PRICING CAPABILITIES AND FIRM PERFORMANCE: A SOCIO-TECHNICAL FRAMEWORK FOR THE ADOPTION OF PRICING AS A TRANSFORMATIONAL INNOVATION
by
STEPHAN M. LIOZU
Submitted in partial fulfillment of the requirements
For the Degree of Doctor of Philosophy
Dissertation Committee:
Richard J. Boland, Case Western Reserve University (chair)
Andreas Hinterhuber, Hinterhuber & Partners
Gary Hunter, Case Western Reserve University
Antoinette M. Somers, Wayne State University
Weatherhead School of Management
Designing Sustainable Systems
CASE WESTERN RESERVE UNIVERSITY
May, 2013 CASE WESTERN RESERVE UNIVERSITY
SCHOOL OF GRADUATE STUDIES
We hereby approve the thesis/dissertation of
Stephan M. Liozu
candidate for the Doctor of Philosophy degree*.
(signed) Richard J. Boland (chair of the committee)
Andreas Hinterhuber
Gary Hunter
Antoinette M. Somers
(date) January 17, 2013
* We also certify that written approval has been obtained for any proprietary material contained therein.
ii
© Copyright by Stephan M. Liozu, 2013
All Rights Reserved DEDICATION
To my son, Lorenzo,
The love of my life,
May this work give him inspiration to go beyond the possible!
iv TABLE OF CONTENTS
List of Tables ...... xv
List of Figures ...... xvi
Acknowledgments...... xix
Abstract ...... xxii
CHAPTER I: OVERVIEW OF RESEARCH JOURNEY ...... 25
Introduction ...... 25
Research Gaps ...... 26
Research Goals...... 27
Integrated Theoretical Framework ...... 27
Theoretical Foundation ...... 29
Resource-based View (RBV) and Capability-based View (CBV) of the Firm .... 29
Defining Capabilities ...... 29
Organizational Capabilities ...... 31
Pricing Capabilities ...... 32
Prior research ...... 32
Nature of pricing capability ...... 37
Summary of pricing capabilities ...... 39
Technical pricing capabilities ...... 40
Tangible versus Intangible Capabilities ...... 42
Socio-Technical Perspective ...... 44
Socio-technical systems theory ...... 45
Socio-technical change ...... 48
v Socio-technical design ...... 50
Concepts of Organizational Theory Relevant to My Research Agenda ...... 52
Summary of Main Theoretical Hypothesis ...... 53
Research Questions ...... 54
Research Design...... 55
Overview of Research Design ...... 56
Study 1: Qualitative inquiry ...... 56
Study 2: Quantitative study ...... 57
Study 3: Quantitative study ...... 58
Mixed Method Approach ...... 58
Structure of Remaining Chapters ...... 61
CHAPTER II: THE ORGANIZATIONAL TRANFORMATION TOWARDS VALUE-
BASED PRICING: THE EMERGENCE OF PRICINg CAPABILITIES ...... 63
Introduction ...... 63
Theoretical Foundation ...... 64
Pricing Orientation ...... 65
Organizational Theory and Organizational Decision Making Theory ...... 66
Rationality ...... 67
Organizational structure ...... 68
Theory of the Firm: Behavioral Theory and Resource-Based View ...... 71
Methods...... 73
Methodological Approach ...... 73
Sample...... 74
vi Data Collection ...... 75
Data Analysis ...... 76
Findings...... 77
Discussion ...... 90
Value-Based Pricing Requires Deep Transformational Change ...... 90
Value-based Pricing: At the Nexus of Experiential and Transformative
Learning ...... 93
Champions Lead the Organizational Transformation ...... 95
The Position of the Pricing Dimension in Industrial Marketing ...... 97
Conceptual Model for the Internalization of and Transformation towards
VBP ...... 100
Limitations ...... 101
Implications for Practice and Future Research ...... 102
CHAPTER III: THE ORGANIZATIONAL DESIGN FOR PRICING AND ITS
CONSEQUENCES ON FIRM PERFORMANCE: A QUANTITATIVE VALIDATION
OF PRICING AND ORGANIZATIONAL CAPABILITIES ...... 104
Introduction ...... 104
Theoretical Foundation ...... 105
Literature on Pricing and Firm Performance ...... 106
Organizational structure ...... 107
Capabilities and Resource-Based View of the Firm ...... 108
Organizational efficacy ...... 109
Organizational champions ...... 110
vii Organizational change capacity ...... 111
Hypothesis Development ...... 111
Championing Behaviors...... 113
Center-led Pricing Management ...... 113
Organizational Change Capacity ...... 114
Championing Behaviors as an Amplifying Variable ...... 115
Link between Capabilities and Confidence ...... 115
The Moderating Effect of Competitive Intensity and Product Advantage ...... 116
Pricing Capabilities ...... 118
Organizational Confidence ...... 118
Research Design and Methods ...... 119
Data Collection and Sampling ...... 119
Data Screening ...... 121
Measure Development and Assessment ...... 121
Behavior of champion on pricing ...... 121
Pricing capabilities ...... 122
Center-led pricing management ...... 122
Organizational confidence ...... 122
Organizational change capacity ...... 122
Competitive intensity and product advantage ...... 123
Firm performance...... 123
Firm-level control variables ...... 123
Non-Response Bias ...... 124
viii Exploratory Factor Analysis ...... 124
Confirmatory Factor Analysis ...... 126
Common Method Bias ...... 128
Hypotheses Testing and Structural Model ...... 129
Findings...... 130
Interactions Effects ...... 131
Direct Effects on Dependent Variables ...... 132
R Square Decomposition ...... 132
Analysis of Moderation...... 134
Controls ...... 134
Final Structure Model ...... 135
Discussion ...... 136
Limitations ...... 139
Implications for Practice and Future Research ...... 140
CHAPTER IV: ORGANIZATIONAL CONFIDENCE FOR PRICING AND ITS
CONSEQUENCES ON FIRM PERFORMANCE: ORGANIZATIONAL CONFIDENCE
AS A STRATEGIC ORGANIZATIONAL CAPABILITY ...... 142
Introduction ...... 142
Theoretical Foundation ...... 143
Organizational Theory ...... 143
Organizational structure ...... 144
Incentive & goal systems ...... 145
Social cognitive theory ...... 145
ix Pricing Literature ...... 147
Pricing literature from an organizational perspective ...... 147
Pricing and firm performance ...... 148
Capabilities and Resource-Based View of the Firm ...... 149
The Qualitative Research ...... 151
Hypothesis Development ...... 154
Pricing Capabilities ...... 155
Delegation of Pricing Authority...... 156
Pricing Process Formalization ...... 157
Incentives & Goals Systems ...... 158
Knowledge before Negotiation ...... 159
Pricing Capabilities and Firm Performance ...... 160
Organizational Confidence and Firm Performance ...... 161
The Moderating Effect of Primary Pricing Orientation ...... 162
Research Design and Methods ...... 163
Data Collection and Sampling ...... 163
Data Screening ...... 164
Measure Development and Assessment ...... 164
Pricing capabilities ...... 165
Price realization ...... 165
Pricing orientation ...... 166
Delegation of pricing authority ...... 166
Pricing process formalization ...... 166
x Organizational confidence ...... 166
Incentives & goal systems ...... 167
Knowledge before negotiation ...... 167
Market turbulences...... 167
Firm performance...... 167
Control variables ...... 168
Non-Response Bias ...... 168
Exploratory Factor Analysis ...... 168
Confirmatory Factor Analysis ...... 170
Common Method Bias ...... 172
Hypotheses Testing and Structural Model ...... 173
Findings...... 174
Direct Effects on Dependent Variables ...... 175
R Square Decomposition ...... 176
Analysis of Moderation...... 177
Controls ...... 177
Final Structural Model ...... 178
Discussion ...... 179
Limitations ...... 182
Implications for Practice and Future Research ...... 183
CHAPTER V: INTEGRATED FINDINGS AND DISCUSSION ...... 185
Integrated Summary of Findings ...... 185
Transformational Journey towards Pricing Excellence ...... 185
xi The Pivotal Role of Pricing Champions ...... 187
Organizational Confidence in Pricing ...... 189
Organizational Change Capacity ...... 190
Unique Organizational Design for Pricing Excellence ...... 191
Integrating the Findings ...... 193
Development of an Integrated Model ...... 194
Stages of Transformation ...... 194
Constant Interaction between Technical and Social Dimensions ...... 196
Dynamic Learning Environment...... 197
Role of Champions ...... 198
Discussion ...... 198
Pricing as a Socio-Technical Innovation ...... 199
Multi-level Perspective of Pricing ...... 200
Pricing and Mindful Learning ...... 201
Pricing Skills of the Future ...... 202
CHAPTER VI: CONCLUSION ...... 205
Limitations of Research ...... 205
Research Design...... 205
Survey Biases ...... 206
Situational Biases ...... 207
Researcher’s Biases ...... 208
Summary of Main Contributions to Theory...... 208
Validation of the Importance and Power of Socio-technical Concepts ...... 208
xii Pricing from a Socio-technical Perspective ...... 209
Advancement of Pricing Capabilities Theory ...... 210
Organizational Confidence Construct Operationalization ...... 210
New Measure Development ...... 211
Contribution to Other Research Domains ...... 212
Implications for Practice ...... 213
Top Executives in Firms ...... 213
Pricing Practitioners ...... 214
Pricing Profession ...... 215
Greater use of technology ...... 215
The increasing importance of pricing software ...... 216
More coordination and professionalization of the pricing function ...... 216
More academic research...... 217
Systematic academic curriculum...... 217
Greater levels of innovation in pricing...... 218
Collaboration among academia and practice...... 218
Professionalizing the pricing function...... 218
Pricing in the executive suite ...... 219
The skills of the future ...... 219
Future Research Agenda ...... 219
Closing Thoughts ...... 221
Appendix A: Detailed Sample Information ...... 222
Appendix B: Interview Protocol and Questions ...... 224
xiii Appendix C: Themes and Sub-Themes ...... 227
Appendix D: Raw Understanding of Value-Based Pricing in Firms ...... 230
Appendix E: Stimulus for Change and Duration of Transformation for Firm Which
Adopted Value-Based Pricing...... 234
Appendix F: Survey Items ...... 235
Appendix G: Construct Table ...... 236
Appendix H: CFA Model in AMOS ...... 239
Appendix I: Trimmed SEM Model in AMOS ...... 240
Appendix J: Conceptual Model for the Internalization of and Transformation
towards Value-based Pricing ...... 241
Appendix K: Survey Items...... 242
Appendix L: Construct Table...... 243
Appendix M: CFA Model in Amos ...... 247
Appendix N: Trimmed SEM Model in AMOS...... 248
References ...... 249
xiv LIST OF TABLES
Table 1: Definitions of Organizational Capabilities ...... 31
Table 2: Prior Research on Pricing Capabilities ...... 34
Table 3: Summary of Pricing Capabilities ...... 39
Table 4: Technical Pricing Dimensions, Resources and Capabilities...... 41
Table 5: Social-Technical Design Principles ...... 51
Table 6: Identified Value-Based Pricing Methodologies in Business Publications ...... 100
Table 7: Sample Characteristics ...... 120
Table 8: EFA Measurement Model ...... 125
Table 9: Correlation of Constructs ...... 125
Table 10: Results of Confirmatory Factor Analysis ...... 127
Table 11: Final SEM Model Fit Statistics ...... 130
Table 12: Result of Hypothesis Test ...... 131
Table 13: R Square Decomposition for the Dependent Variables ...... 133
Table 14: Controls...... 135
Table 15: Sample Characteristics ...... 164
Table 16: EFA Measurement Model...... 169
Table 17: Correlation of Constructs ...... 170
Table 18: Results of Confirmatory Factor Analysis ...... 171
Table 19: Final SEM Model Fit Statistics ...... 174
Table 20: Result of Hypothesis Test ...... 175
Table 21: R Square Decomposition for the Dependent Variables ...... 176
Table 22: Controls...... 178
Table 23: Stimulus and Duration of Change...... 185
xv LIST OF FIGURES
Figure 1: Integrated Theoretical Framework ...... 28
Figure 2: Diagnosing and Improving Pricing Capability ...... 36
Figure 3: Organizational Capital in Pricing ...... 38
Figure 4: A Framework of Intangible Capabilities ...... 43
Figure 5: Enduring Aspects of Socio-Technical Theory ...... 46
Figure 6: Socio-Technical Systems ...... 47
Figure 7: Factors Affecting the Treatment of Organizational Issues ...... 48
Figure 8: Socio-Technical Model ...... 49
Figure 9: Overall Theoretical Hypothesis ...... 54
Figure 10: Overall Research Design ...... 56
Figure 11: Mixed Method Research Design ...... 60
Figure 12: Price Point Definition Process for Value-Based Pricing (VBP) ...... 78
Figure 13: Differences in the Decision Making Process between Firms Using Value-
Based Pricing and Those That Did Not ...... 79
Figure 14: Price Point Definition Process for Cost-Based Pricing (CBP) ...... 79
Figure 15: Price Point Definition Process for Competition-Based Pricing (COBP) ...... 80
Figure 16: Evidence of Decision Making Factors in Firms Using Cost-Based or
Competition-Based Pricing Orientation ...... 81
Figure 17: Evidence of Role Specialization in Firms That Use Value-Based Pricing .... 82
Figure 18: Evidence of Expertise Centralization in Firms That Use Value-Based
Pricing ...... 83
Figure 19: Pricing Process Formalization by Pricing Orientation ...... 84
xvi Figure 20: Differences in the Training Focus among Firms with Different Pricing
Orientations ...... 85
Figure 21: Evidence of Leader’s Decisive Influence ...... 87
Figure 22: Importance of Employee's Beliefs on Confidence ...... 88
Figure 23: Importance of Courage and Pricing Heroes on Confidence ...... 89
Figure 24: Importance of Success Stories on Confidence ...... 89
Figure 25: Evidence of Cost-Plus Mentality in Firm’s Culture or DNA ...... 91
Figure 26: Evidence of Firm’s DNA Transformation to Value-based Pricing ...... 91
Figure 27: Understanding of Value-based Pricing by Executive Leaders in Firms
Using It...... 99
Figure 28: Conceptual Model for the Internalization of and Transformation
towards VBP ...... 101
Figure 29: Hypothesized Research Model ...... 112
Figure 30: Final Structural Model...... 135
Figure 31: Hypothesized Research Model ...... 154
Figure 32: Final Structural Model...... 179
Figure 33: Process of Cultural Transformation ...... 186
Figure 34: Constellation of Championing Behaviors ...... 187
Figure 35: Contract between Involvement in Pricing vs. Championing of Pricing ...... 188
Figure 36: Dimensions of Organizational Confidence in Pricing ...... 189
Figure 37: Developing a Strong Belief System ...... 190
Figure 38: Center-Led Management Design for Pricing ...... 192
Figure 39: Activities of Center-Led Pricing Teams ...... 193
xvii Figure 40: Stages of the Transformation Process ...... 195
Figure 41: Towards a Model of Pricing as a Socio-Technological Innovation ...... 197
Figure 42: Multi-Level Perspective on Pricing Technological Innovation ...... 200
Figure 43: Pricing Skills of Today and Tomorrow ...... 203
Figure 44: A Balance of Skills ...... 204
Figure 45: A Pricing Capabilities Scale ...... 211
Figure 46: A Center-Led Pricing Management Scale ...... 212
Figure 47: Framework for Transformation ...... 217
xviii ACKNOWLEDGMENTS
The last four years have been a real journey not only personally but professionally. The journey has been one filled with ups and downs, with unexpected intellectual revelations and “explosions,” and by an awakening to a body of knowledge that has gone well beyond any expectations I could have reasonably imagined. I entered the program as a very confident Chief Executive Officer with over twenty years of global business experience. I very quickly realized the extent of the theoretical and intellectual gaps I had. Business schools and businesses in general do not offer comprehensive tools for learning what management really is, where it comes from, and what drives managers to act the way they do. In that sense, I leave this program filled with rich and diversified knowledge, philosophical aspirations, and a renewed sense to lead organizations for successful transformations.
It has been my great fortune and a great privilege to have been guided on this transformational journey by an incredibly dedicated, committed, and caring group of individuals. I am indebted to them not only for leading me through the transformation but also for guiding me on how to block biases, fight mental locks, and soften inflexible practitioners’ views in a way that led to the delivery of this excellent and unbiased body of work. I only hope that they can be confident of my appreciation and gratitude, as well as the high regard in which I hold all of them.
I personally thank every member of my dissertation committee for their patience, for their persistence, and for their continuous support for the past years. As my dissertation committee Chair, Dick Boland gave me the necessary inspiration and skills to create stories, create a web of theoretical concepts, and think as a social and philosophical
xix researcher. He introduced me to theories and concepts that opened my thinking and broadened my views. Andreas Hinterhuber provided strong support to my dissertation as a practitioner scholar. His knowledge in pricing and value management is second to none.
The depth and breadth of his intellect provided continuous challenge to my daily work and constant stimulation to get my work published in academic and practitioners’ circles.
Gary Hunter has been a constant source of inspiration and was kind enough to share guidance on how to get my work published, how to refine my theoretical propositions, and how to relate pricing to the world of account management. Finally, Toni Somers was always responsive and accessible. She was also instrumental in making sure I successfully passed the difficult phase of learning structural equation modeling and applying the science to my work. I thank her for her kindness and patience along the way.
I would also like to thank Paul Salipante, who provided me with early guidance in the first semester of the program. Paul introduced me to the foundational theories of management and provided me with classic references to read early on. His support and kindness allowed me to build a strong literature foundation that proved invaluable for the rest of my research journey. Sheri Perelli also strongly contributed to my work, by challenging my biases and preconceived views early on in the qualitative process. Sheri helped frame my research questions, nailed my early conceptual framework and, most above all, helped me open my mind to what qualitative really is.
