser, it might only be worth $2 a pound or $1 a pound or 70 cents a pound. So what we do is when we talk to customers about – when they ask us for a quote, we ask them a lot of questions. “What’s the application? What are you using it for? How long do you need? How much do you need to buy? Where’s it gonna go? What’s the end use? What’s the demands of the environment?” ."

  54

 

Firms Using Cost-based Pricing

CB1 - EL

"My take on value-based pricing is maybe different from most. I think a lot of people talk about value from a standpoint of the things that we all do. We have trucks. We have sales people. We have technical people. So you look and say, well, you know, we have that, too. So from a true value standpoint, I honestly believe thinking for the customer on behalf of what the true savings is – I’ll give you a great example of it. We had a customer that by making a change saved $3,000,000. Their spend on our fluid was probably about $60,000."

CB1 - SM

"I think, when I hear that term, value-based, I think in terms of are there performance characteristics that the product that we’re selling – and we do that all the time. I mean with engine oils, you try to show the customer if they buy a semi-synthetic engine oil from us and they pay $7.80 a gallon, versus paying $6 a gallon from one of these independent guys that are bathtub blenders, if we can extend their drain interval – like maybe with the cheaper oil, they’re going to have to drain their oil every 10,000 miles. Well if they buy a semi-synthetic oil from us, through oil analysis, we might be able to prove to them they can run that oil for 30,000 miles instead of 10,000 miles."

CB1 - FA "I would say I could assume what I think that it is, which is the – value based pricing, meaning I’m going to – there’s some sort of value added to what I’m doing to this product that allows me to charge X that it cost me plus what I think I’m adding the value, and that equals Y, the selling price. "

CB2 - EL

"Yeah. For us, I would link that to our value add. We have our base goods that we make off our line. And now we’re getting more into adding some additional value to it. We’ve partnered with an outside converter, and they’ve just recently built a line that they’ll now basically toll manufacture for us our value-add goods, which for us could be an adhesive. That’s a big one for us. "

CB2 - SM "If you’re saying value-based, it’s a good product at the right price delivered on time that you provide service for, and you help the customer any way that you can to make them successful, yeah, I understand that. And that’s what we do."

CB2 - FA

"To me, that would be looking at all – that whole bundle of services that we’re providing to somebody. If we’re spending time running trials to develop a product, the things that we do from an inventory standpoint to ensure that the customer never runs out, to the technical service guys that we send out periodically to help the customer processing new material. All of those things are part of what we call our SG&A, our overhead type costs and you typically don’t get into a cost calculation when you’re doing kind of a cost plus pricing setting. So yeah, we need to take a look at that."

CB3 - EL

"It means trying to size up what this is worth to our customer and price it from that standpoint. So to me, that would be – I don’t know what it is to you, but to me, that would say we have programs where we have a certain technology that allows our customer to realize the lower scrap rate, substantially lower than our competition. And we think it’s pretty unique, and we’ll place some value on what that scrap rate is worth to our customer, and say we should be able to capture some portion of that premium."

CB3 - SM

"Value based pricing just by interpreting what – to me that would be providing, depending on product, customer, the situation, something that could be priced differently for different situations – the same product – depending on the situation. Let’s say a customer –I’m purely just shooting at this, Stephan, but a customer that we have and some customers that have long term agreements with would be better capable and suited to provide, I’ll call it better value price to them – a better value proposition to them than a smaller customer that has low volume is a payment risk – is a receivable risk and they would have a different price structure and model."

CB3 - FA "I understand it in terms of the value that it brings to the customer. So I guess it goes beyond just a product, but kind of the composite cost of the customer, the logistics and the scrap and what other things they have to put on top of it to make it work."