Research cannot be accomplished without access to respondents and without good data collection. For this, I will be forever grateful to the Professional Pricing Society and their staff, as well as to the Strategic Account Management Association and their staff.
Both organizations graciously gave me access to their membership bases. They also
xx allowed me to present findings to selected groups of members and gave me excellent
feedback along the way.
Finally, I am most grateful to Sue Nartker and Marilyn Chorman for their steadfast support, patience, and positive energy over the last four years. They have been my strongest advocates in the face of many challenges, which has truly humbled me. This
PhD simply could not have been completed in less than four years, without their
responsiveness, can-do attitude, and positive energy!
xxi
Pricing Capabilities and Firm Performance: A Socio-Technical Framework for the Adoption of Pricing as a Transformational Innovation
Abstract
by
STEPHAN M. LIOZU
Pricing remains a neglected field not only in scholarly publication but also in the
field of practice. Despite practitioners’ and consultants’ literature describing the strong
potential positive effect of pricing on the firm profits, a vast majority of firms do not embrace pricing as a full-fledged activity of the marketing function, do not have a dedicated pricing function, and in effect do not manage pricing at all. At best, pricing activities and responsibilities are fragmented and distributed among several organizational actors. In 2010, the Professional Pricing Society reported that only 5% of
Fortune 500 firms have a dedicated pricing function. To make the situation worse, when firms pay attention to pricing, they find the subject difficult and complex. They most often “throw in the towel” and cannot reach the level of desired success in terms of either firm performance or organizational change.
To address this strong problem of practice, I designed a sequential, multi-stage, mixed-method research project to discover how firms successfully transform their pricing orientation and to understand their use of systems, models, strategies, and tactics. I
xxii borrow concepts from socio-technical systems and design, to explain how pricing is a
technological innovation that requires both social and technical capabilities for successful
adoption and assimilation by organizations.
I report on three studies that comprise my project. Study 1 is a qualitative study of
44 managers in 15 industrial firms across three industries and 10 U.S. states that draws on
grounded theory, organizational theory, and decision-making theory to explore the
difference between firms that successfully adopted modern pricing practices and firms
that did not. The findings identify stark contrasts in how firms are organized for pricing,
how managers make pricing decisions, and what organizational factors are critical for the
transformation towards value-based pricing. Based on these findings, a model of pricing
transformation is proposed. Five organizational factors are identified as critical
dimensions of the transformation: technical pricing capabilities, pricing champions,
organizational confidence in pricing, organizational change capacity, and center-led
management of the pricing function. Study 2 is a quantitative study of 748 pricing and
business professionals from around the world who are engaged in the pricing process and
was aimed at hypothesized contribution to relative firm performance of the five
organizational factors identified in the qualitative. A structural equation model reveals that each factor positively contributed to firm performance but also that the way organizations were designed strongly influenced the relationship between technical and social pricing capabilities. Study 3 is a quantitative study of 507 account and commercial management professionals from around the world focusing on one of the most significant contributors to the overall model of the second study, namely, organizational confidence in pricing. This third study identifies the antecedents and consequences of pricing
xxiii confidence on relative firm performance, and reveals that organizational confidence in pricing significantly and positively impacted firm performance.
Taken together, the three studies triangulate on the technical capabilities and social capabilities associated with pricing as critical in explaining how firms adopt and assimilate pricing as a technological innovation. I propose a framework of transformation in pricing orientation that includes both the technical and social capabilities that are necessary to increase adoption and assimilation of a pricing orientation. This dissertation contributes to 1) the understanding of how a pricing orientation can be further adopted and better assimilated in firms, 2) the development of pricing capabilities theory, and 3) the role of socio-technical systems theory in advancing the social and human agenda in firms.
Key words: Cultural transformation; organizational capabilities; organizational change capacity; organizational confidence; organizational design; pricing; pricing capabilities; pricing champions; pricing orientation; socio-technical systems.
xxiv
CHAPTER I: OVERVIEW OF RESEARCH JOURNEY
Introduction
In most companies, the pricing function receives limited attention. Data from the
Professional Pricing Society, the world’s largest organization dedicated to pricing, reveal
that less than 5% of Fortune 500 companies have a full-time function exclusively dedicated to pricing (Mitchell, 2011), and, according to McKinsey & Company, fewer than 15% conduct systematic pricing research (as cited in Hinterhuber, 2004). Among
business schools accredited by the Association to Advance Collegiate Schools of
Business (AACSB), only 9% offer courses that emphasize pricing significantly
(McCaskey & Brady, 2007).
Numerous studies contend that pricing has a substantial and immediate effect on
company profitability: small variations in price influence the operating profit by as much
as 20% to 50% in both directions (Hinterhuber, 2004; Nagle & Holden, 2002). Pricing is
also generally considered the dimension of the marketing concept that costs the least and
generates only revenues (Macdivitt & Wilkinson, 2011).
The paradox between the declared and published importance of the pricing
function and its lack of acceptance and standing in firms fueled my intense interest and
curiosity in trying to research the phenomenological gap. Why is pricing so important to
business and marketing yet unrecognized as a managerial practice? The intent of my
overall research agenda is to reinforce the importance of pricing in theory and practice, to
advance the status and visibility of pricing theory in the marketing and management
literature, and to empirically validate some of the commonly accepted tacit relationships
published in books and magazines for practitioners. The transformation of the pricing 25
profession in firms can only happen with the combined effect of increased academic research in the field, increased collaboration between academia and the field of practice, and increased professionalization of the profession.
Research Gaps
Although pricing is a key contributor to firm profitability, research on pricing is comparatively limited: “price is so important to the firm’s success, one wonders why pricing has not received more attention” (LaPlaca, 1997: 192). Within the broad research domain of pricing, the topic of pricing strategy has only witnessed an increase in interest, albeit from a low level (Leone, Robinson, Bragge, & Somervuori, 2012). This lack of attention from either practitioners or marketing scholars (Hinterhuber, 2004, 2008a;
Malhorta, 1996; Noble & Gruca, 1999a) is puzzling. It is even more surprising that only a few papers published in the field of pricing in top marketing and management journals deal with research problems related to pricing strategies and managerial considerations
(Leone et al., 2012). Indeed, pricing literature remains silent on how organizational and behavioral characteristics of firms may affect pricing processes and how firms organize for pricing (Ingenbleek, 2007). A review of 53 empirical pricing studies conducted by
Ingenbleek (2007) concluded that the pricing literature is highly descriptive and fragmented, that pricing practices are often not cumulative, and that theoretical development on how price decisions are made in firms is limited.
My own literature review revealed the need for more research on pricing resources and pricing capabilities from a strategic and organizational perspective. First, the dimensions of pricing capabilities needed to be articulated and empirically validated.
Second, even though the pricing literature documents the importance of pricing
26
capabilities from a qualitative perspective (Dutta, Zbaracki, & Bergen, 2003), there are no quantitative studies that explore the relationship between pricing capabilities and firm
performance. Third, marketing scholars and practitioners assume the impact of pricing,
but we so far lack robust empirical studies substantiating this assumption
Empirically documenting the return on investment (ROI) of pricing capabilities leads to
greater visibility of the pricing function with top executives and makes it easier to justify
critical investments in pricing programs, systems, and resources.
Research Goals
My research goals are to contribute to important dimensions of pricing theory by
creating knowledge that will be used to move the pricing function forward, by bridging
the fields of theory and practice in the area of pricing capabilities, and by developing
specific frameworks, programs, and tools that can bring the pricing practice to a higher
level. By conducting research at a global level, combining various research methods, and
researching these phenomena with support from the Professional Pricing Society, the
Strategic Account Management Association, and some of the best-in-class pricing teams,
I aim to energize the field of pricing and to encourage other potential researchers to enter this rich, yet under-explored field as well.
Integrated Theoretical Framework
My research questions include the following: How and to what extent do firms build pricing capabilities to positively influence relative firm performance? What are tangible and intangible pricing capabilities, and how do they collectively affect performance? How and to what extent do organizational behaviors affect the development of unique pricing capabilities at the individual and organizational levels in
27
firms? What critical technical and social capabilities in pricing are needed to reach the
long journey towards pricing excellence? Drawing on extant management and pricing literature, I designed an integrated theoretical framework, presented as Figure 1, to guide my exploration of these questions.
FIGURE 1: Integrated Theoretical Framework
The model suggests that firms engaged in a pricing transformation, or driven to
reach pricing excellence, build competitive advantage and thus superior relative
performance by developing and nurturing both social and technical pricing capabilities.
Furthermore, having these capabilities in place in the firm is not enough. I propose that
there are several organizational factors that might influence the design, adoption, and
internalization of these pricing capabilities. For example, top leadership plays a pivotal
role in connecting all the elements of a pricing system and in ensuring that the
organization collectively leverages the power of these capabilities and inimitable strategic
resources (Liozu & Hinterhuber, 2012). Finally, I conjecture that a socio-technical
perspective can shed a light on how technical pricing capabilities (infrastructure,
information systems, tools & models, and advanced methods) cannot simply be adopted
as technological innovations without strong social and behavioral considerations such as 28
organizational change capacity and organizational confidence (Hinterhuber & Liozu,
2012). The focus on both social and technical capabilities in pricing provides an
appropriate balance in the development of analytical and organizational intelligence
(Halal, 1999) necessary to support the organizational journey towards pricing excellence
(Liozu, Hinterhuber, Boland, & Perelli, 2012a).
Theoretical Foundation Resource-based View (RBV) and Capability-based View (CBV) of the Firm
My overall research inquiry draws on the literature on the resource-based view
(RBV) and on research on marketing and pricing capabilities. On the grounds of earlier
conceptual work (Hitt & Ireland, 1986; Penrose, 1959; Wernerfelt, 1984), Barney (1991)
offered a comprehensive framework linking resources to sustained competitive advantage
and superior performance. Subsequent scholars argued that in addition to resources,
capabilities play a fundamental role in enabling competitive advantage and superior
profitability, where capabilities are defined as a special type of resource “whose purpose
is to improve the productivity of the other resources possessed by the firm” (Makadok,
2001: 389). The RBV has been criticized for its inability to explain how resources are
obtained, developed, and deployed within firms (Morgan, Vorhies, & Mason, 2009;
Priem & Butler, 2001). Since then, however, theorists have made strong complementary
contributions to the RBV by focusing on the activities and processes necessary to deploy
and leverage tangible and intangible resources. The capability-based view (CBV) and the dynamic capability (DC) theory (Teece, Pisano, & Shuen, 1997) contribute, along with the RBV, to the theoretical foundation of my research agenda.
Defining Capabilities
29
Day (1994) defines capabilities as “complex bundles of skills and accumulated
knowledge, exercised through organizational processes, that enable firms to coordinate
activities and make use of their assets” (1994: 38). This definition clearly separates assets
from capabilities. Capabilities are the glue that joins assets so that they can be deployed
advantageously (Day, 1994). This distinction between resources and capabilities is highly
relevant for my inquiry. For example, firms might be able to create value by creating and
developing resources to generate economic rents (Barney, 1991; Peteraf, 1993), but they must also be able to capture that value through appropriate pricing activities and processes (Dutta et al., 2003). Day’s definition of capabilities implies that identifying capabilities in an organization might not be as easy as identifying and listing resources.
Capabilities may be hidden or embedded in the fabric of the organization (Makadok,
2001) in a way that makes them obscure (Day, 1994; Teece et al., 1997), distributed among various individuals, and dispersed (Leonard-Barton, 1992).
Finally, another relevant definition of capabilities is drawn from the concept of dynamic capabilities (Teece et al., 1997). Capabilities are defined as “the firm’s ability to integrate, build and reconfigure internal and external competences to address rapidly changing environments” (Teece et al., 1997: 516). This definition completes previous ones by proposing that capabilities are not static. To be truly distinctive (Day, 1994) and inimitable (Dierickx & Cool, 1989), dynamic capabilities need to reflect the
“interconnectedness between individual capabilities, business processes, competitive strategy and firm environment” (Hallberg, 2008: 33). They also need to reflect the organization’s ability to achieve innovative forms of competitive advantage (Leonard-
Barton, 1992).
30
Organizational Capabilities
The concept of capabilities transcends its individual dimension and can be
elevated at the organizational level under the name of organizational capabilities. The
literature is rich in papers about and definitions of organizational capabilities. Table 1
lists various definitions proposed by the best scholars in the field. There is a consensus,
though, that organizational capabilities are related to organizational objectives or to a desired end (Hallberg, 2008). Most scholars also agree that organizational capabilities include both distinct mechanisms (Makadok, 2001): resource picking and capability building. Other scholars add a third mechanism to organizational capabilities by proposing that organization routines constitute a form of organized activity and the exercise of repetitive capability (Cyert & March, 1992; Dutta et al., 2003; Salvato &
Rerup, 2011).
Other scholars framed the concept of organizational capability by providing a more encompassing and complex perspective grounded on the concept of the firm’s human capital (Dutta, Bergen, Levy, Ritson, & Zbaracki, 2002). Ulrich and Lake (1990) propose that organizational capabilities are a “business’s ability to establish internal structures and processes that influence its members to create organization-specific competencies and thus enable the business to adapt to changing customers and strategic needs” (1990: 40). I believe this definition reflects critical dimensions of organizational capabilities such as their dynamic nature, their comprehensive scope, and the required emphasis on human intelligence.
TABLE 1: Definitions of Organizational Capabilities
Publication Definition 31
Amit & Shoemaker, 1993 “[…] a firm’s capacity to deploy Resources, usually in combination, using organizational processes, to effect a desired end. They are information- based, tangible or intangible processes that are firm specific and are developed over time through complex interactions among the firm’s Resources” (35).
Dosi, Nelson, & Winter, “[t]o be capable of some thing is to have a generally reliable capacity to 2000 bring that thing about as a result of intended action. Capabilities fill the gap between intention and outcome, and they fill it in such a way that the outcome bears a definite resemblance to what was intended” (2).
Dutta et al., 2003 See Amit & Schoemaker (1993).
Grant, 1991 A capability is “[…] the capacity for a team of resources to perform some task or activity” (119). Helfat & Peteraf, 2003 “[…] organizational capability refers to the ability of an organization to perform a coordinated set of tasks, utilizing organizational resources, for the purpose of achieving a particular result” (999).
Makadok, 2001 “…a capability is defined as a special type of resource—specifically, an organizationally embedded nontransferable firm-specific resource whose purpose is to improve the productivity of the other resources possessed by the firm” (389).
Salvato & Rerup, 2011 “…are large scale units of analysis; they are collections of routines characterized by evident firm-level purpose” (472). Winter, 2003 “An organizational capability is a high-level routine (or collection of routines) that, together with its implementing input flows, confers upon an organization’s management a set of decision options for producing significant outputs of a particular type” (991).
Pricing Capabilities
Pricing capabilities are at the center of my overall research agenda. The concept of pricing capabilities has received limited attention in management literature and has not been clearly elaborated. In this section, I discuss prior research on pricing capabilities, explore the nature of pricing capabilities, and propose a list of pricing dimensions, pricing resources, and main pricing activities related to the technical dimension of pricing capabilities.
Prior research. Prior research on the concept of pricing capabilities is very limited, not only in terms of the number of published academic papers but also in terms 32
of the research methods used to explore the concept. Table 2 shows three of the most
relevant academic studies touching on the concept of pricing capabilities. Dutta et al.
(2003) highlighted the role of pricing capabilities, defined as a set of complex routines,
skills, systems, know-how, coordination mechanisms, and complementary resources, in
increasing company performance. Pricing capability refers to, on the one side, the price-
setting capability within a firm (identifying competitor prices, setting pricing strategy,
translating from pricing strategy to price), and, on the other, to the price-setting capability vis-à-vis customers (convincing customers on price-change logic, negotiating price changes with major customers). In this and subsequent qualitative-research settings, pricing capabilities were found to be positively related to company performance
(Berggren & Eek, 2007; Dutta et al., 2002; Dutta et al., 2003; Hallberg, 2008).
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TABLE 2: Prior Research on Pricing Capabilities
Construct Definition Authors & Items
Market-related Pricing capabilities are part of seven distinct Morgan, Vorhies, & Mason (2009) Capabilities – market-related capabilities: • Using pricing skills and systems to respond Pricing 1. product development quickly to market changes 2. pricing • Knowledge o Competitors’ pricing tactics 3. channel management • Doing an effective job at pricing 4. marketing communications products/services 5. selling • Monitoring competitors prices and price changes 6. market planning 7. marketing implementation
Premium The premium price capability reflects the Koufteros, Vonderembe, & Doll (2002) Pricing ability to command superior prices. • Our capability of selling at price premium Capability Customers are willing to pay premium • Our capability of selling at prices above average prices for product innovation. Products that • Our capability of selling at high prices that only offer new features or products that are first a few firms can achieve in the market can command premium prices.