CB4 - EL

"I think it comes back to the philosophy of trying to understand how your product is viewed by the buyer and what are the things that are important. So it’s really understanding his purchasing criteria and requirements, what does he value, what is he looking for. And understanding your market in a very profound way because then you don’t leave money on the table, you’re not as likely to, or your don’t overprice and miss the business because you really missed what they customer’s looking for. So I think that, and then understanding the competitive environment is very important, too. Not only with their prices but what is their value proposition and how does your compare to that. Because if all you do is listen to the customer, they’re going to give you one dimension and it’s all going to be about lower price and you have to really profoundly understand the reality from the total business perspective."

  55

CB4 - SM

"For me, it’s what some good or service is worth to the customer. What is he willing to pay, and why is he willing to pay that? So you know, when you get in these discussions or in planning these things, how do you differentiate yourself? We have a tendency because we’re engineering driven. Sometimes we have a tendency to differentiate ourselves from the view of, “I’m an engineer, and I just made this thing better.” As a sales guy, I always look to see what is cost drivers – what causes them the pain, what causes them frustration."

CB4 - FA "If I were to hear the term "value-based pricing," it would be the cost of the product plus the service that we provide to the product to make sure that it works for our particular customer's application."

CB5 - EL

"What would be my definition of value-based pricing? Well, probably along the lines for the end user or for the customer would be, in essence, him getting the most for his money. Part of our job, as we look at it, is trying to be somewhat consultative. We’re not gonna be the cheapest guy in the marketplace, but we’ll try to work, especially on negotiated stuff, with our clients and the whole design team. And the more information that they share, for instance, around their budgeting, the better we could offer for them. So if we know what their desired intents are, we’re gonna try to not oversell them on something that’s beyond what they’re looking for, nor undersell them on something that’s below what they’re looking for. So from a value standpoint, we try to give ‘em the most for their money."

CB5 - SM

"When you say value-based pricing – I’m not sure. I think when you say value-based pricing, I think, in my terms here at (Company) that terms are of our cost plus mentality, but I think value-based pricing, I think what you’re probably talking about is understanding the value of your product in the marketplace, and then pricing appropriately."

CB5 - FA

"I would definite it as segregating your products into different market segments for different customers, different industries, understanding the need of those industries, determining what their – the competition is for those specific niche areas, and then establishing pricing based on what the needs of the customer are versus what the competition is offering and what your differentiation is in the marketplace. "

CB6 - EL "What it means to me is getting the maximum price for the type of value that our product offers. Okay. And the way to do that is, as I said before, is truly understand the market dynamics, market trends, the customers’ needs, desires, what’s driving your decision."

CB6 - SM

"To me a value-based pricing would be you take your costs that’s up to a point, you have all your costs. That takes you to X, and then you add on top of that what is the perceived value? But then my personal comment on that through my industry experience is you have to do that. And you come up with something. Then you have your reality check of the market, meaning is that product so much better than a competitive product? That I can come up with my own perceived value, but if I don’t have any validity with the market on that, I can think I can sell a product at $1, but my customers say, ‘Well, that’s fine, but I currently have a product here. And I pay 90 cents. And I will not pay $1 for your product"."

CB6 - FA

"Um, to me, and it could be my own interpretation of this, what you’re able to bring to the customer and looking at all aspects and all of whether or not there’s a technical aspect, an R&D aspect, certain fit for you aspect. In other words, of your product and trying to maximize what you can get out of it with your customer, that’s my view of it."

Firms Using Competition-based Pricing

COB1 - EL "I guess from all the education I’ve had, I would look at that being that you establish the value of every part of what you do, and you try to get a premium for the value that you offer to the marketplace. So you’ want to make sure that you’re truly getting paid for the value you offer to the market. That’s how I would interpret it."

COB1 - SM

"Would be in your customer’s mind, the value of what you bring to them with that product and brand. So if Macintosh, to use consumer products, Macintosh comes in and says, “I’ve got this phone. It’s got a few really cool Macintosh things.” To me as a consumer, the brand carries more value. The product carries a little bit more value, and so there’s a premium that they can charge. Now what that premium is, is highly, in my mind, unscientific. That’s almost art as it is science. Now I’m sure they can measure that art by charging different amounts on different things and seeing the response rate."

COB1 - FA "You know, you’re selling on like the benefits and features of the products or the company, you know, and you should be getting a premium for that if there is a perceived premium for that in the marketplace."

  56

COB2 - EL

"I think the term, and probably a bit more generic in nature, is really to just best understand what your overhead structure is and how to ensure that you are receiving and maintaining the appropriate margins associated with what you have in play. Yeah, I really think that we establish what we think to be a firm understanding of what our overhead structure is, and what the marketplace and industry that we serve, we establish certain boundaries around that. And to me, that’s what’s going to bring that value basis to how we operate. Value add is an interesting point, but it’s an area that’s proven to be successful for us as we’ve gone through, and once again, it’s the introduction of anything that we have that I think, from a contract manufacturing standpoint, gets us further down the food chain to supply our customers for what they need where they are."

COB2 - SM

"That I would basically not worry – the costs are gonna be what they are. And I can say I can do it for $5.00. But if the value of this calculator is $10.00, I should sell it for $10.00, regardless. Yeah. I think, if that’s the correct definition. I mean when we see the opportunity to – if someone’s asking us to do something that we have three competitors who are saying it’s gonna cost X to do it, and we can do it for half of that, we will not do it for half of that. "

COB2 - FA "I would think about our value added products we sell with the value add services we add into the business. But I don’t get involved with the pricing of that at all."

COB3 - EL

"You know, I would say it is – to take a look at it from a customer’s perspective in terms of value, you bring to the table to them and making sure you’re getting fair value, fair dollars for what you’re bringing to the table. In example of the Toyota one where you look at it and say, “Okay, you can buy from us for 30 percent over the material that has historically been higher aesthetic.” So if they’re 30 percent more expensive, if I can level out the aesthetics, in a sense, I should be able to charge 29 percent premium on my material and be 1 percent less."

COB3 - SM "Well, it's, in my opinion, it's all relative to the value of your product. I mean is it an aesthetic product? Is it a performance product? It's all about perception, I think. Perceived value. You know, can you – where can you price your product according to the value that customers are going to get out of using it? "

COB4 - EL

"Well, for me, what that means is looking at ultimately the benefit that the customer ultimately gets from your product, under every mechanism, not just in terms of performance, but in terms of the total value that you provide to the customer. And then turning that around and saying, "What is that ultimately worth?" Okay? And in terms of what someone is going to be willing to pay for your product."

COB4 - SM "Value based pricing to me means that you understand what your product brings to a certain application and what value it really brings. And you are able to get the pricing that you believe the value deserves."

COB5 - EL

"Very simply. I understand it as trying to determine exactly what the – what a company’s current cost is for something and then going – presenting a solution – an alternative to that that’s priced the same with higher quality or priced lower with the same – it’s trying to understand the customer’s full cost and then making pricing decisions based on the customer’s cost rather than on your own internal – I guess maybe that’s a better way to say it. It’s pricing based on the customer instead of based on you. So that’s my understanding of it."

COB5 - SM

"I understand it to be – I'll use it for the practical example as opposed to try to define it. Cost plus is nothing than that I want to hit 55 percent gross margins to make my business run on all of my instrument sales, therefore, I go down and I get my standard costs once a year from manufacturing. And it's whatever it is, and I multiply that by whatever the math is to get me a 55 percent gross margin, and that becomes my price. That would be a cost plus pricing strategy. Value based pricing would say, "Okay, what is the market gonna pay based on my research around talking to customers, seeing what pricing's already in the market from competition, and what my own judgment is of the value of my offering?" And I'm gonna say, "I think I can get a buck for this." And if it costs me 95 cents to make, then my gross margin's 5 cents. If it costs me 5 cents to make, then my margin's 95 cents. But what I'm gonna – I'm gonna work from the customer backwards and the value proposition backwards, and I'm gonna build that on."