Pricing Pricing processes for setting or changing Dutta, Zbaracki, & Bergen (2003) Capabilities prices are capabilities that a firm can use as • Translating pricing strategy to price a basis for competitive advantage. • Convincing customer on the price change logic • Negotiating price changes within major customers • Developing internal pricing management process • Capturing value through price
The marketing-capability literature, by contrast, includes pricing as one of the market-related dimensions used to determine and quantify marketing capacities. In this instance, scholars use quantitative surveys to document a positive link between pricing capabilities—a subset of marketing capabilities—and firm performance (Morgan et al.,
2009; Vorhies & Morgan, 2005). These and other surveys—see, for example, Kemper,
Engelen, and Brettel (2011)—use the following scale to define pricing capabilities: (a) using pricing skills and systems to respond quickly to market changes; (b) learning about competitors’ pricing tactics; (c) pricing products/services effectively; and (d) monitoring competitors’ prices and price changes. Subsequent studies (e.g., Zou, Fang, & Zhao,
2003), on the performance of Chinese exporters) used a similar scale and confirmed the
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relationship between pricing capabilities and performance. All these studies explore and
measure pricing capabilities as part of a much wider subset of marketing capabilities: in
parallel, they measure capabilities related to product development, channel management,
market communication, selling, market information management, marketing planning,
and marketing implementation (Vorhies & Morgan, 2005), as well as other capabilities. It
is therefore not surprising that the construct “pricing capabilities” in this stream of
research is a somewhat crude one having a limited number of measurement items. In
other words, use of a three- or four-item scale of pricing capabilities may risk
underestimating the complexity of pricing capabilities in firms. In this study I aim to capture the complexity of pricing capabilities by using a richer scale.
Finally, Hallberg (2008) further explored the concept of pricing capabilities by investigating their strategic dimensions in firms. The author conducts multiple case studies in the packaging industry to uncover critical dimensions of pricing capabilities and to design a framework for diagnosing and improving firm pricing capability, as shown in Figure 2.
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FIGURE 2: Diagnosing and Improving Pricing Capability
This work, based on the seminal work conducted by Dutta et al. (2003), made several contributions to the theory of pricing capabilities. The first was to propose conceptualizations of critical pricing factors. The lack of conceptualization has been noted as a potential barrier to the adoption of pricing practices (Liozu, Hinterhuber,
Boland, & Perelli, 2012b), as practitioners might not be able to differentiate between pricing policy, pricing strategies, and pricing approaches, for example. The second contribution is to link pricing capabilities and resources to the appropriation of economic value and profits. Finally, Hallberg’s research (2008) substantiates, refines, and 36
complements the empirical and theoretical work conducted by Dutta et al. (2003).
Despite these important contributions, this body of work does not establish statistical validation of the positive relationship between pricing capabilities and firm performance by surveying a larger and more diverse sample of pricing practitioners in firms. This work is also limited to a single industry across a limited number of countries. Both greatly limit the contribution and reinforce the need for more robust empirical evidences to develop and support pricing capabilities theory.
Nature of pricing capability. To generate organizational capital in pricing, managers in firms must invest in specific strategic capabilities related to systems, human factors, and social networks (Dutta et al., 2002). As shown in Figure 3, there are three dimensions of organizational capital that are interconnected and that can create sustainable and inimitable competitive advantage (Dierickx & Cool, 1989; Dutta et al.,
2002; Hallberg, 2008): human capital, system capital, and social capital. Human capital refers to the development of specific training programs to support the diffusion of knowledge on pricing and value management. Training strategies dedicated to pricing are critical in laying the required pricing foundation for all relevant stakeholders (Liozu et al., 2012b).
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FIGURE 3: Organizational Capital in Pricing
Pricing is a dynamic field, and innovations are being introduced incrementally.
Therefore, pricing capabilities related to human capital must be dynamic in order to
include all new concepts, methods, and theories (Teece et al., 1997). System capital refers
to implementing and managing all appropriate pricing software (Dutta et al., 2002) in
order to make appropriate pricing decisions. Finally, social capital is defined as “the
internal glue that coordinates and holds together the many participants in the pricing
process” (Dutta et al., 2002: 65). Pricing capabilities related to social capital are the most
difficult to develop but are also the least imitable by competitors. These capabilities are
specific activities uniquely designed for an organization to support its pricing
transformation (Liozu, Boland, Hinterhuber, & Perelli, 2011). I agree with these three
dimensions of pricing capabilities. However, I feel that the definition of the technical dimension of pricing capabilities proposed by Dutta et al. is too narrow and requires
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additional exploration. In addition, there is a strong need to explore the relationship
between the three dimensions of organizational capital and to measure how these
dimensions influence firm performance. My aim is to show that both technical and social dimensions are equally critical in the development of organizational capital in pricing and in the generation of sustainable firm performance.
Summary of pricing capabilities. Based on previous definitions of pricing
capabilities proposed by Dutta et al. (2003) and Hallberg (2008), I propose the summary
of pricing capabilities shown in Table 3.
TABLE 3: Summary of Pricing Capabilities
Activities Routines Skills/Know-How Coordination Mechanisms
• Defining functionality equivalent • Technical know-how about • Cross-functional teams to generate products competitive products, product equivalent competitive product • Nested routines for tracking Identifying changes comparison competitive prices (e.g. special competitor prices • Sales force tacit know-how of field • Coordination between sales force and discounts) sources for reliable competitive select customers to establish • Assessing competitive price price information competitive prices information
• Coordinating knowledge of differing • System development expertise assumptions Setting pricing • Collecting customer purchase • Pricing strategy expertise • Developing consensus on strategy and history • Database skills assumptions about customers translation from • Nested conflict resolution routines • Financial analysis skills • Coordinating knowledge of different pricing strategy to • Tracking past pricing actions • Customer price sensitivity pricing strategies price • Pricing actions analysis • Scenario analysis of customer • Channeling information on pricing response actions
• Information exchange with • Technical skills: pricing tool kit customers’ pricing systems • Learn about different perspectives Convincing and price change effects • Identify effect on customers’ • Develop consensus within firm and customers on the • Know-how on customer response customers sales force on new prices price change logic • Tacit know-how to separate sincere • Send information to pricing team • Learn of customer response concerns from negotiating postures • Prepare price change presentation
• Knowledge of firm members biases • Consensus amount participants on and relations with customers new prices • Know-how about competitive • Consensus in negotiation team on • Organizational hierarchy approval offerings negotiation strategy Negotiating price of new prices • Knowledge of customer negotiating changes with major • Customers assessment strategy customers • Development of negotiation • Cross-functional negotiation materials expertise • Customer price sensitivity analysis
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Pricing capabilities are mostly related to the monitoring of competitive pricing, to the price-setting process, and to two dimensions of price negotiation. For each capability,
I propose a set of routines, skills, and coordination mechanisms that are critical in deploying each of them and in embedding each of them in the fabric of the organization
(Makadok, 2001).
Technical pricing capabilities. Armed with the definition of pricing capabilities, their nature, as well as a list of potential capabilities from prior research, I am able to further the concept of pricing capabilities and provide clarity in their conceptualizations.
However, to support my socio-technical perspective, I need to conduct another step in the exploration. In Table 4, I suggest a conceptualization of pricing dimensions, pricing resources, and pricing capabilities from a technical perspective.
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TABLE 4: Technical Pricing Dimensions, Resources and Capabilities
Pricing Pricing Resources Pricing Activities Dimension
Infrastructure Hardware • Select appropriate technology, deploy and conduct user training Communication Devices Select appropriate technology, deploy and conduct user Internet & Intranet Support training Deploy platforms for adequate speed of communication and Mobile Communication Network provide real time pricing data Equip appropriate staff and conduct user training
Analytics Cockpit and Dashboards • Design and communicate dashboards Automated Pricing Reports Design, program & communicate reports Basic Pricing Analysis Conduct analysis; waterfall, pricing cloud, price-elasticity, pricing sensitivity, cost-to-serve, CVP, EVE®. Advanced Pricing Analytics Conduct data analysis to optimize pricing decisions & set proper pricing levels; conduct segmentation analysis
Information ERP System • Select appropriate technology, implement pricing module and Systems manage pricing operations Business Intelligence Software Select appropriate technology, implement pricing module and manage pricing operations Pricing Optimization Software Select appropriate pricing optimization software, set up interface with ERP, implement and manage pricing operations. Value-based Pricing Software Select appropriate solutions, implement and manage pricing operations. Competitive Intelligence Software Select appropriate solutions, implement and manage pricing operations.
Tools & Models TCO Models • Design proprietary tools and models to perform and manage output for TCO analysis. Monetization Models Design proprietary tools and models to capture monetization analysis output. Advanced Cost Models Design proprietary tools and models to measure real and projects costs used for bidding and planning. Value-in-Use Models Design proprietary tools and models to capture VIU analysis.
Advanced Segmentation Method • Conduct cluster analysis and user-need based segmentation. Methods Pricing Research Conduct conjoint and willingness-to-pay research. Voice-of-customer Research Conduct ethnographic, focus groups, direct and indirect surveys to assess value and perceived worth. Value Assessment Methods Conduct all six types of value-assessment techniques.
Consistent with previous research related to the importance of pricing systems
(Dutta et al., 2002; Nagle & Holden, 2002), I have included them as a critical dimension of pricing capabilities. I have, however, distinguished between pricing systems and pricing infrastructure. The combination of both dimensions ensures that the sales force is able to “set the right price at the right time” (Dutta et al., 2002). I complete the list of technical dimensions of pricing by adding three new components: pricing analytics,
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pricing models and tools, and pricing methods. My research shows that the ability to
design proprietary tools and models strongly contributes to the development of strong
pricing capabilities and the adoption of advanced pricing orientation (Liozu et al., 2011).
The implementation of all five technical dimensions and the related pricing resources
might add a tremendous amount of complexity in firms, creating an issue of technological adoption. I posit that pricing may be considered a technological innovation leading to radical and difficult technological changes, thus requiring organizational capacity to change.
Tangible versus Intangible Capabilities
Current literature on marketing and pricing capabilities is silent on the difference between tangible and intangible capabilities and how they influence competitive advantage. 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” (Barney, 1991). A specific combination of tangible and intangibles resources and capabilities is valuable, rare, and difficult to imitate or acquire by competitors (Barney & Clark, 2007; Dierickx & Cool, 1989; Hall, 1993) and cannot be captured on a piece of paper (Nadler & Tushman, 1990). 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, 2990).
Renowned scholars have focused on the study of intangible capabilities. They refer to
them as intellectual capital (Marr, Schiuma, & Neely, 2004); as social capital, or “the
glue that coordinates and holds together the many participants in the pricing process”
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(Dutta et al., 2002); as intangible assets (Hall, 1992); or as knowledge assets (Sanchez,
Chaminade, & Olea, 2000). Itami and Roehl (1991) also calls them intangible assets and
proposes that they include information, brand names, reputation, and corporate culture,
for example. The construct of corporate culture is often mentioned when referring to
these intangible capabilities.
Hall (1993) discusses functional versus cultural capabilities and proposes that they incorporate “habits, attitudes, beliefs and values which permeate the individuals and groups which comprise the organization.” He proposes the framework shown in Figure 4.
FIGURE 4: A Framework of Intangible Capabilities
His research uncovers the most important intangible cultural capabilities in firms
such as ability to manage change, perceptions of high quality standards, and management
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style (Hall, 1993). The culture of the firm is an “invisible structure” that is powerful enough to shape the norms and rules that employees follow (Itami & Roehl, 1991).
Extant literature on tangible versus intangible capabilities supports my theoretical framework, presented earlier. Although they are different, they are inseparable, and together they create inimitable competitive advantage. Lev (2001) notes that intangibles are often embedded in physical assets…leading to consideration interactions between tangible and intangible assets in the creation of value. He follows by stating that “when such interactions are intense, the valuation of intangibles on a standalone basis becomes impossible” (Lev, 2001: 7). I support this position and conjecture that it can be applied to pricing capabilities. Although tangibles, or physical pricing capabilities (models, networks, training, systems), can be easily purchased in the market, intangible pricing capabilities (pricing confidence, change capacity, pricing-championing behaviors) are often the firm’s only source of competitive edge that can be sustained over time (Itami &
Roehl, 1991).
Socio-Technical Perspective
In previous sections of this chapter, I established the following points:
- When managers decide to invest in organizational pricing capital, they should
approach that as a major technological innovation.
- The journey towards pricing excellence is an organizational transformation
requiring deep change that will most likely create moments of discontinuity.
- Technical dimensions of pricing and the related resources and activities can
add technical and social complexity and might face resistance in adoption by
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users and practitioners. Therefore, greater focus should be given to user
adoption and experience.
Because pricing capabilities theory does not stand on a robust, well-developed theoretical foundation, I have investigated other theories to provide additional support to my overall hypothesis. I have found strong contributions in socio-technical theory and, more particularly, in the socio-technical change and socio-technical design approaches.
Socio-technical systems theory. Socio-technical systems (STS) theory is rich in concepts and principles addressing issues and evolutions in work design, in workers’ motivation, in work analysis, and the design of autonomous work systems (Trist, 1981).
The theory explores the nature of technical systems, social systems, and the work- relationship structure that brings the two systems together (Pasmore, 1995). Early in the conceptualization of socio-technical theory, Fred Emery argued that “because organizations employ whole persons, it is important to pay attention to human needs beyond those required for the regular performance of tasks dictated by the technology”
(as cited in Pasmore, 1995). While the original aim of STS theory was to promote human considerations in the design and adoption of technologies as well as the democratization of work practices, STS theory has evolved over the years as scholars have brought to it additional contributions and considerations. However, many aspects of STS theory endure today, as shown in Figure 5 (Pasmore, 1995), and some of these might be applied to my view that pricing is a technological system.
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FIGURE 5: Enduring Aspects of Socio-Technical Theory
For example, as pricing technologies get deployed in an organization, the result is increased complexity in pricing and systems use, requiring users and teams to work autonomously to adapt and stabilize their process post deployment. The deployment of pricing resources also requires greater team interaction in pricing activities, greater organizational adaptation, and a potential redesign of roles and job descriptions. Because each firm creates a unique social construction of what a pricing transformation might be
(Liozu et al., 2012a), teams involved in the pricing journey will customize the transformational roadmap and work more autonomously without top-down control and intervention to ensure that the transformation stays on track. Finally, the transformation will require both experiential and transformative learning to ensure that individual actors develop the required skills (Liozu et al., 2012a).
I previously conjectured that pricing might be considered as a technological innovation. Pricing may also be characterized as a technological system reinforcing the need for attention to networks of actors, to interaction, knowledge flows, network dynamics, and co-evolution (Carlsson & Stankiewicz, 1991; Geels & Kemp, 2007). A technological system is defined as a “network of agents interacting under a particular
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institutional infrastructure to generate, diffuse, and utilize technology.” Technological
systems are defined in terms of “knowledge or competence flows rather than flows of
ordinary goods and services” (Carlsson & Stankiewicz, 1991). This definition reinforces
the social dimension of systems as well as the use of technologies by organizational actors. Actors or users are therefore critical in the functioning of socio-technical systems.
Geels (2004) proposed a framework of STS that highlights the basic elements and
resources necessary for the functioning of the system, as shown in Figure 6.
FIGURE 6: Socio-Technical Systems
Geels suggests that STS also consists of artifacts, knowledge, capital, labor, and
cultural meanings. This framework clearly demonstrates the duality of STS and shows
that users also have to integrate technologies in their practices, organizations, and
routines, requiring learning and adaptation. The concept of cultural appropriation and
domestication of technologies suggests that technologies “have to be tamed to fit in
concrete routines and application contexts (including existing artifacts)” (Geels, 2004). 47
Socio-technical change. The importance of social and organizational factors in the success or failure of information systems development has been well documented
(Luna-Reyes, Zhang, Gil-García, & Cresswell, 2005). As Eason (1988) noted,
“Traditional approaches to the development of information systems have concentrated on
the delivery of the technology, rather than emphasizing the human and organizational
changes that are required in order to ensure that the system delivers meaningful benefits.”
Doherty and King (2003) support this statement and propose a list of factors affecting the
treatment of organizational issues, as shown in Figure 7.
FIGURE 7: Factors Affecting the Treatment of Organizational Issues
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There is a general consensus in the information systems literature that information
systems failures are linked to the failure to predict and manage the organizational impacts
of information technologies investments (Doherty & King, 2005). The development of
new socio-technical approaches that explicitly address these failures and propose new
development and change management frameworks has been slow. The end result of these
failures in organizational change related to technology adoption is often resistance to
change (del Val & Fuentes, 2003) and, in extreme cases, system rejection (Martinsons &
Chong, 1999). It is therefore paramount to consider information technology innovation
from a socio-technical change perspective. Leavitt (1964) proposed a socio-technical model that views organizational systems as composed of four interactive and aligned components, as shown in Figure 8.
FIGURE 8: Socio-Technical Model
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This model highlights the need for strong interactions between the four elements of the model as well as the need for adaptation to maintain the “system state” stable
(Lyytinen & Newman, 2008). However, with the introduction of new technology, disruption in the economy, or the emergence of radical technology in the market, the system may suffer from critical events or punctuated moments of discontinuity, thus requiring the socio-technical elements of the system to be re-configured and re-aligned
(Lyytinen & Newman, 2008). This duality between punctuated events and the need for stability forces organizations to identify and manage various rules related to cognitions
(user preferences, rigidities, skills, shared beliefs, technical ideologies), norms (proper behaviors, role perceptions), and regulations (formal rules and contracts) (Geels, 2004).
The socio-technical change perspective of systems therefore reinforces the need to pay close attention to humans as actors and users of the technology and the systems (Dutta et al., 2002). This practical view of socio-technical change reflects what Orlikowski and
Iacono (2001) identify as “an ensemble view” of technology. Hardware and software and other technology-related components are parts of a more socio-technical ensemble that includes people, work processes, and cultural factors (Cherns, 1977; Luna et al., 2005).
Socio-technical design. I posit that, considering the nature of socio-technical systems and the socio-technical change perspective related to technology adoption, the challenge of managers in organization becomes one of socio-technical design. How do managers design technological innovation and change strategies that embrace the view proposed by Orlikowski and Iacono (2001)? How do managers design pricing transformation roadmaps that include human, technical, and social components of dynamic systems?
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Albert Cherns (1976), an associate of the Tavistock Institute, described nine socio-technical design principles, as shown in Table 5.
TABLE 5: Social-Technical Design Principles
Principle 1 Compatibility Principle 2 Minimal Critical Specifications Principle 3 The Socio-technical Criterion Principle 4 The Multifunctionality Principle Principle 5 Boundary Location Principle 6 Information Principle 7 Support Congruence Principle 8 Design and Human Value Principle 9 Incompletion
Most of these principles can be adopted for the design of a pricing transformational journey over multiple years and the development of pricing capabilities: the process of design must be compatible with the objective of the transformation; the specifications of the transformation must be somewhat adaptable to incorporate change; work processes must be designed using the experience of all; multi-functionality has to be designed to generate adaptability and learning; the boundaries of the transformation facilitate knowledge sharing and change capacity; information must flow freely and not be blocked by bureaucracy; support systems among team members involved in the transformation promote cooperation and build collective confidence; human values are at the center of the transformation; and, finally, the journey never ends, because pricing excellence requires perseverance, adaptation to changing dynamics, and many iterative processes.
Socio-technical designers need to see the big picture. They need to see complex systems design as an ensemble or a unified process (Mumford, 2000). This means taking 51
into account technical, economic, organizational, and social issues at every stage of the
design process. Designers too need to develop unique capabilities to make sure socio- technical design principles are integrated into their work and their value systems
(Mumford, 2006). Mumford (2000) lists these unique capabilities as follows: knowledge
capability, resource capability, psychological capability, organizational capability, and
ethical capability. Therefore, the design agenda includes strong considerations for the
place of humans in technology that will change how work is done and how technology is
adopted. The most important thing that social-technical design can contribute is its value
system. This tells us “that although technology and organizational structures may change,
the rights and needs of the employee must be given as high a priority as those of the non-
human parts of the system” (Mumford, 2006).
Concepts of Organizational Theory Relevant to My Research Agenda
To further strengthen the theoretical foundation of my work, I also investigated organizational theory from a decision-making perspective (March, 1994; March &
Simon, 1958) to identify and draw from relevant concepts that may inform my exploratory inquiry. Organizational theory focuses on the internal structure of the firm and the relationships between its units and departments (Grant, 1996), and decision- making theory addresses the flow of information within organizations that supports and influences decision-making processes (March, 1994, 1999; Simon, 1961). A critical question is how pricing decisions occur in organizations, how pricing capabilities are developed, and what organizational factors influence managerial judgment when decisions are made. Previous work by leading behavioral and social researchers has addressed many important aspects of organizational theory. I focus on the most relevant
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concepts of this theory, including organizational structure (Aiken, Bacharach, & French,
1980; Hall, 1977; Hall, Johnson, & Haas, 1967; Miller, Dröge, & Toulouse, 1988),
organizational efficacy (Bandura, 2000; Bohn, 2001), organizational champions (Howell
& Shea, 2006; Schon, 1963), and organizational change capacity (Judge & Douglas,
2009).
I conjecture that these four organizational concepts are important influencers for
the adoption of pricing as a technological innovation as well as for the deployment of
pricing resources. Change capacity, championing behaviors, and organizational
confidence combined with a unique organizational structure are critical organizational
capabilities required to support the development of pricing capabilities. In Chapters 2, 3,
and 4 of this dissertation, I propose an in-depth literature review for these four concepts
and make connections to specific hypotheses of my individual research studies.
Summary of Main Theoretical Hypothesis
My theoretical exploration leads to the development of a main hypothesis for this
dissertation, as represented in Figure 9.
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FIGURE 9: Overall Theoretical Hypothesis
I posit that pricing is a socio-technological innovation that can be adopted and internalized only through the design and implementation of an intentional transformational strategic roadmap aimed at generating and developing organizational capital in pricing. For a successful transformation in pricing, managers in charge must think like social-technical designers and must pay equal attention to technical and social resources and capabilities in pricing. The technical resources and capabilities relate to infrastructure, information systems, pricing analytics, tools & models, and advanced pricing methods. Social or organizational capabilities relate to organizational change capacity, organizational confidence, championing behaviors, and organizational design of pricing organization. This strategic roadmap becomes a journey towards pricing excellence that leads to superior relative firm performance.
Research Questions
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A careful review of the analysis presented so far in the area of pricing capabilities
from a socio-technical perspective uncovers significant research gaps. The first gap relates to the social and organizational dimensions of firms that can positively impact the pricing transformation towards pricing excellence but also positively impact firm performance. Second, pricing is traditionally considered by many practitioners as a function mostly characterized by its technical and analytical dimensions. It is therefore equally critical to identify the organizational capabilities that can increase the technological adoption of pricing resources and ensure a successful organizational transformation. Finally, to the best of my knowledge, a comprehensive quantitative scale to measure pricing capabilities as a construct does not exist.
These three gaps represent the basis for the research questions addressed in this dissertation and define the core scope of the research agenda I designed over the past four years:
1. What are the pricing and organizational capabilities influencing the adoption
of a pricing orientation in firms? Specifically, how do these capabilities differ
by industrial sector and by the function of the respondents?
2. What impact do pricing and organizational capabilities in firms have on
relative firm performance? What are the antecedents of pricing capabilities,
and how might pricing capabilities be measured?
3. What impact do pricing capabilities have on organizational confidence in
pricing? How does organizational confidence in pricing impact relative firm
performance?
Research Design
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The overall research design was informed by a problem of practice, by my strong
practitioner experience, as well as by various research methodologies studied over the
past years. The lack of attention to and interest in the field of pricing, and particularly
pricing capabilities, guided my research agenda with the focus of a practitioner and the
curiosity of a researcher.
Overview of Research Design
The overall design for addressing the research questions embraces a mixed
methods approach (Creswell, 2009) and is aligned with my research gaps and the related
research questions I am trying to explore. Three distinct empirical studies were designed sequentially, as shown in Figure 10.
FIGURE 10: Overall Research Design
Study 1: Qualitative inquiry. What are the pricing and organizational
capabilities influencing the adoption of a pricing orientation in firms? Specifically,
how do they differ by industrial sector and by the function of the respondents?
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Study 1 proposed a conceptual model listing the organizational factors and capabilities influencing the adoption of a modern pricing approach. The main idea was to compare and contrast firms that adopted value-based pricing and those that adopted cost- based or competition-based pricing. This conceptual model was built on the findings derived from 44 semi-structured interviews in 15 industrial firms across 10 U.S. states.
Using grounded theory principles (Corbin & Strauss, 1990), I asked informants (CEOs, sales and marketing executives, finance and accounting executives) to describe experiences and stories related to making a recent pricing decision and a more strategic pricing decision. By probing these specific experiences, I was able to gather unique data that were then manually coded. My analysis led to the identification of seven themes based on 781 codable moments (Boyatzis, 1998). The conceptual model uncovered five dimensions that were highly influential in characterizing firms that adopted value-based pricing and implemented technical pricing resources: change, confidence, champions, capabilities, and center-led management of pricing.
Study 2: Quantitative study. What impact do pricing and organizational capabilities have on relative firm performance? What are the antecedents of pricing capabilities, and how might pricing capabilities be measured?
Study 2 sought to operationalize the five organizational factors identified in the qualitative study in order to measure the impact of pricing capabilities and the other four organizational capabilities on relative firm performance. For this study, I surveyed the global membership of the Professional Pricing Society and sent them the link to an electronic survey. From this group, 748 pricing, marketing, and business professionals completed the survey. The results of structured equation modeling (SEM) analysis
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revealed the positive influence of these five factors on relative firm performance as well
as the pivotal role champions play in developing pricing capabilities. The findings also
uncovered the importance of the organizational design of these five elements and how
that design uniquely influenced firm performance.
Study 3: Quantitative study. What impact do pricing capabilities have on
organizational confidence in pricing? How does organizational confidence in pricing
impact firm performance?
Study 3 used a quantitative approach to address the research question of whether
organizational confidence in pricing has an effect on relative firm performance. My aim
was to identify the antecedents of organizational confidence in pricing, including
measuring the influence on pricing capabilities of building pricing confidence. I surveyed
the global membership of the Strategic Account Management Association and obtained
responses from 507 sales, account, and contract managers. The results of SEM analysis
showed a significant positive relationship between pricing capabilities and organizational
confidence in pricing, which in turn positively influenced relative firm performance. The
analysis revealed that organizational confidence in pricing is a critical organizational capability that can strongly influence firm performance, substantiating the findings of
Study 2.
Mixed Method Approach
The broad research agenda was to answer multiple research questions related to
pricing capabilities and organizational capabilities and their impact on firm performance.
When defining the integrated research design, it was clear that the research goal was not
to simply answer three specific questions by conducting three individual studies. Rather,
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the aim was to adopt a comprehensive and contextual description of the concept of both
pricing and organizational capabilities. The intent was to apply a different theoretical and
methodological approach to the research. I adopted a sequential mixed methods
approach, a combination of both triangulation (Jick, 1979) and complementarity (Greene,
Caracelli, & Graham, 1989). Triangulation seeks to find convergence and collaboration
through the use of different methods. It is defined as the combination of methodologies in
the study of the same phenomenon (Denzin, 1978) and can take two forms: “within
method” and “between method.” The objective being to construct a holistic and
integrated inquiry (Jick, 1979), I adopted a “between method” mixed method approach as
the research method of choice. Meanwhile, complementarity seeks to elaborate, enhance,
or clarify the results of one method through the use of another method. The integration of
the three research studies, embracing both qualitative and quantitative strands (Greene et
al., 1989), happened during the interpretation phase, where the data results were used to derive integrated findings and to construct a holistic understanding of the results.
I also adopted a sequential rather than a concurrent studies design (Creswell,
Plano Clark, Gutmann, & Hanson, 2003). In a sequential studies design, qualitative and quantitative stages are distinct and sequential rather than conducted in parallel or concurrently. This particular research design offers the advantage of focusing on and exploring a phenomenon of interest as well as the ability to use the data collected from the qualitative study in order to generate theory development and hypotheses that can be tested during the quantitative phases of the research process. For the dissertation, Study 1 was conducted first. Results from Study 1 provided exploratory insights into the pricing and organizational capabilities that influenced the adoption of pricing orientation and the
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deployment of pricing resources. Study 1 informed the hypothesized model developed for
Study 2 and Study 3, which were then completed sequentially, as shown in Figure 11.
FIGURE 11: Mixed Method Research Design
For the dissertation, I selected both qualitative and quantitative research methods.
The two methods draw from different philosophical foundations (positivist and post positivist paradigms respectively) (Lincoln & Guba, 1985) and present perceived strengths and weaknesses. The intent was to leverage the strengths of both methods. The quantitative research method is argued to be strong in terms of generalizability and replicability (Hair, Black, Babin & Anderson, 2010; Ivankova, Creswell, & Stick, 2006),
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while the qualitative research method is perceived to be strong where “behavior in
context” needs to be studied and where situational factors are important. This research
approach allowed me to use both inductive and deductive reasoning to generate a novel
theory of pricing capabilities and to validate this theory through survey research (Van de
Ven, 2007).
For the data sampling approach, a mix of purposive and probability sampling was
used (Teddlie & Yu, 2007), with a sequential use of purposive and probability sampling
strategies for the qualitative and quantitative phases, respectively. Purposive sampling in
the qualitative phase allowed selection of firms that adopted one of the three pricing
orientations as well as firms across industries and of different sizes. On the other hand, probability sampling in the quantitative phase allowed a wide range of cases to be selected from the Professional Pricing Society and the Strategic Account Management
Association membership populations in order to reach representation and to maximize generalizability.
Structure of Remaining Chapters
The structure of the remaining chapters is as follows. Chapter 2 covers Study 1,
which addresses the research question on the influence of pricing and organizational
capabilities on the adoption of pricing orientation and pricing resources in industrial
firms. It is written as a complete stand-alone research paper suitable for publication in an
academic journal. Chapter 3 covers Study 2, which addresses the research question on the
impact of pricing and organizational capabilities on relative firm performance. It too is
written in the structure of a complete stand-alone research paper. Chapter 4 covers Study
3, which addresses the research question on the effects of organizational confidence in
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pricing on firm performance as well as the relationship between pricing capabilities and organizational confidence in pricing. Like Chapters 3 and 4, it is also structured as a stand-alone research paper. Chapter 5 presents an integrated findings and discussion section that weaves the findings of the three studies into a story of organizational transformation from a socio-technical perspective. Finally, Chapter 6 concludes the dissertation with limitations of the overall research approach and the implications of the research findings for theory of pricing capabilities and for the field of pricing practice. I also suggest an agenda for future research and leave the readers with closing thoughts about my unique, challenging, and exciting research journey.
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CHAPTER II: THE ORGANIZATIONAL TRANFORMATION TOWARDS VALUE-BASED PRICING: THE EMERGENCE OF PRICING CAPABILITIES
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, 1999; Ingenbleek, Debruyne, Frambach,
& Verhallen, 2003; Nagle & Holden, 2002) and pricing practitioners (Dolan & Simon,
1996; Forbis & Mehta, 1981; Fox & Gregory, 2004; Nagle & Holden, 2002).
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,
2008b). Cost-based and competition-based approaches still play a dominant role in industrial pricing practice (Coe, 1990; Ingenbleek et al., 2001; Noble & Gruca, 1999a, b;
Shipley & Bourdon, 1990).
Historically, pricing has received little attention from practitioners and marketing scholars (Hinterhuber, 2004, 2008a; Malhorta, 1996; Noble & Gruca, 1999a, b). 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, 1999; Hinterhuber,
2008b; Ingenbleek, 2007) 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
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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
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, 1994; March & Simon, 1958)
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).
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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 (Jaworski & Kohli, 1993; Kirca, Jayachandran, &
Bearden, 2005; Narver & Slater, 1990; Slater & Narver, 1994). 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: 21).
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 (Hinterhuber, 2008b; Malhorta, 1996; Noble & Gruca, 1999a), 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 (2008b) made a strong contribution to the topic by conducting a broad and comprehensive review of two dozen surveys conducted between 1983 and 2006. The
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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, 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, 2008b). 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
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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 rationality (Cyert
& March, 1992; March & Simon, 1958; Simon, 1961), uncertainty and ambiguity in decision making (Brownlie & Spender, 1995; Daft & Weick, 1984; March, 1999;
Spender, 1989) and organizational structure (Aiken et al., 1980; Hall, 1977; Hall et al.,
1967; Miller et al., 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
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(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 (Anderson, Kumar, & Narus, 2007: 23; Brownlie & Spender,
1995; Spender, 1989: 188).
According to behavioral theorists, managers in organizations simplify the
decision-making process by using various behaviors (Cyert & March, 1992: 264):
satisficing (March, 1978); following rules of thumb (Schwenk, 1988); and defining
standard operating procedures and organizational routines (Feldman, 2000; Pentland &
Reuter, 1994). 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
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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, 1970). The
specialization 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
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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 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
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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 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
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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 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” (Barney, 1991: 101). A specific combination of these tangible and intangibles resources and capabilities is valuable, rare and difficult to imitate or acquire by competitors (Barney & Clark, 2007; Dierickx & Cool, 1989; Hall,
1993) 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
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number of capabilities clusters” (Dosi et al., 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 et al.,
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 et al., 2002; Dutta et al., 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 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
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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.
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
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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 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.
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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 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
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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 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
12 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.
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FIGURE 12: Price Point Definition Process for Value-Based Pricing (VBP)
As illustrated in Figure 14, of the six firms that 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 16). 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 13 provides evidence of the scientific versus unscientific nature of decision making processes in these firms.
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FIGURE 13: 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 14: Price Point Definition Process for Cost-Based Pricing (CBP)
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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 15, 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 16). 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 15: Price Point Definition Process for Competition-Based Pricing (COBP)
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FIGURE 16: 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.
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
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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 17, 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.
FIGURE 17: 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."
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In these firms, pricing responsibility was center-led and the department provided pricing support to the entire organization. Our findings (see Figure 18) 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.
FIGURE 18: 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 19). 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.
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FIGURE 19: 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 20).
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FIGURE 20: 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
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proprietary tools to support the implementation of the total cost of ownership and value- in-use pricing methodologies.
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
21). 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.
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FIGURE 21: 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”.
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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 22). 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 23). 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 22: 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."
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FIGURE 23: 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 24) indicate that success stories in the area of pricing increased organizational confidence and created
“organizational heroes” with respect to successful pricing activities.
FIGURE 24: 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
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in these firms engaged in specific activities and behaviors in order to energize teams and
to create emotional contagion in their organization.
Discussion
Our data contradicts the widely held assumption (Cressman, 2010; Hinterhuber,
2008b; Ingenbleek, 2007) 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 (Cressman, 2010; Hinterhuber, 2008a, b; Ingenbleek, 2007; Monroe,
1990; Nagle & Holden, 2002). However, we argue that the implementation and
internalization of VBP requires deep organizational change that transforms the firm’s
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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 or competition to customer value. The respondent excerpts in
Figure 25 illustrate how cost mentality is engrained in firm DNA while Figure 26 suggests that the transformation process does not happen swiftly.
FIGURE 25: 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 26: 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 91
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 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.
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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 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
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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 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
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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 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
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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 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, 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,
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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 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 (Cressman, 2009; Hinterhuber, 2004, 2008a; Lancioni, 2005; Noble & Gruca,
1999a; Shipley & Jobber, 2001) as well as an under-researched and under-published field compared to other elements of the marketing mix (Malhorta, 1996; Noble & Gruca,
1999a). 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.
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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 vary from firm to firm as well as within firms. Figure 27 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 D. 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.
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FIGURE 27: 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 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 6).
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TABLE 6: 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 neither valuable nor necessary to create of a well defined and standard conceptualization of VBP that could simply be copied and pasted across organizations.