COB5 - SM2

"Value – my definition of value-based pricing was – I guess a short answer would be whatever the market will bear. Forget about what our cost it. Forget about what our margin is. It's whatever the market will bear. If we have a list price of $1,000, and we see the market will bear $1,200, $1,300, $1,400, that's value-based pricing. The difference between the two."

COB5 - FA

"Well, I know that we've looked at different pricing and different costing models on activity-based costing, I would say. But, to me, value-based, I go back to we have looked at what the market will bear, and we start through this voice of customer and our product management team. So I don't really – don't have a lot of extra input into the value-based side."

  57

REFERENCES  

Aiken, M., Bacharach, S., & French, J. L. 1980. Organizational structure, work process, and proposal making in administrative bureaucracies. Academy of Management Journal, 23(4): 631-652.

Anderson, J., Kumar, N., & Narus, J. A. 2007. Value merchants: demonstrating and documenting superior value in business markets. Harvard Business School Press.

Anderson, J. C., & Narus, J. A. 1998. Business marketing: Understand what customers value. Harvard Business Review, 76(6): 53-65.

Bamey, J. 1991. Firm resources and sustained competitive advantage. Journal of Management, 17(1): 99-120.

Bandura, A. 1986. Social foundations of thought and action. Prentice Hall.

Bandura, A. 1997. Self-efficacy: The exercise of control. Worth Publishers.

Barnard, C., & Andrews, K. 1968. The functions of the executive. Harvard University Press.

Barney, J., & Clark, D. 2007. Resource-based theory: creating and sustaining competitive advantage. Oxford University Press, USA.

Bass, B. 1985. Leadership and performance beyond expectations. New York: Free Press.

Bohn, J. 2001. The design and validation of an instrument to assess organizational efficacy. Unpublished Dissertation. University of Wisconsin, Milwaukee.

Bohn, J. 2002. The relationship of perceived leadership behaviors to organizational efficacy. Journal of Leadership & Organizational Studies, 9(2): 65.

Boyatzis, R. 1998. Transforming qualitative information: Thematic analysis and code development. Sage Publications, Inc.

Brownlie, D., & Spender, J. 1995. Managerial judgement in strategic marketing. Management Decision, 33(6): 39-50.

Chakrabarti, A. 1974. The role of champion in product innovation. California Management Review, 17(2): 58-62.

Coe, B. 1990. Strategy in retreat; pricing drops out. Journal of Business & Industrial Marketing, 5(1): 5-25.

Cohen, W., & Levinthal, D. 1990. Absorptive capacity: a new perspective on learning and innovation. Administrative Science Quarterly, 35(1).

  58

Corbin, J., & Strauss, A. 2008. Basics of qualitative research. Sage Publications, Inc.

Cressman, Jr., G. 1999. Commentary on industrial pricing: Theory and managerial practice. Marketing Science: 455-457.

Cressman, Jr., G. 2009. Why pricing strategies fail. The Journal of Professional Pricing, (Second Quarter 2009).

Cressman, Jr., G. 2010. Selling value-based pricing strategies: Making pricing strategy work. The Journal of Professional Pricing, (First Quarter 2010): 16-19.

Cyert, R., & March, J. 1992. A behavioral theory of the firm. Wiley-Blackwell.

Daft, R., & Weick, K. 1984. Toward a model of organizations as interpretation systems. The Academy of Management Review, 9(2): 284-295.

Day, G. 1994. The capabilities of market-driven organizations. The Journal of Marketing, 58(4): 37-52.

Deaker, J., & Zang, X. 2006. How to organize the pricing discipline. The Pricing Advisor, Nov. 2006: 1-4.

Deschamps, J. 2008. Innovation leaders: How senior executives stimulate, steer and sustain innovation. Jossey-Bass.