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
28. 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.
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FIGURE 28: 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.
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.
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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, 1999;
Hinterhuber, 2008a, b; Noble & Gruca, 1999a, b; Shipley & Jobber, 2001). 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 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 (see Appendix E). 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.
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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 (Cressman, 2009; Hinterhuber, 2008a).
There is much to be researched and published to enhance the visibility and credibility of the pricing profession in industrial markets.
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CHAPTER III: THE ORGANIZATIONAL DESIGN FOR PRICING AND ITS CONSEQUENCES ON FIRM PERFORMANCE: A QUANTITATIVE VALIDATION OF PRICING AND ORGANIZATIONAL CAPABILITIES
Introduction
In most companies, the pricing function receives limited attention. Data from the
Professional Pricing Society, the world’s largest organization dedicated to pricing, reveal
that fewer than 5% of Fortune 500 companies have a full-time function exclusively dedicated to pricing (Mitchell, 2011) and, according to McKinsey & Company fewer than
15% conduct systematic pricing research (Hinterhuber, 2004). Among AACSB (The
Association to Advance Collegiate Schools of Business) accredited business schools, only 9% offer courses that put a significant emphasis on pricing (McCaskey & Brady,
2007). Yet numerous studies contend that pricing has a substantial and immediate effect on company profitability: small variations in price influence the bottom line by as much as 20% to 50% in both directions (Hinterhuber, 2004; Nagle & Holden, 2002).
Historically, pricing has received little attention from either practitioners or marketing scholars (Hinterhuber, 2004, 2008a, b; Malhorta, 1996; Noble & Gruca,
1999a, b). A review of 53 empirical pricing studies concluded that pricing literature is highly descriptive and fragmented and that theoretical understanding of firm pricing decisions is limited (Ingenbleek, 2007). Pricing literature is silent about how organizational and behavioral characteristics of firms may affect pricing processes and how firms organize for pricing (Ingenbleek, 2007). To address this deficit, we first conducted qualitative interviews with 44 managers in 15 companies in 10 U.S. states to study similarities and differences in experiences related to pricing management and orientation. Results documented stark differences in how firms organize for pricing, 104
manage the pricing process, and develop internal capabilities to face uncertain and
ambiguous pricing decisions. Five organizational elements associated with advanced
pricing orientation and pricing maturity emerged: championing behaviors, organizational
confidence, pricing capabilities, change capacity and center-led pricing management.
Subsequently, we surveyed 748 marketing, pricing, commercial and management
professionals and leaders involved in managing pricing activities for their firms to
measure the affect of these five characteristics on perceived firm performance. Our
inquiry contributes to the fields of pricing and organizational behavior by linking three
factors—pricing capabilities, championing behaviors associated with pricing and
organizational change capacity—to relative firm performance. Most importantly, our data
highlight the role of organizational design in support of the pricing function and imply
that organizational design for pricing may impact perceived firm performance.
Theoretical Foundation
Our work was informed by two key management theories: organization theory
(March, 1994; March & Simon, 1958) and the theory of the firm (Cyert & March, 1992)
– and by the literature linking pricing and firm performance. We take organization theory
to include the internal structure of the firm and the relationships between its units and
departments (Grant, 1996), as well as the flow of information within organizations supporting and influencing decision making processes (March, 1994, 1999; Simon,
1961). A critical question is how pricing decisions occur in organizations and what organizational factors influence processes and managerial judgment when decisions are made. Previous work by leading behavioral and social researchers has covered many important aspects of organization theory. Below, we focus on the most relevant ones
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including organizational structure (Aiken et al., 1980; Hall, 1977; Hall et al., 1967; Miller et al., 1988), organizational efficacy (Bandura, 2000; Bohn, 2001), organizational
champions (Howell & Shea, 2006; Schon, 1963) and organizational change capacity
(Judge & Douglas, 2009). And therefore we propose to view price management in firms through the lens of these theories and concepts to create incremental knowledge.
Literature on Pricing and Firm Performance
Most pricing practitioners agree that pricing orientation and the lack of scientific and systematic ROI calculations for pricing strategies constrain visibility of pricing in the corporate executive suite and restrain firm adoption of modern pricing approaches. In addition, marketing and pricing literature is silent about both the effect of firm pricing orientations on overall company performance (Cressman, 1999; Hinterhuber, 2008b;
Ingenbleek, 2007) and, more specifically, on how modern pricing practices might lead to superior firm performance.
Pricing literature has explored the relationship between pricing practices and firm performance and pricing practitioners and consultants generally advocate the superiority of value-based pricing approaches over others approaches. Monroe (1990), for example, argues: “…the profit potential for having a value-oriented pricing strategy that works is far greater than with any other pricing approach.” Similarly, Cannon and Morgan (1990:
25) recommend perceived value pricing if profit maximization is the objective:
‘‘Perceived value pricing enables a company to select an optimal price/volume combination.” Cost-based pricing approaches, conversely, lead to sub-optimal
profitability (Backman, 1953; Myers, Cavusgil, & Diamantopoulos, 2002).
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To the best of our knowledge, the link between purposefully developed pricing
practices and company profitability has not yet been examined empirically. Ingenbleek et
al. (2003), testing the relationship between pricing approach and new product success,
however, found value-informed pricing has the overall strongest positive effect on
product performance. A subsequent study (Ingengleek, Frambach, & Verhallen, 2010),
showed value-informed pricing positively influences new product market (but not new product financial) performance (noting the latter link may require a more complex model including data on sales, costs and other information) (Ingenbleek et al., 2010).
Organizational structure. Organization structure, which can be variously defined
and take myriad forms, relates to dimensions that “cannot be reduced to or deduced from
properties of the organization’s members” (Aiken et al., 1980). Several reviews (Hall,
1977; John & Martin, 1984; Miller et al., 1988) have suggested that complexity
(structural differentiation), formalization, and centralization are the most common and
consistent characteristics of structure. We focused on the characteristics of centralization
of the pricing function in the hands of specialized experts. Structural differentiation
“includes differences in attitudes and behaviors on the part of the members of the
differentiated departments” (Lawrence & Lorsh, 1967) and is defined as the differences
in occupational specialties present in the organization and their degrees of
professionalism (Hage & Aiken, 1967, 1970). 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
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notion of expertise is important in our definition of centralization. Locus of authority is
highly dependent on locus of expertise. Because central positions are non routine and
highly specialized, they are likely to reflect power and influence (Pfeffer, 1978) but not
decision making authority.
Capabilities and Resource-Based View of the Firm
While providing useful insights about decision making in organizations, the
behavioral theory of the firm does not explain performance differences between 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 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: 110). 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” (Barney, 1991: 101). A specific combination of these tangible and intangibles resources and capabilities is valuable, rare and difficult to imitate or acquire by competitors (Barney & Clark, 2007; Dierickx &
Cool. 1989; Hall, 1993) 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 et al., 2000: 125). Because organizations face more and more complexity, they need to constantly re-evaluate and re-package the
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required set of capabilities (Cohen & Levinthal, 1990) making them dynamic in nature
(Teece et al., 1997).
Organizational efficacy. Social cognitive theory (Bandura, 1997) suggests two main perceptions lead to an organization member’s motivation to “engage in teamwork activities and behaviors” − the “individual’s perception of his or her ability to perform
generic teamwork behavior (self-efficacy) and perceptions regarding the team’s possession of the resources required for completing the task (collective efficacy)” (Tasa et al., 2007: 19). Social cognitive theory widens the concept of human agency to collective agency (Bandura, 2000): people share beliefs in their “collective power” to produce desired results. Socially shared cognitions are placed into an organizational context where people work together to accomplish desired outcomes and ends (Bohn,
2001). Among the social cognitions of firm members are beliefs or perceptions of their organization’s capabilities. Bandura (1997: 476) posits that “an organization’s beliefs about its efficacy to produce results is undoubtedly an important feature of its operative culture.”
Self efficacy, central to the motivational concept of human action in organizations, is defined as a generative capacity of one’s resources and abilities to cope with a control situation (Bandura, 1997). Collective efficacy refers to the perception of groups, teams and other social collections of the capability of a group (Bohn, 2001). A meta-analysis conducted by Gully et al. (2002) showed that the relationship between
collective efficacy and team performance was positive and significant thus supporting
social cognitive theory’s claim that efficacy is “a primary determinant to the extent to
which individuals or teams are likely to put forth the efforts required to perform
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successfully” (Bandura, 1986: 392). Confidence consists of “positive expectations” for favorable outcomes and tremendous potential results (Hoover and Valenti 2005). It influences the member’s willingness to invest money, time, reputation and emotional energy to shape the ability to perform (Kanter, 2006: 7).
Organizational champions. Nearly a half century ago, a seminal article on radical military innovation defined the role of a champion to be 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: 85). Schon declared that a new idea “either finds a champion or dies.” Later, Chakrabarti (1974: 58) elaborated by linking the role of champion to the various stages of the collective decision making process. The champion plays a critical role at all stages overcoming technical and organizational obstacles and guiding effort to achievement by the “sheer force of his will and energy.”
Other scholars and practitioners have focused on the role of champions from a strict leadership perspective. Organizational champions have been defined as charismatic leaders (Nadler & Tushman, 1990), transformational leaders (Bass, 1985: 22; Wang &
Huang, 2009) and champions of change (Nadler & Nadler, 1997: 98). Champions may exhibit a “constellation of behaviors” (Howell, Shea, & Higgins, 2005: 643) that can be nurtured and learned – including “communicating a clear vision of what innovation could be or do, displaying enthusiasm and demonstrating commitment to it, and involving others in supporting it” (Howell & Higgins, 1990: 323).They may increase “effort- accomplishment expectancies” by reinforcing collective efficacy and increase self- efficacy and collective efficacy by expressing positive evaluations (Tasa et al., 2007), showing confidence in people to perform effectively and to meet challenges (Nadler &
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Tushman, 1990), awakening spirits to rouse up the troops (Hacker & Roberts, 2003), and
energizing members of the organization (Nadler & Tushman, 1990; Thompson, 2009:
100).
Organizational change capacity. Studies show that approximately 70 percent of
planned organizational change initiatives fail (Judge & Douglas, 2009). To effect change,
organizations must be receptive to it (Butler, 2003) and ready for it (Holt, Armenakis,
Field, & Harris, 2007). Yet among a plethora of academic studies addressing
organizational change, few deal specifically with organizational change capacity (OCC),
focusing instead on tangential concepts such as adaptive capacity (defined by Staber &
Sydow, (2002: 410) as “the ability to cope with unknown future circumstances or organizational flexibility (defined by Hatum & Pettigrew, (2004: 239) as “a combination of a repertoire or organizational and managerial capabilities that allows organizations to adapt quickly under environment shifts”). Only recently has an emerging stream of literature explored OCC by operationalizing the construct and proposing systematic measurement of its relevant items. Moilanen (2005: 71) defined OCC as “a consciously managed organization with ‘learning’ as a vital component in its values, visions and goals, as well as its everyday operations and assessment.” Lately, Judge and Douglas
(2009: 635), building on Hatum and Pettigrew (2004), proposed a combination of organizational and managerial capabilities allows “an enterprise to adapt more quickly and effectively than its competition to changing situations.”
Hypothesis Development
Based on our theoretical foundation and the qualitative findings of the first phase
of our research, we proposed the following conceptual model and hypotheses (Figure 29).
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FIGURE 29: Hypothesized Research Model
Our model suggests that: 1) three organizational factors (championing behaviors, center-led management and organizational change capacity) influence how firms design and develop pricing capabilities and impact the organization’s overall sense of confidence; 2) unique and inimitable pricing capabilities and a superior sense of confidence strongly and positively impact relative firm performance; 3) competitive intensity and product advantage moderate the relationship between both pricing capabilities and organizational confidence and relative firm performance; 4) pricing capabilities also acts as a power lever on organization confidence; and; 5) championing behaviors amplify the relationship between center-led pricing management and organizational confidence on relative firm performance.
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Championing Behaviors
Champions mobilize organizations by energizing teams, providing resources and
continuously emphasizing pricing capabilities, as well as learning from failures to break
down organizational and behavioral barriers (Chakrabarti, 1974). The focus by champions on energizing teams creates organizational excitement which leads to a sort of
“emotional contagion” (Hatfield et al., 1994: 7) that is necessary for change. Charismatic champions raise “effort-accomplishment expectancies” by reinforcing self and collective efficacy (Tasa et al., 2007) and by showing confidence in people to meet challenges
(Nadler & Tushman, 1990).
Hypothesis 1a. Championing behaviors have a positive effect on pricing capabilities.
Hypothesis 1b. Championing behaviors have a positive effect on relative firm performance.
Hypothesis 1c. Championing behaviors have a positive effect on organizational confidence.
Center-led Pricing Management
The presence of a centralized highly specialized team of pricing experts supporting decentralized pricing activities (Deaker & Zang, 2006) positively influences
business leaders’ capabilities to take pricing decisions based on scientific analysis and
facts rather than intuition or gut feeling. This central team of experts also boosts
organizational confidence in executing pricing activities (John & Martin, 1984). Central
marketing and pricing teams focus on the diffusion of pricing expertise and skills across
the organization. These capabilities are therefore concentrated within a few positions resulting in a “led from the center” pricing strategy (Ecker, 2010: 13). Because these
central positions are non routine and highly specialized, their expert incumbents are 113
likely to gain power and influence (Pfeffer, 1978) while not having pricing decision making authority. The specialization of centrally grouped pricing experts in the organization is needed to perform specialized tasks supporting a broad array of pricing-
related activities in marketing, sales, R&D and management.
Hypothesis 2a. Center-led pricing management has a positive effect on pricing capabilities.
Hypothesis 2b. Center-led pricing management has a positive effect on organizational confidence.
Organizational Change Capacity
Marketing and pricing studies concerned with the adoption of pricing strategies and practices in business markets recommend value-based pricing as a modern and advanced pricing approach (Cressman, 2010; Hinterhuber, 2008b; Ingenbleek, 2007;
Nagle & Holden, 2002). To purposefully implement and internalize these advanced and modern pricing practices, firms require organizational change capacity 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 the organizational culture of the
firm, for example from cost or competition to customer value. We conjecture that the
capacity of firms to change will strongly and positively influence the development of
pricing capabilities as well as amplify organizational confidence or the attitude of “can
do” (Bohn, 2001) towards change. Finally we posit that the overall capacity of a firm to
learn and adapt to change will positively influence firm performance vis-à-vis competitors.
Hypothesis 3a. Organizational change capacity has a positive effect on pricing capabilities.
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Hypothesis 3b. Organizational change capacity has a positive effect on relative firm performance.
Hypothesis 3c. Organizational change capacity has a positive effect on organizational confidence.
Championing Behaviors as an Amplifying Variable
Championing behaviors can have a powerful impact on organizations as top
executives make strategic choices (Hambrick & Mason, 1984), purposefully get involved
in projects and tasks (Cyert & March, 1992) and influence group cohesiveness through
transformational leadership (Wang & Huang, 2009). When executive champions design organizational architecture, they influence the management and speed of system-wide
organization change (Nadler & Tushman, 1990). We hypothesized that presence of strong championing behaviors in firms coupled with the presence of purposely designed center-
led pricing teams and organizational change capacity can strongly influence relative firm
performance.
Hypothesis 4. Championing behaviors amplifies the positive effect of organizational change capacity on relative firm performance.
Hypothesis 5. Championing behaviors amplifies the positive effect of center-led pricing management on relative firm performance.
Link between Capabilities and Confidence
Center-led teams of pricing experts focus on diffusing pricing knowledge and
capabilities across the organization. By doing so, they contribute to the building of
organizational confidence and the sense of collective capability. The complexity of
conditions under which business managers make pricing decisions, 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). When faced with a pricing
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decision or with the need to price a new product or service, managers in firms do not have the luxury of choosing between a rational and analytic approach vs. intuitive and emotional approach. Managers need to have the capabilities to reach a greater level of
decision effectiveness and decision confidence (Dane & Pratt, 2007; Simon, 1987). This
“balancing act” conducted by pricing experts can help decision-makers narrow the
decision range, create confidence in pricing activities and remove uncertainty and
ambiguity from the price setting process. Accordingly, we conjecture that pricing
capabilities increase manager’s decision-making rationality and strongly impact
organizational confidence.
Hypothesis 6. Pricing capabilities have a positive effect on organizational confidence.
The Moderating Effect of Competitive Intensity and Product Advantage
The adoption and implementation of pricing practices (including changes to
organizational design) may be moderated by exogenous factors related to competitive
intensity and perceived product advantage. Competitive intensity generates market
disruptions and turbulences in the identification and evaluation of factors that
differentiate a firm’s products versus those of competition (Hinterhuber, 2004; Nagle &
Holden, 2002). Changes in the competitors’ product value proposition impact the firm’s
position on the customer value map (Smith & Nagle, 2005) or the value equivalence line
(Leszinski & Marn, 1997). Competitive intensity may also reinforce competitive
behaviors (Armstrong & Collopy, 1996) as well as stimulate sales force discounting
behaviors when faced with price pressure and uncertainty (Davey, Childs, & Carlotti, Jr.,
1998). Managers can be overwhelmed by the amount of competitive information and the
number of pricing decisions they have to make (Dutta et al., 2003). An increase in level 116
of competitive intensity requires managers to react faster and in a timely manner. As competition increases, so may stress, uncertainty and “unanalyzability” of market information (Daft & Weick, 1984) leading erratic and more intuitive pricing decisions
(Brownlie & Spender, 1995). Ingenbleek et al. (2003), examining the relationship
between pricing practices and new product success, s showed that customer value-based
pricing approaches positively affect new product success and that pricing practices reflect
relative product advantage and competitive intensity. Cost-based pricing is a “best
practice” if competitive intensity is high, and is “bad practice” if it is low.
Hypothesis 7a. Competitive intensity negatively moderates the relationship between of organizational confidence on relative firm performance such that, for high competitive intensity, the relationship will be weaker than for low competitive intensity.
Hypothesis 7b. Competitive intensity negatively moderates the relationship between pricing capabilities and relative firm performance such that, for high competitive intensity, the relationship will be weaker than for low competitive intensity.
Hypothesis 8a. Product advantage positively moderates the relationship between organizational confidence and relative firm performance such that, for high product advantage, the relationship will be stronger than for low product advantage.
Hypothesis 8b. Product advantage positively moderates the relationship between pricing capabilities and relative firm performance such that, for high product advantage, the relationship will be stronger than for low product advantage.
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Pricing Capabilities
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 et al., 2002). Firms with well defined pricing practices using advanced pricing
methods have a greater capacity to design and implement structured pricing training
programs and design pricing tools to assist in the decision-making process. The presence
and development of these pricing capabilities, whether formal or informal (Dutta et al.,
2003), generate greater organizational confidence in pricing programs, decision-making
rationality and business performance when combined with other marketing capabilities
(Vorhies & Morgan, 2005). While pricing and marketing literatures have not addressed
the specific relationship between pricing capabilities and firm performance, we
conjecture this relationship is strong and positive.
Hypothesis 9. Pricing capabilities have a positive effect on relative firm performance when controlling for firm size, firm nature, firm main activity and Function of respondents.
Organizational Confidence
The adoption of modern pricing practices in firms coupled with the
implementation of commercial programs focused on value strategies requires that
managers design and implement people development programs to improve organizational
confidence. Such programs might include communication initiatives to foster shared
beliefs about firm products and technology, coaching of commercial personnel to price
and capture value with confidence (Anderson et al., 2007), and training of staff to generate greater courage to stand firm to customers’ pricing objections and be, as one
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interview respondent stated, “superman for one second” when facing customers’
objections.
CEO’s and top executives need to appreciate the criticality of developing these
internal beliefs and implement specific programs and activities to boost organizational
confidence. These shared beliefs in employees’ “collective power” promote people
working together leading to desired superior outcome (Bohn, 2001).
Hypothesis 10. Organizational confidence has a positive effect on relative firm performance when controlling for firm size, firm nature, firm main activity and function of respondents.
Research Design and Methods Data Collection and Sampling
To test our hypotheses, we designed a cross-sectional self-administered survey to measure the latent variables associated with our conceptual model. Marketing, pricing, commercial and management professionals and leaders involved in managing pricing activities for their firms constituted our population. The Professional Pricing Society
(PPS), a professional organization dedicated to the education and networking of pricing professionals around the world, supported our research by: 1) providing access to their
database of active and non-active members; 2) distributing the survey electronically; and
3) conducting follow ups to non-respondents. The survey was email to 18,300 PPS
members in April 2011. Responses were returned over an eight week period. About 300
“bounced back” and were assumed not to have reached the intended recipients. Of the
remaining 18,000, 1,148 surveys were returned partially or fully completed for a response
rate of 6.4%. We determined 748 were usable for further analysis. Our response rate is
consistent with surveys targeted at large professional organizations not typically asked to
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participate in academic research. Ours was the first large scale academic inquiry ever
conducted in conjunction with PPS. A series of procedures, shown to enhance survey
response rates of managers were undertaken: (1) all respondents were assured of
individual and organizational anonymity; (2) a cover letter explaining the practitioner and
academic nature of the research project was included with the survey; (3) a note of
endorsement from the president of the Professional Pricing Society, outlining his personal support of the research encouraged member responses; (4) two further waves of the
survey were sent at two week intervals, reminding members to respond; (5) members
were offered access to survey results upon completion of the study and incentivized with
a raffle prize. Characteristics of the respondents are provided in Table 7.
TABLE 7: Sample Characteristics
Main Activity Count % Function of Respondents Count % Manufacturing Firm 415 55% General Management 65 9% Service Organization 206 28% Marketing and Sales 177 24% Distribution/Retail Company 107 14% Finance and Accounting 29 4% Missing Data 20 3% Pricing and Revenue Management 427 57% Nature of Firm Count % Administrative and Operations 27 4% Publicly Traded 437 58% Missing 23 3% Privately Owned 257 34% Geography of Firm HQ Count % Both 25 3% North America 508 68% Do Not Know 9 1% Latin America 10 1% Missing 20 3% Europe 180 24% Firm Size - Employees Numbers Count % Asia Pacific 21 3% Less Than 250 78 10% Middle East/Africa 2 0% 251 to 500 43 6% Missing 27 4% 501 to 1,000 45 6% Geography of Respondent's Loc Count % 1,001 to 10,000 233 31% North America 532 71% More than 10,000 329 44% Latin America 22 3% Missing 20 3% Europe 140 19% Asia Pacific 25 3% Total Respondents 748 Middle East/Africa 2 0% Missing 27 4%
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Data Screening
We conducted an inspection of the data and removed two outliers from the data
set. We then examined the data for skewness and kurtosis and found no threats to the model. Finally, all statistical assumptions for using the data analysis technique were met.
Measure Development and Assessment
Although most scale items were adapted from those in the existing literature with slight modifications to reflect our focus, a new scale was developed for pricing capabilities, then refined through pretests and pilot testing using established item development procedures and guidelines (Churchill, 1979).
Content validity was determined through comprehensive review of the literature, pilot tests, and assessment by a panel of practitioners and academics to ensure that measurement items covered the domain of the constructs (Churchill, 1979; Nunnally,
1978). To assess the survey’s quality, face-to-face interviews with pricing practitioners were conducted using Bolton’s pretesting methodology (Bolton, 1993). We pretested our scale items with a small panel of academics and pricing and business practitioners. Next, a pilot test involving 150 professionals representing pricing, business and general manager functions from companies both manufacturing and service industries provided
70 complete and usable responses. The survey was iteratively modified to incorporate all relevant test results.
The survey items are presented in Appendix F and a description of the survey constructs is presented in Appendix G.
Behavior of champion on pricing. A nine-item scale adapted from Howell and
Shea (2005) was used to assess champion behaviors. Each item was measured using a
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seven-point Likert scale anchored at the extremes by ‘strongly agree’ and ‘strongly
disagree.’
Pricing capabilities. A multiple-item scale was developed by the team in accord with an operational definition as suggested by Kerlinger and Lee (1999: Chap. 3) and by relying on our fieldwork and on extant research. We used twelve items ranging from 1-
‘much worse than competitors’ to 7- ‘much better than competitors’ to operationalize this
scale.
Center-led pricing management. Since there was little empirical precedent to
measure the degree to which a central-led pricing team supports an organization with
specific pricing activities, a multiple-item scale was also developed by the team in accord
with an operational definition as suggested by Kerlinger and Lee (1999: Chap. 3) and by
relying on our fieldwork and on extant research. We used seven items ranging from 1-
‘rarely done to 7- ‘frequently done’ to operationalize this scale.
Organizational confidence. Sense of collective capability (4 items), sense of
mission and future (4 items) and sense of resilience (4 items) were assessed using seven-
point, Likert-type scales anchored with ‘strongly agree’ at the extreme positive end and
‘strongly disagree’ at the opposite end of the scale. The twelve-item scale was based on
adapting existing measures from Bohn (2001).
Organizational change capacity. Two aspects of organizational change capacity
were measured: trustworthy leader (3 items) and innovation culture (5 items). We
adapted the eight-item scale developed and validated by Judge and Douglas (2009). The
seven-point, Likert-type scale was anchored with ‘strongly agree’ at the extreme positive end and ‘strongly disagree’ at the opposite end of the scale.
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Competitive intensity and product advantage. For both constructs, we adapted a three-point scale developed and validated by Ingenbleek et al. (2003). The seven-point,
Likert-type scale was anchored with ‘strongly applies’ at the extreme positive end and
‘does not apply’ at the opposite end. These items were then transformed into a high versus low categorical variable using the median split of the summated items approach to be used a moderating variable in our SEM model.
Firm performance. In line with previous research we used subjective assessment of company performance (Ingenbleek, 2007; Morgan et al., 2009; Simsek, 2007) following the convention of asking managers to compare their firms’ relative performance to that of their competitors on eight different dimensions for the past year
(e.g. growth in sales, return on investment, return on sales and so forth) using a scale ranging from 1 (‘much worse’) to 7 (‘much better’) than competitors. Moreover, since firms in our sample were from various geographical zones, a multidimensional measure based on perceptual firm performance facilitates comparisons across firms and contexts, such as across industries, time horizons, and economic conditions (Song, Droge,
Havanich, & Clantone, 2005). Third, earlier studies have shown that perceptual performance measures tend to be highly correlated with objective indicators, which supports their validity (Dess & Robinson, 1984).
Firm-level control variables. We controlled for a number of likely determinants of performance by including demographic characteristics of the firm, such as firm main activity (manufacturing, service, retail), firm nature (B2B, B2C, both), firm size measured as the number of employees (Amburgey & Rao, 1996) and geographical zone.
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Non-Response Bias
A commonly used method for estimating the bias in strategy research (Armstrong
& Overton, 1977) is to compare early and late responses among the variables. The test
assumed that late respondents were more similar to non-respondents than to their early counterparts. One way ANOVA tests, performed at the item level indicated no significant differences in data derived from early vs. late responders, except on 2 of the 44 (4.5%) variables. Consequently, it appears that bias present from the time of response is due to chance and thus provided some assurance against non-response bias.
Exploratory Factor Analysis
An exploratory factor analysis (EFA) was conducted on the sample dataset using
principal axis factoring with Promax rotation. For all but eight items, communalities
exceeded the minimal acceptable threshold of .50 (Hair et al., 2010). Additionally, both
2 the Kaiser-Meyer-Olkin (KMO) value of .958 and Bartlett’s Test of Sphericity (χ 946df =
17444.8; p = .000), exceeded the acceptable threshold levels indicating the
appropriateness of the data for factor analysis. The EFA resulted in six factors, consistent
with our conceptual model as displayed in Table 8. Each item loaded on its respective
factor with a value greater than .40 and no cross-loadings of more than .20 (Hair et al.,
2010; Igbaria, Iivari, & Maragahh, 1995). The total variance explained by these six
factors totaled 59%.
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TABLE 8: EFA Measurement Model
No. of Cronbach Construct Loadings Items Alpha Center-Led Pricing Management 5 0.667; 0.589; 0.613; 0.669; 0.688 0.784 0.641; 0.672; 0.602; 0.613; 0.718; Pricing Capabilities 10 0.906 0.771; 0.831; 0.601; 0.611; 0.623 0.625; 0.829; 0.837; 0.622; Relative Performance 8 0.915 0.624;0.807; 0.836; 0.856 Organizational Confidence 4 0.512; 0.610; 0.522; 0.335 0.851 0.871; 0.916; 0.824; 0.782; 0.803; Championing Behaviors 9 0.959 0.722; 0.803; 0.792; 0.934 0.593; 0.816; 0.834; 0.720; Organizational Change Capacity 8 0.919 0.729; 0.762; 0.754; 0.664
The final number of items represented by the six factors, after completion of the
EFA analysis, was 44 items. Those items which were dropped from each construct are identified in Appendix G. Additionally, the reliability of each of the final six factors was computed as shown in Table 8 and in all cases far exceeds the minimum acceptable threshold of 0.70 (Nunnally, 1978). Table 9 provides the correlations between the factors.
All of the average variance extracted exceed the square of the correlation between the construct, thus demonstrating discriminant validity.
TABLE 9: Correlation of Constructs
Center-Led Organizational Pricing Relative Organizational Championing Constructs Pricing Change Capabilities Performance Confidence Behaviors Management Capacity Center-Led Pricing Management 0.43 Pricing Capabilities 0.445 0.48 Relative Performance 0.328 0.555 0.55 Organizational Confidence 0.317 0.467 0.456 0.58 Championing Behaviors 0.449 0.551 0.564 0.531 0.71 Organizational Change Capacity 0.363 0.477 0.555 0.549 0.705 0.57 Bolder values on the diagonal are the AVE's.
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Confirmatory Factor Analysis
We conducted a confirmatory factor analysis (CFA) to validate the factor structure. The measurement model was constructed incorporating each construct and associated items. The model was further trimmed (Appendix H) and appropriate covariance relationships were added when theoretically justified (Byrne, 2009). The overall fit for the model is good, as represented by: CMIN/DF = 1.842, CFI = .969,
RMSEA= .034 (90% confidence interval 0.031-0.036), PCLOSE = 1.00. The composite reliability (CR) for each construct is provided in Table 10. The CR values exceed the acceptable threshold level (> 0.70) and the average variance extracted (AVE) values confirming the reliability of the indicators and demonstrating convergent validity. For discriminate validity we show that for all but two constructs the maximum shared variance (MSV) and average shared variance (ASV) are less than the AVE (Fornell &
Larcker, 1981).
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TABLE 10: Results of Confirmatory Factor Analysis
Standardized Average Maximum Average Constructs and Cronbach Standard Standard Critical Composites Mean Regression Variance Shared Shared Corresponding Items Alpha Deviation Error Ratio Reliability Weights Extracted Variance Variance Pricing Capabilities (PC) 0.906 0.9 0.48 0.42 0.35 PC1 4.32 1.594 0.766 0.051 23.998 PC2 4.32 1.425 0.653 0.048 19.298 PC3 4.73 1.318 0.808 0.041 25.956 PC4 4.44 1.482 0.625 0.051 18.228 PC6 4.35 1.498 0.694 0.05 20.932 PC7 4.25 1.473 0.756 0.048 23.406 PC8 3.98 1.505 0.682 0.050 20.384 PC10 4.12 1.568 0.607 0.054 17.513 PC11 3.96 1.162 0.621 0.056 17.982 PC12 4.63 1.514 0.712 0.05 21.448 Relative Performance (RP) 0.915 0.91 0.55 0.40 0.32 RP1 4.63 1.310 0.621 0.045 17.875 RP2 4.86 1.279 0.696 0.043 20.536 RP3 4.93 1.339 0.725 0.045 21.683 RP4 4.74 1.311 0.735 0.044 22.09 RP5 4.65 1.366 0.764 0.044 23.593 RP6 5.03 1.295 0.774 0.042 23.809 RP7 4.82 1.292 0.797 0.042 24.442 RP8 4.89 1.320 0.815 0.043 25.231 Organizational Change 0.919 0.91 0.57 0.64 0.41 Capacity (OCC) OCC1 5.14 1.340 0.821 0.041 26.707 OCC2 5.01 1.419 0.796 0.041 26.707 OCC3 5.06 1.410 0.872 0.042 29.156 OCC4 5.37 1.378 0.710 0.045 21.662 OCC5 4.97 1.448 0.710 0.048 21.619 OCC6 4.70 1.520 0.744 0.05 22.762 OCC7 4.46 1.578 0.687 0.053 20.638 OCC8 4.69 1.548 0.648 0.052 19.082 Champion Behavior (CBE) 0.959 0.96 0.71 0.55 0.41 CBE1 4.76 1.690 0.827 0.051 27.228 CBE2 5.21 1.603 0.828 0.048 27.361 CBE3 5.10 1.549 0.861 0.046 29.113 CBE4 4.86 1.516 0.839 0.045 27.998 CBE5 4.58 1.631 0.862 0.048 29.223 CBE6 5.05 1.498 0.813 0.046 26.562 CBE7 5.03 1.557 0.848 0.046 28.474 CBE8 5.16 1.524 0.821 0.046 27.007 CBE9 0.894 0.049 31.129 Center-led Pricing 0.784 Management (CLED) 0.79 0.43 0.26 0.20 CLED2 5.01 1.598 0.617 0.078 14.436 CLED3 5.56 1.389 0.584 0.069 13.504 CLED4 4.70 1.603 0.645 0.078 15.252 CLED5 5.15 1.509 0.692 0.072 16.67 CLED7 5.58 1.292 0.729 0.06 17.792 Organization Confidence 0.851 (OC) 0.84 0.58 0.64 0.44 OC2 4.74 1.505 0.81 0.049 25.091 OC4 4.71 1.486 0.796 0.048 24.435 OC7 5.08 1.414 0.805 0.045 25.124 OC9 5.75 1.216 0.608 0.043 17.063
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We tested for metric and configural invariance to identify whether the factor
structure is equivalent across different groups. The good model fit demonstrated
configural invariance across both types of competitive intensity (high and low) and
product advantage (high and low). Further analysis of metric invariance suggested that
group were also invariant. We concluded that groups are equivalent and adequate for
further analysis.
Common Method Bias
Surveys from a single set of respondents can introduce common method bias
(CMB) in the data. Consequently, we took several steps to mitigate, detect, and control
for a common method bias. We carefully constructed all survey items, and wherever
possible, used pre-tested, valid, multidimensional constructs (Huber & Power, 1985). We
varied the scale anchors and format in the questionnaire, performed a series of scale-
validation processes before distributions, and invited business professionals to rate the
measures.
Several post hoc tests determined the extent to which common method bias was
present in our data. Using Harman’s single-factor test, all 44 items were entered into an unrotated principal components factor analysis to determine the number of factors necessary to account for the variance in the variables. If a single factor emerged or a
single general factor explained more than 50% of the variance between the independent
and dependent variables, common method variance may be present (Podsakoff,
MacKenzie, Lee, & Podsakoff, 2003). Our results indicated the presence of six potential
factors (all with eigenvalues greater than one) that explained a total of 59 percent of the
variance. The first factor explained 39% percent of the variance. These results provide
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initial evidence response bias does not appear to exist in the data (Podsakoff & Organ,
1986).