Dierickx, I., & Cool, K. 1989. Asset stock accumulation and sustainability of competitive advantage. Management Science, 35(12): 1504-1511.

Dolan, R., & Simon, H. 1996. Power pricing: How managing price transforms the bottom line. Free Press.

Dosi, G., Nelson, R., & Winter, S. G. 2000. The nature and dynamics of organizational capabilities. Oxford University Press, USA.

Duncan, R. 1972. Characteristics of organizational environments and perceived environmental uncertainty. Administrative Science Quarterly, 17(3): 313-327.

Dutta, S., Bergen, M. E., Levy, D., Ritson, M., & Zbaracki, M. 2002. Pricing as a strategic capability. MIT Sloan Management Review, 43(3): 61.

Dutta, S., Zbaracki, M. J., & Bergen, M. 2003. Pricing process as a capability: A resource-based perspective. Strategic Management Journal, 24(7): 615.

Feldman, M. 2000. Organizational routines as a source of continuous change. Organization Science, 11(6): 611-629.

  59

Forbis, J., & Mehta, N. 1981. Value-based strategies for industrial products. Business Horizons, 24(3): 32-42.

Fox, J., & Gregory, R. 2004. The dollarization discipline: How smart companies create customer value--and profit from it. John Wiley & Sons Inc.

Fredrickson, J. 1986. The strategic decision process and organizational structure. Academy of Management Review, 11(2): 280-297.

Gatignon, H., & Xuereb, J. 1997. Strategic orientation of the firm and new product performance. Journal of Marketing Research, 34(1): 77-90.

Glaser, B., & Strauss, A. 1977. The discovery of grounded theory: Strategies for qualitative research. Aldine.

Grant, R. 1996. Toward a knowledge-based theory of the firm. Strategic Management Journal, 17: 109-122.

Green, S., & Taber, T. 1978. Structuring experiential learning through experimentation. The Academy of Management Review, 3(4): 889-895.

Gully, S., Incalcaterra, K., Joshi, A., & Beauien, J.M. 2002. A meta-analysis of team-efficacy, potency, and performance: Interdependence and level of analysis as moderators of observed relationships. Journal of Applied Psychology, 87(5): 819-832.

Hacker, S., & Roberts, T. 2003. Transformational leadership: Creating organizations of meaning. ASQ Quality Press.

Hage, J., & Aiken, M. 1967. Relationship of centralization to other structural properties. Administrative Science Quarterly, 12(1): 72-92.

Hage, J., & Aiken, M. 1970. Social change in complex organizations. New York: Random House.

Hall, R. 1977. Organization, structure, and process, (Vol. 2). London: Prentice-Hall.

Hall, R. 1993. A framework linking intangible resources and capabiliites to sustainable competitive advantage. Strategic Management Journal, 14(8): 607-618.

Hall, R., Johnson, N., & Haas, J. E. 1967. Organizational size, complexity, and formalization. American Sociological Review, 32(6): 903-912.

Hatfield, E., Cacioppo, J., & Rapson, R. L. 1994. Emotional contagion. Cambridge Univiversity Press.

  60

Hinterhuber, A. 2004. Towards value-based pricing: An integrative framework for decision making. Industrial Marketing Management, 33(8): 765-778.

Hinterhuber, A. 2008. Customer value-based pricing strategies: why companies resist. Journal of Business Strategy, 29(4): 41-50.

Hinterhuber, A. 2008. Value delivery and value-based pricing in industrial markets. Advances in Business Marketing and Purchasing, 14: 381-448.

Hoover, J., & Valenti, A. 2005. Unleashing leadership: Aligning what people do best with what organizations need most. Career Press Inc.

Howell, J., & Higgins, C. 1990. Champions of technological innovation. Administrative Science Quarterly, 35(2).

Ingenbleek, P. 2007. Value-informed pricing in its organizational context: literature review, conceptual framework, and directions for future research. Journal of Product & Brand Management, 16(7): 441-458.