Next, we conducted a CFA-based Harman’s single-factor test in which we hypothesized a single common methods factor as causing all the indicators. The common methods factor extracted 28.8% of the variance. Additionally, an unrelated construct, a marker variable, determined ex post to have no signification correlation with other items in the constructs was added to the measurement model (Lindell & Whitney, 2001). Since we did not measure an unrelated construct a priori, we used a modified test in which a
weakly related construct scale comprised of four unrelated items rejected during the EFA
process (Pavlou & Gefen, 2005). The marker variable extracted 1.25% of the variance.
We also examined multicollinearity and CMB with linear regression analysis on
the study constructs and found low variance inflation factors. Multicollinearity can be
ruled out because no two predictor variables correlated more strongly than .70 (Hair et
al., 2010). Finally, we examined the correlation matrix and found no highly correlated
factors (highest correlation is r = .705), whereas evidence of common method bias should
have resulted in extremely high correlations (r > .90). Based on these tests,
multicollinearity is not present and common method bias does not appear to pose a
problem with our analysis.
Hypotheses Testing and Structural Model
Our next step was to conduct a structural analysis on the hypothesized causal
model, using the constructs and items from the CFA analyses. SEM was particularly
appropriate because it allows estimation of multiple associations, simultaneously
incorporates observed and latent constructs in these associations, and accounts for the
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biasing effects of random measurement error in the latent constructs (Medsker, Williams,
& Holahan, 1994).
We used AMOS for two reasons: First AMOS is useful in studying models with latent variables and measurement errors. Second, AMOS is an effective tool for testing complex simultaneous equations. The AMOS model is used to construct the structural model and establish its validity. The final trimmed SEM model was developed by reducing insignificant paths, adjusting modification indices and adding covariance paths where there was theoretical justification (see Appendix I). Data supported this model with an exceptionally good fit as shown in Table 11.
TABLE 11: Final SEM Model Fit Statistics
Model Fit Measures Threshold Structural Model References
Chi-Square / Df 30.185/30 p-value <0.05 0.456 Non Significant CMIN/DF <2 1.006 (Tabachnick & Fidell, 2007) PCFI >0.5 0.167 (Hu & Bentler, 1999) CFI >0.95 1.000 (Hu & Bentler, 1999) RMSEA <0.06 0.002 (Hu & Bentler, 1999) Pclose >0.5 1.00 (Jöreskog & Sörbon, 1993)
The adequacy of the psychometric properties in the measurement model enables us to further test our direct effect hypotheses (H1a,b,c–H10) shown in the research model depicted in Figure 29.
Findings
The results of the 17 tested hypotheses are presented in Table 12. Five hypotheses were not supported.
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Interactions Effects
We anticipated championing behaviors would have an amplifying effect on relative performance when combined with center-led pricing management and organizational capacity. Both hypotheses H4 and H5 were not supported. The significant positive relationship between championing behaviors (b = .099, p < .005) and organizational change capacity (b = .116, p < .05) on relative performance might explain this outcome.
TABLE 12: Result of Hypothesis Test
Hypothesis Beta Supported H1a: Championing Behavior Have a Positive Effect on Pricing Capabilities .353*** Yes H1b: Championing Behaviors Have a Positive Effect on Relative Firm Performance .091** Yes H1c: Championing Behaviors Have a Positive Effect on Organizational Confidence 0.185*** Yes H2a: Center-Led Pricing Management Has a Positive Effect on Pricing Capabilities 0.354*** Yes H2b: Center-Led Pricing Management Has a Positive Effect on Organizational Confidence 0.013 No H3a: Organizational Change Capacity Has a Positive Effect on Pricing Capabilities 0.140*** Yes H3b: Organizational Change Capacity Has a Positive Effect on Relative Firm Performance 0.121** Yes H3c: Organizational Change Capacity Has a Positive Effect on Organizational Confidence 0.574*** Yes H4: Championing Behavior Amplifies the Positive Effect of Organizational Change Capacity on No -0.009 Relative Firm Performance H5: Championing Behavior Amplifies the Positive Effect of Center-led Pricing Management on No -0.18 Relative Firm Performance H6: Pricing Capabilities Have a Positive Effect on Organizational Confidence 0.235*** Yes H7a: Competitive Intensity Negatively Moderates the Relationship Between of Organizational HighCI= 0.376*** Confidence on Relative Firm Performance such that, for High Competitive Intensity, the relationship Yes will be Weaker than for Low Competitive Intensity LowCI= 0.154(ns) H7b: Competitive Intensity Negatively Moderates the Relationship Between of Pricing Capabilities on HighCI= 0.371*** Relative Firm Performance such that, for High Competitive Intensity, the relationship will be Weaker No than for Low Competitive Intensity LowCI= 0.298*** H8a: Product Advantage Positively Moderates the Relationship Between of Organizational HighPA= 0.363*** Confidence on Relative Firm Performance such that, for High Product Advantage, the relationship Yes will be Stronger than for Low Product Advantage LowPA= 0.128(ns) H8b: Product Advantage Positively Moderates the Relationship Between of Pricing Capabilities on HighPA= 0.236*** Relative Firm Performance such that, for High Product Advantage, the relationship will be Stronger No than for Low Product Advantage LowPA= 0.251*** H9: Pricing Capabilities Has a Positive Effect on Relative Firm Performance when Controlling for Yes 0.341*** Firm Size, Firm Nature, Firm Main Activity and Function of Respondents H10: Organizational Confidence Has a Positive Effect on Relative Firm Performance when Yes Controlling for Firm Size, Firm Nature, Firm Main Activity and Function of Respondents 0.274*** ***p<0.01; **p<0.05; *p<0.1
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Direct Effects on Dependent Variables
First, the behavior of the champion on pricing had a positive and significant
impact on relative firm performance (b = 0.09, p < .05), pricing capabilities (b = 0.351, p
< .01) and on organizational confidence (b = 0.189, p < .01). Our findings support H1a,
H1b and H1c.
Second, the hypothesized impact of center-led pricing management on pricing capabilities (b = 0.359, p < .01) was also significant. However, center-led pricing management did not positively influence organization confidence (b = 0.013, P = 0.531).
These results provide support for H2a but not for H2b, respectively.
Third, organizational change capacity was positively and significantly related to firm pricing capabilities (b = 0 .135, p < 0.01) and organizational confidence (b = 0.575, p < .01) but also directly to relative firm performance (b = 0.116, p < 0.05), thereby validating H3a, H3b and H5c.
Fourth, pricing capabilities had a positive and significant influence on organizational confidence (b = 0.241, p < 0.01) and a much stronger positive influence on relative firm performance (b = 0.344, p<0.01), providing support for H6 and H9.
Finally, as with pricing capabilities, organizational confidence has a positive and significant influence on relative firm performance (b = 0.279, p < 0.01). All but one of our 11 direct-effect hypothesized relationships were supported.
R Square Decomposition
All hypothesized latent variables connected to relative firm performance (H1b,
H3b, H9 and H10) had a positive and significant relationship with it. The decomposition of the relative firm performance R Square, as shown in Table 13, revealed that pricing
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capabilities explained 34 percent of its variance, while organizational confidence explained 28 percent. Championing behaviors and organizational change capacity accounted for 10% and 11% of the total variance respectively.
TABLE 13: R Square Decomposition for the Dependent Variables
Relative Firm Performance R Square Decomposition 0.567
Portion of Standardized Independent Variable Dependent Variable Correlations Variance Estimates explained by IV
Championing Behaviors Relative Performance 0.564 0.099 10% Pricing Capabilities Relative Performance 0.555 0.344 34% Organizational Confidence Relative Performance 0.456 0.278 22% Organizational Change Capacity Relative Performance 0.555 0.116 11% Controls Relative Performance 23% Total 100%
Pricing Capabilities R Square Decomposition 0.543
Portion of Standardized Independent Variable Dependent Variable Correlations Variance Estimates explained by IV
Championing Behaviors Pricing Capabilities 0.551 0.351 36% Center-led Management Pricing Capabilities 0.445 0.359 29% Organizational Change Capacity Pricing Capabilities 0.477 0.135 12% Controls Pricing Capabilities 23% Total 100%
Organizational Confidence R Square Decomposition 0.828
Portion of Standardized Independent Variable Dependent Variable Correlations Variance Estimates explained by IV
Championing Behaviors Organizational Confidence 0.531 0.189 12% Pricing Capabilities Organizational Confidence 0.467 0.241 14% Organizational Change Capacity Organizational Confidence 0.549 0.575 38% Controls Organizational Confidence 36% Total 100%
Similarly, the decomposition of the R Square for pricing capabilities revealed the strong contribution of championing behaviors (36%) and center-led pricing management
(29%) in explaining its total variance. Finally, organizational change capacity was the
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stronger contributor to the R Square of organizational confidence with 38% of explained variance.
Analysis of Moderation
Our analysis revealed that competitive intensity and product advantage did not moderate the relationship between pricing capabilities and relative firm performance.
This relationship remained positive and significant under conditions of high and low competitive intensity as shown in Table 13, but also under circumstances of high and low product advantage. H7b and H8b were not supported. However, we did find significant moderation for both categorical variables in the relationship between organizational confidence and relative firm performance. Under both conditions of high competitive intensity (b = 0.376, p < 0.01) and high product advantage (b = 0.236, p < 0.01), organizational confidence was positively and significantly related to relative firm performance. These results were not found under low conditions of competitive intensity
(b = 0.154, p = 0.073) and product advantage (b = 0.128, p= 0.121). H7a and H8a were supported.
Controls
Table 14 shows that most controls we tested for were not significant except for firm size which had a positive effect on organizational confidence.
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TABLE 14: Controls
Standardized Controls Dependent Variables P Value Estimates Size Pricing Capabilities 0.044 0.124 Size Organization Confidence -0.036 0.043 Size Relative Firm Performance -0.070 0.804 Activity Pricing Capabilities -0.014 0.581 Activity Organization Confidence -0.005 0.755 Activity Relative Firm Performance -0.044 0.08 Nature Pricing Capabilities 0.034 0.214 Nature Organization Confidence -0.001 0.933 Nature Relative Firm Performance 0.009 0.741 Function Pricing Capabilities 0.013 0.624 Function Organization Confidence 0.010 0.554 Function Relative Firm Performance 0.037 0.156
Final Structure Model
The final structural model is provided in Figure 30 along with a representation of the significant paths.
FIGURE 30: Final Structural Model
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Discussion
Our objective was to improve understanding of how firms organize for pricing, how they manage the pricing process and how managers make pricing decisions to achieve superior relative performance. Our hypotheses were based on the results of an initial qualitative inquiry that developed a framework for firm pricing orientation and on a thorough review of the literature in the areas of pricing, organizational theory and resource-based view of the firm. Our intention was to construct a strong and unique bridge between the fields of pricing and organizational behavior.
Our results support the proposition that a unique organizational design for the pricing function (emphasizing champions, change capacity, center-led pricing, capabilities and confidence) leads firms to greater relative firm performance. Our ability to statistically link these organizational characteristics to firm performance adds an additional “brick” to the wall of knowledge about pricing. Our findings shine a new light on the findings of previous studies and offer four substantive contributions.
First, our results support resource-based theory that pricing capabilities positively and significantly influence firm performance vis-à-vis competition. Previous studies on marketing capabilities suggest a positive link between pricing capabilities—a subset of marketing capabilities—and firm performance (Morgan et al., 2009; Vorhies & Morgan,
2005). However, these studies measured pricing capabilities as part of a much wider subset of marketing capabilities. In other studies, pricing capabilities were investigated using case study or qualitative—but not quantitative—research methods. Our inquiry, by providing a robust pricing capabilities construct that can be used in future studies as well as a causal model linking pricing capabilities to relative firm performance, is unique.
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Second, our findings suggest that the role of executives in the corporate suite is
essential for the design and sustainable implementation of pricing strategies in firms. A
unique organizational architecture for pricing and the promotion of a culture of change
and pricing knowledge diffusion should become a top priority for CEOs and other senior
executives. By investing to build pricing capabilities that generate a sustainable and
inimitable competitive advantage (Dierickx & Cool, 1989; Dutta et al., 2003), champions
of pricing forge shared vision, a collective “can do” mentality and a sense of resilience in the firm that lead to superior levels of organizational efficacy (Bohn, 2001) and superior outcome. Dutta et al. (2002: 66) posit that “most CEOs will never set a single price. They can, however, give their managers the ability to win price wars, maintain price leadership and hold a competitive edge in pricing.”
Third, our findings also suggest that top executives play an essential role in the purposeful design of the pricing function in organizations. They assemble a constellation of organizational elements to positively influence organization intelligence. The unique design and assembly of various pricing sub-systems (strategy, culture, structure) (Halal,
1999: 69) generate superior problem solving capacity. Each sub-system contribute to organizational intelligence by developing, adopting and linking procedures, patterns, and knowhow in pricing that “allow the organization to do well in the face of constraints imposed by such things as scarce resources and competition” (March, 1999: 1). Therefore we conjecture that the development and the deployment of unique intellectual capital in pricing (Dutta et al., 2002), also characterized as “brain ware” (Liebowitz, 2000: 1), throughout the organization create superior pricing intelligence that leads to superior firm performance.
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Fourth, our study reveals that firms engaged in the design and deployment of modern pricing strategies require a superior organizational capacity for change. Moilanen
(2005) defined an organization with change capacity as “a consciously managed organization with “learning” as a vital component in its values, visions and goals, as well as its everyday operations and assessment.” We conjecture that it is the combination of organizational learning and the development of managerial capabilities that allows firms to adapt more quickly and effectively than competitors to changing situations. The implementation and internalization of modern and advanced pricing practices require strong firm-wide pricing knowledge foundation in pricing. Prior knowledge confers “an ability to recognize the value of new information, assimilate it, and apply it to commercial ends” (Cohen & Levinthal, 1990). Changes in pricing knowledge and capabilities are incrementally developed over time (Dutta et al., 2003), and are dependent on organizational absorptive capacities (Cohen & Levinthal, 1990; Szulanski, 1996;
Zahra & George, 2002) of pricing process actors. Therefore, the more a firm can accept, adapt and absorb changes in internal pricing systems, the greater the organization’s confidence and the greater its relative performance versus competition.
In aggregate, the five organizational and behavioral elements we revealed are related to pricing create superior competitive advantage and superior firm performance.
Our findings suggest that the importance of organizational behaviors in the marketing and pricing literature has been underestimated and that multi-disciplinary research may be needed to further investigate the relationships.
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Limitations
We explored a topic that has previously received little attention in either practitioner or scholarly literature. Several potential limitations of our work should be acknowledged. The performance measures we utilized are perceptual, although using perceptual or subjective data has been advocated in the strategic management literature
(Dess & Robinson, 1984). Our respondents included a large number Professional Pricing
Society member firms but may not necessarily be representative of all firms conducting pricing activities and managing the pricing process.
Because our survey was self-administered, results may not reflect what respondents actually do when managing the pricing process. Babbie said, “Surveys cannot measure social action: they can only collect self-reports of recalled past action or of prospective or hypothetical action” (2007: 276). In other words, to truly understand how organizational and behavioral dynamics affect pricing process and how pricing decisions are made in firms, it might be useful to augment our results with field observations and qualitative inquiry.
Finally, no statistical test can assure a bias-free analysis (Podsakoff et al., 2003).
We made a purposeful effort to minimize common method bias. Still, it would have been preferable to include multiple respondents from each participating company and to have used different objective measures for the dependent variables. Recognizing the difficulties of this, we used an “informed observer” approach to best reflect firm behavior.
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Implications for Practice and Future Research
Our findings, which support previous observations that the pricing function is often neglected, under-utilized and under-managed (Cressman, 1999; Hinterhuber,
2008b; Noble & Gruca, 1999a, b; Shipley & Jobber, 2001), have implications for both pricing practice and future research about it. Firm managers in charge of pricing activities may find our findings useful with respect to designing and organizing pricing roles and responsibilities, and reinforcing their firm’s pricing sophistication by adopting modern pricing methods and organizational design. Our results imply CEO’s and top executives should adopt a more mindful approach to pricing by paying more attention to it, allocating more resources for it and leading the organization in the development of robust pricing capabilities. The data suggest that doing so may boost firm performance vis-à-vis competition. Our five organizational “C”s—champions, change, center-led pricing, capabilities and confidence—provide a practical road map for firms on how to organize for pricing to reach greater relative firm performance.
Our findings point to the need for more research on pricing preferences and practices: today, fewer than 2% of all articles published in major marketing journals focus on pricing (Malhorta, 1996). The void is especially evident with respect to industrial firms and we recognize, among myriad research opportunities, the following: the dimensions of the three pricing orientations (cost, competition and customer value) need to be clearly 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
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relate to firm performance. Finally, the roles and responsibilities of teams in the internalization of modern pricing practices in firms begs further inquiry.
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CHAPTER IV: ORGANIZATIONAL CONFIDENCE FOR PRICING AND ITS CONSEQUENCES ON FIRM PERFORMANCE: ORGANIZATIONAL CONFIDENCE AS A STRATEGIC ORGANIZATIONAL CAPABILITY
Introduction
In most companies, the pricing function receives limited attention. Data from the
Professional Pricing Society, the world’s largest organization dedicated to pricing, noted
that fewer than 5% of Fortune 500 companies have a full-time function exclusively dedicated to pricing (Mitchell, 2011) and, according to McKinsey & Company fewer than
15% conduct systematic pricing research (Hinterhuber, 2004). Among AACSB (The
Association to Advance Collegiate Schools of Business) accredited business schools, only 9% offer courses that put a significant emphasis on pricing (McCaskey & Brady,
2007). Yet numerous studies contend that pricing has a substantial and immediate effect on company profitability: small variations in price influence the bottom line by as much as 20% to 50% in both directions (Hinterhuber, 2004; Nagle & Holden, 2002).