Ingenbleek, P., Debruyne, M., Frambach, R. T., & Verhallen, T. M. M. 2003. Successful new product pricing practices: A contingency approach. Marketing Letters, 14(4): 289-305.

Jaworski, B., & Kohli, A. 1993. Market orientation: antecedents and consequences. The Journal of Marketing, 57(3): 53-70.

John, G., & Martin, J. 1984. Effects of organizational structure of marketing planning on credibility and utilization of plan output. Journal of Marketing Research, 21(2): 170-183.

Kanter, R. 2006. Confidence: How winning streaks and losing streaks begin and end. Three Rivers Press.

Kirca, A., Jayachandran, S., & Bearden, W. O. 2005. Market orientation: a meta-analytic review and assessment of its antecedents and impact on performance. Journal of Marketing, 69(2): 24-41.

Kolb, D. 1984. Experiential learning. Englewood Cliffs, NJ: Prentice-Hall.

Kolb, D., Boyatzis, R., & Mainemelis, C. 2001. Experiential learning theory: Previous research and new directions. In R. J. Sternberg & L.-F. Zhang, (Eds.), Perspectives on thinking, learning, and cognitive styles: 227-247. Lawrence Earlbaum Associates, Inc.

Lancioni, R. 2005. Pricing issues in industrial marketing. Industrial Marketing Management, 34(2): 111-114.

  61

Langer, E. 1997. The power of mindful learning. Reading, MA: Addison-Wesley.

Lawrence, P., & Lorsh, J. 1967. Organization and enviroment. Boston: Division of Research, Harvard Business School.

Lincoln, Y. S., & Guba, E. 1985. Naturalistic inquiry. Beverly Hills, CA: Sage Publications.

Malhotra, N. K. 1996. The Impact of the Academy of Marketing Science on marketing scholarship: An analysis of the research published in JAMS. Journal of the Academy of Marketing Science, 24(4): 291.

March, J. 1978. Bounded rationality, ambiguity, and the engineering of choice. The Bell Journal of Economics, 9(2): 587-608.

March, J. 1994. A primer on decision making: How decisions happen. Free Press.

March, J. 1999. The pursuit of organizational intelligence. Wiley-Blackwell.

March, J., & Simon, H. 1958. Organizations. Wiley.

Maxwell, J. 2005. Qualitative research design: An interactive approach, (Vol. 42). Thousand Oaks, CA: Sage Publications, Inc.

Mezirow, J. 1996. Contemporary paradigms of learning. Adult Education Quarterly, 46(3): 158.

Mezirow, J. 1997. Transformative learning: Theory to practice. New Directions for Adult and Continuing Education, 1997(74): 5-12.

Mezirow, J. 2000. Learning to think like an adult. Learning as transformation: Critical perspectives on a theory in progress: 3-33.

Mezirow, J., & Welton, M. 1995. In defense of the lifeworld. State University of New York Press New York.

Miller, D. 1987. Strategy making and structure: analysis and implications for performance. Academy of Management Journal, 30(1): 7-32.

Miller, D., Droge, C., & Toulouse, J.-M. et al. 1988. Strategic process and content as mediators between organizational context and structure. Academy of Management Journal, 31(3): 544-569.

Monroe, K. 1990. Pricing: Making profitable decisions. McGraw-Hill Companies.

Nadler, D., & Nadler, M. 1997. Champions of change: How CEOs and their companies are mastering the skills of radical change. San Francisco, CA: Jossey-Bass.

  62

Nadler, D., & Tushman, M. 1990. Beyond the charismatic leader and organizational change. California Management Review: 77-97.

Nagle, T., & Holden, R. 2002. The strategy and tactics of pricing: a guide to profitable decision making. New Jersey: Prentice Hall.

Narver, J., & Slater, S. 1990. The effect of a market orientation on business profitability. The Journal of Marketing, 54(4): 20-35.

Noble, P., & Gruca, T. 1999. Industrial pricing: Theory and managerial practice. Marketing Science, 18(3): 435-454.

Noble, P., & Gruca, T. 1999. Response to the comments on industrial pricing: Theory and managerial practice. Marketing Science, 18(3): 458.

Pentland, B., & Reuter, H. 1994. Organizational routines as grammars of action. Administrative Science Quarterly, 39(3).

Pfeffer, J. 1978. The micropolitics of organizations. In M. W. Meyer, (Ed.), Environments and organizations: 29-50. San Francisco: Jossey-Bass.

Pfeffer, J., & Sutton, R. 2006. Evidence-based management. Harvard Business Review, 84(1): 62.

Porac, J. F., Thomas, H., & Baden-Fuller, C. 1989. Competitive groups as cognitive communities: The case of scottish knitwear manufacturers. Journal of Management Studies, 26(4): 397-416.

Pugh, D., Hickson, D., Hinings, C. R., Macdonald, K. M., Turner, C. & Lupton, T. 1963. A conceptual scheme for organizational analysis. Administrative Science Quarterly, 8(3): 289-315.

Schon, D. 1963. Champions for radical new innovations. Harvard Business Review, 41(2): 77-86.

Schwenk, C. R. 1988. The cognitive perspective on strategic decision making. Journal of Management Studies, 25(1): 41-55.

Shamir, B., House, R. J., & Arthur, M. B. 1993. The motivational effects of charismatic leadership: A self-concept based theory. Organization Science, 4(4): 577-594.

Shipley, D., & Bourdon, E. 1990. Distributor pricing in very competitive markets. Industrial Marketing Management, 19(4): 215-224.

Shipley, D., & Jobber, D. 2001. Integrative pricing via the pricing wheel. Industrial Marketing Management, 30(3): 301-314.

  63

Simon, H. A. 1961. Administrative behavior. New York: Mac Millan.

Slater, S. 1997. Developing a customer value-based theory of the firm. Journal of the Academy of Marketing Science, 25(2): 162-167.

Slater, S., & Narver, J. 1994. Market orientation, customer value, and superior performance. Business Horizons-Bloomington, 37: 22-22.

Smith, G. 1995. Managerial pricing orientation: the process of making pricing decisions. Pricing Strategy & Practice, 3(3): 28-39.

Spender, J. 1989. Industry recipes. Oxford: Basil Blackwell.

Stein, E. 1995. Organization memory: Review of concepts and recommendations for management. International Journal of Information Management, 15(1): 17-32.

Szulanski, G. 1996. Exploring internal stickiness: Impediments to the transfer of best practice within the firm. Strategic Management Journal, 17: 27-43.

Tasa, K., Taggar, S., & Seijts, G. H. 2007. The development of collective efficacy in teams: A multilevel and longitudinal perspective. Journal of Applied Psychology, 92(1): 17-27.

Taylor, E. 2007. An update of transformative learning theory: A critical review of the empirical research (1999–2005). International Journal of Lifelong Education, 26(2): 173-191.

Teece, D., Pisano, G., & Shuen, A. 1997. Dynamic capabilities and strategic management. Strategic Management Journal, 18(7): 509-533.

Thomke, S. 2003. Experimentation matters. Boston: Harvard Business School Press.

Thompson, M. 2009. The organizational champion: How to develop passionate change agents at every level. McGraw Hill Professional.

Van de Ven, A., & Ferry, D. 1980. Measuring and assessing organizations. New York: Wiley.

Wang, Y., & Huang, T. 2009. The relationship of transformational leadership with group cohesiveness and emotional intelligence. Social Behavior and Personality: An International Journal, 37(3): 379-392.

Wernerfelt, B. 1984. A resource-based view of the firm. Strategic Management Journal, 5(2): 171-180.

Zahra, S., & G. George 2002. Absorptive capacity: A review, reconceptualization, and extension. The Academy of Management Review, 27(2): 185-203.