Historically, pricing has received little attention from either practitioners or marketing scholars (Hinterhuber, 2004, 2008b; Malhorta, 1996; Noble & Gruca, 1999b).
A review of 53 empirical pricing studies concluded that pricing literature is highly descriptive and fragmented and that theoretical understanding of firm pricing decisions is limited (Ingenbleek, 2007). Pricing literature is silent about how organizational and behavioral characteristics of firms may affect pricing processes and how firms organize for pricing (Ingenbleek, 2007). To address this deficit, we first conducted qualitative interviews with 44 managers in 15 companies in 10 U.S. states to study similarities and differences in experiences related to pricing management and orientation. Results documented stark differences in how firms organize for pricing, manage the pricing 142
process, and develop internal capabilities to face uncertain and ambiguous pricing
decisions. Five organizational elements associated with advanced pricing orientation and
pricing maturity emerged: championing behaviors, organizational confidence, pricing
capabilities, change capacity and center-led pricing management.
Subsequently, we surveyed 507 account and commercial management professionals and leaders involved in managing pricing activities for their firms to measure the drivers of organizational confidence for pricing and its impact on perceived firm performance. Our inquiry contributes to the fields of pricing and organizational behavior by linking three critical factors—pricing capabilities, knowledge prior to pricing negotiation and organizational confidence associated with pricing—to relative firm performance. Most importantly, our data highlight that the purposeful design of organizational programs to boost the pricing confidence with their sales and account management teams may result in a strong and positive impact on perceived firm performance.
Theoretical Foundation
The development of our theoretical model is guided by three related streams of literature: organizational theory, pricing, firm capabilities and resource-based view.
Organizational Theory
Our work is guided by organization theory, which we take to include the internal structure of a firm and the relationships between its units and departments (Grant, 1996),
as well as the flow of information within organizations that supports and influences
decision-making processes (March, 1994, 1999; Simon, 1961). A critical question is how
pricing decisions occur in organizations and what organizational factors influence
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processes and managerial judgment when decisions are made. Previous work by leading behavioral and social researchers has covered many important aspects of organization theory. Below, we focus on the most relevant ones, including formalization as part of the organizational structure construct (Aiken et al., 1980; Hall, 1977; Hall et al., 1967; Miller et al., 1988), and organizational efficacy (Bandura, 2000; Bohn, 2001).
Organizational structure. Organization structure, which can be variously defined and take myriad forms, relates to dimensions that “cannot be reduced to or deduced from properties of the organization’s members” (Aiken et al., 1980). Several reviews (Hall,
1977; John & Martin, 1984; Miller et al., 1988) have suggested that complexity
(structural differentiation), formalization, and centralization are the most common and consistent characteristics of structure. For this paper, we focus on formalization and explore how the degree to which a firm is formalized acts 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, 1977; Hall et al., 1967) 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 activities, making decisions and implementing processes 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 might increase the level of organization commitment and confidence in executing these activities as well as providing a strong message about top leadership
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commitment. Top management should avoid over- or under-specification of the formalized process that could lead to negative organizational consequences (Hall, 1977:
112).
Incentive & goal systems. Alignment of organizational incentives is a
requirement to avoid organizational conflicts and potential breakdowns in organizational
goal achievement (Hinterhuber, 2008a; Kerr, 1975). “Rewarding A while hoping for B”
(Kerr, 1975: 1) generates inadequate incentive structures and a potential failure of
collaboration in the firm (Barnard & Andrews, 1968). Reward systems designed by
management can serve either to “sharpen or to blunt their decisive effectiveness” (Walton
& Dutton, 1969: 75). Literature on pricing and specifically on the adoption of value-
based pricing, suggest that reward systems based on profitability need to be implemented
across multiple departments of the firm (Hinterhuber, 2004, 2008a) to gain alignment
across these departments and buy-in from sales organizations to embark on a value-
selling transformation (Anderson et al., 2007).
Social cognitive theory. Social cognitive theory (Bandura, 1997) suggests that there are two main perceptions leading to an organization member’s motivation to
“engage in teamwork activities and behaviors.” These two perceptions are related to the
“individual’s perception of his or her ability to perform generic teamwork behavior (self- efficacy) and perceptions regarding the team’s possession of the resources required for completing the task (collective efficacy)” (Tasa et al., 2007). The growing interdependency of individual in organizations (Gully et al., 2002) requires greater collective agency and action among them through shared beliefs with the intention of accomplishing greater organizational outcomes. Social cognitive theory widens the
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concept of human agency to collective agency (Bandura, 2000). People share beliefs in
their “collective power” to produce desired results. Socially shared cognitions are placed
into an organizational context where people work together to accomplish desired
outcomes and ends (Bohn, 2001). Among the social cognitions that firm’s members have
are beliefs or perceptions of their organization’s capabilities. Bandura (1997: 476) posits
that “an organization’s beliefs about its efficacy to produce results is undoubtedly an
important feature of its operative culture”.
Self-efficacy is central to the motivational concept of human action in
organizations. Self-efficacy may be defined as a generative capacity of one’s resources
and abilities to cope with a control situation (Bandura, 1997). Collective efficacy refers to
the perception of groups, teams and other social collections who perceive the capability
of a group at the group level (Bohn, 2001). A meta-analysis conducted by Gully et al.
(2002) showed that the relationship between collective efficacy and team performance
was positive and significant thus supporting social cognitive theory’s 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). This notion of effort is also supported by other authors. Confidence consists of “positive expectations” for favorable outcomes and tremendous potential results (Hoover & Valenti, 2005). It influences the individual’s member’s willingness to invest in money, reputation and emotional energy to shape the ability to perform (Kanter, 2006: 7).
In this paper, we will use the words organizational efficacy and organizational confidence interchangeably and will adopt Bohn’s definition and properties of
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organizational efficacy as an organizational factors affecting the adoption of pricing
approach:
Organizational efficacy is a generative capacity within an organization to cope effectively with the demands, challenges, stressors and opportunities it encounters within the business environment. It exists as an aggregated judgment of an 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).
Pricing Literature
Pricing literature from an organizational perspective. Several studies have examined pricing practices from the perspective of organizational decision processes but, among them, only a handful have linked the bodies of knowledge on pricing and organizational behaviors. Cyert and March (1992), who studied pricing behaviors in a retail environment, suggest that, over time, simplifying “rules of thumb” emerge within the firm. They argue that prices are “negotiated” between various departments of the firm as a way to reach consensus and achieve negotiated objectives. Finally, they propose that cost-based pricing practices are included among these rules of thumb or routines.
Lancioni, Schau and Smith (2005) researched the intraorganizational influence on business-to-business pricing strategies and more specifically the importance of
interdepartmental rivalry and conflicting interests on the pricing process. The findings
show that resistance to progressive pricing strategies emanate from many groups in firms
each of them “having parochial interests and agendas.” The most dominant resistance and
roadblocks were created by the finance department which was ranked as the most
difficult to work with in developing a comprehensive pricing policy. Senior management
was also ranked high because of its desire to control the pricing process. Finally,
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Ingenbleek (2007) conducted a meta-analysis of 53 pricing studies drawn from cost-
principle theory, decision making theory and marketing strategy. Although no empirical
research was conducted, Ingenbleek proposed a conceptual framework and several
directions for future research in the field of value-informed pricing. His review of the
literature suggests that information sources represent a key resource to be acquired,
developed and deployed within the firm. However, the availability of information does
not guarantee success in value-informed pricing – the degree to which information is processed, interpreted, communicated and used can influence the implementation of it.
Thus the pricing process within the firm can influence the management of information related to customer value perceptions. Ingenbleek (2007) made the following critical conclusions with regards to pricing literature: 1) it is highly descriptive and lacks statistical significance; 2) research insights on pricing practices are often not cumulative; and 3) theory about how price decisions are made in firms is limited. We hope to build on the scholarly work of Cyert and March, Lancioni, and Ingenbleek by bridging the fields of pricing and organizational behavior.
Pricing and firm performance. Most pricing practitioners agree that pricing
orientation and the lack of scientific and systematic ROI calculations for pricing
strategies constrain visibility of pricing in the corporate executive suite and restrain firm
adoption of modern pricing approaches. In addition, marketing and pricing literature is
silent about both the effect of firm pricing orientations on overall company performance
(Cresman, 1999; Hinterhuber, 2008b; Ingenbleek, 2007) and, more specifically, on how
modern pricing practices might lead to superior firm performance.
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Pricing literature has explored the relationship between pricing practices and firm
performance and pricing practitioners and consultants generally advocate the superiority
of value-based pricing approaches over others approaches. Monroe (1990), for example,
argues: “…the profit potential for having a value-oriented pricing strategy that works is
far greater than with any other pricing approach.” Similarly, Cannon and Morgan (1993:
25) recommend perceived value pricing if profit maximization is the objective:
“Perceived value pricing enables a company to select an optimal price/volume
combination.” Cost-based pricing approaches, conversely, lead to sub-optimal
profitability (Backman, 1953; Myers et al., 2002).
To the best of our knowledge, the link between purposefully developed pricing practices and company profitability has not yet been examined empirically. Ingenbleek et
al. (2003) tested the relationship between pricing practices and new product success and
found that value-informed pricing has the overall strongest positive effect on product
performance. A subsequent study (Ingenbleek et al., 2010), showed value-informed
pricing positively influences new product market (but not new product financial)
performance (noting the latter link may require a more complex model including data on
sales, costs and other information) (Ingenbleek et al., 2010).
Capabilities and Resource-Based View of the Firm
The resource based view (RBV) of the firm is an emerging perspective in
strategic management that explains firm performance in terms of internal resources and
capabilities. It explains and predicts why some firms are able to establish positions of
sustainable competitive advantage leading to superior returns or economic rent, and
perceives the firm as a “unique bundle of resources and capabilities where the primary
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task of management is to maximize value” (Grant, 1996: 110). Resources are generally
rare, inimitable, and non-substitutable firm-specific assets that add value to firms’
operations by enabling firms to implement strategies that improve efficiency and
effectiveness (Barney, 1991). In contrast, capabilities refer to firms’ abilities to perform a coordinated set of tasks, utilizing internal resources, for achieving desired outcomes
(Helfat & Peteraf, 2003). Amit and Schoemaker (1993) split this general construct into two distinct concepts – resources and capabilities, by defining the former as tradable and nonspecific firm assets and the latter as non-tradable, firm-specific abilities to integrate, deploy, and utilize other resources within the firm. In this sense, resources are the inputs of production processes, while capability refers to the capacity to deploy resources using organization processes (Amit & Schoemaker, 1993). They are often developed in strategic, functional, and sub functional areas by combining physical, human, and technological resources (Amit & Schoemaker, 1993). Although, there is no predetermined functional relationship between a firm’s resources and its capabilities
(Grant, 2002), Makadok (2001) made a useful distinction: a resource is an observable but not necessarily tangible asset that can be independently valued and traded, while a capability is unobservable and hence necessarily intangible, cannot be independently valued, and changes hands only as part of its entire unit. Makadok (2001) further suggested that economic rents are created when firms are more effective than their rivals in selecting and deploying resources to build capabilities, and that resource-picking and capability-building are not necessarily independent but complementary activities. The key characteristic of capability which separates it from resource is its organizational embeddedness, which suggests that capability cannot easily be bought from the external
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factor market, is embedded within the organization, and must be built or cultivated over
time. While resources by themselves can serve as the basic unit of analysis, firms build
capabilities by assembling these resources into unique configurations, thereby
transforming inputs into outputs of greater worth (Amit & Schoemaker, 1993).
Capability-building refers to the ability of firms to build unique competencies that can
leverage their resources (Teece et al., 1997). Firms derive their competitive strengths
from their “small number of capabilities clusters” (Dosi et al., 2000: 125). Because
organizations face increased complexity, they need to constantly re-evaluate and re-
package the required set of capabilities (Cohen & Levinthal, 1990) making them dynamic
in nature (Teece et al., 1997).
Dutta et al., (2003) highlighted the role of pricing capabilities, defined as a set of complex routines, skills, systems, know-how, coordination mechanisms, and
complementary resources, in increasing company performance. Pricing capability refers
to, on the one hand, the price-setting capability within a firm (identifying competitor
prices, setting pricing strategy, translating from pricing strategy to price) and,
alternatively, to the price-setting capability vis-à-vis customers (convincing customers on price-change logic, negotiating price changes with major customers). In this and subsequent qualitative research settings, pricing capabilities were found to be positively related to firm performance (Berggren & Eek, 2007; Dutta et al., 2002; Dutta et al., 2003;
Hallberg, 2008).
The Qualitative Research
Pricing processes are complex. They span multiple hierarchical levels and cross
functional boundaries, both within and across firms. To fully capture the complexity of
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pricing in the hypothesized model, we complement the literature review with qualitative
research on pricing practice in U.S. industrial firms. In this way we hope to capture all
relevant relationships between pricing orientation and performance, which then guide our
quantitative model.
We approached the Professional Pricing Society (PPS; www.pricingsociety.com )
with a request to conduct research on its membership base. They provided us with a
sample of 36 firms that met the following criteria: (a) company CEO or President; (b) at
least two layers of management; and (c) geographic location (U.S. only). These firms
represented a variety of industries, among them building materials, transportation
products, and resins & plastics products. We contacted the CEO of each firm to
determine their willingness to be interviewed, of which fifteen companies agreed to
participate in our study. Seven were small (between 50 and 380 employees) and eight
were medium-sized (between 900 and 2,200 employees) firms. We conducted, on average, three interviews at each firm between April and 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. We focused on managers’ experiences in making pricing decisions and in participating in their 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. Informants were first invited to
talk about themselves, their background, and their work. We then asked them to describe
their specific 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.
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Third, we asked informants to reflect on the effectiveness of their pricing strategies,
tactics, and processes in increasing organizational performance. For these questions we
used probes to provoke specific details about the pricing process. The overall goal was to
elicit experience-based practitioner perspectives on the organizational factors that
influence their firm’s pricing orientation and to probe for a link between pricing strategy
and firm performance.
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 followed: open-coding, axial coding, and selective coding
(Boyatzis, 1998).
Ingenbleek et al. (2003) pointed out the risk of a social desirability bias in asking managers about the information used in pricing processes, since managers could be tempted to justify prices based on costs. All respondents, however, indicated that pricing decisions were based on a combination of data from accounting, competitor observation, and customer-value estimates. Consequently, social desirability bias did not seem to be a concern.
Four themes emerged from these interviews: the role of boundary-spanning,
highly idiosyncratic pricing capabilities; the need for formalized structures and decision-
making processes; and the role of organizational self-efficacy (see the conceptual model
in Appendix J). The results of our qualitative research suggest that pricing practices based
on specific capabilities, and supported by a high degree of organizational formalization in
companies with a high degree of confidence, contribute to increasing firm performance—
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as opposed to pricing practices that are not supported by investments in specific capabilities, in an environment with low task formalization that is also characterized by a low degree of organizational confidence.
Hypothesis Development
Based on our theoretical foundation and the qualitative findings of the first phase of our research, we proposed the following research model as shown in Figure 31.
FIGURE 31: Hypothesized Research Model
Our model suggests that: 1) five organizational factors (pricing capabilities, delegation of pricing authority, pricing process formalization, incentive and goal systems and knowledge before negotiation) influence the level of organizational confidence associated with pricing; 2) unique and inimitable pricing capabilities, aligned goals and incentives systems and a sense of confidence strongly and positively impact relative firm
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performance; 3) firm primary pricing orientation moderates the relationship between
pricing capabilities, incentives & goals systems and organizational confidence and
relative firm performance such that the firm using value-based pricing will exhibit
superior levels of organizational confidence and pricing capabilities than firms using
cost-based and competition-based pricing.
Pricing Capabilities
Managers in 13 out of the 15 firms participating in our qualitative research project
indicated that their sales force lacked pricing and value selling capabilities. The following
quotes illustrate their views on the matter:
As a consequence of a negative business environment what I always say is that salesmen would sell their mother on Saturday to make their business plan – CEO of a Firm Using Value-based Pricing.
I can tell you our sales rep at the grass roots level isn't capable of having this level of discussion, and would have caved in on price early on in the game. (The barrier) is not having the skills to be able to properly defend your pricing. So the selling skills to sell value-based concept and the value that it would bring. I would also say that it is not just the skills, but a lack of understanding of your own company values – Vice President of Sales of a Firm Using Value-based Pricing.
I have traveled with five or six sales people last year. I could see them in front of customers. And there was one guy who’s excellent. He knows all the bells and whistles and the features. He knows the competition, the weaknesses. In 15 minutes, he brings across the sweet spot of our product and makes the customer believe that our product’s the best product in the marketplace. So he (customer) is willing to pay the price and willing to pay to buy. I traveled with other sales people (who) were completely helpless in front of customers because they didn’t know the product. They threw the product on the table and said, “This is our new blah, blah, blah,” and that’s it – CEO of a Firm Using Value-based Pricing.
In firms using value-based pricing, center-led teams of pricing experts focused on diffusing pricing knowledge and capabilities across the organization. By doing so, they contribute to the building of organizational confidence and the sense of collective 155
capability. When faced with a pricing decision or with the need to price a new product or
service, decision makers do not have the luxury of choosing between a rational and
analytic approach vs. intuitive and emotional approach. They need to have the
capabilities to reach a greater level of decision effectiveness and decision confidence
(Dane & Pratt, 2007; Simon, 1987). This “balancing act” conducted by pricing experts
can help decision-makers narrow the decision range, create confidence in pricing
activities and remove uncertainty and ambiguity from the price setting process.
Accordingly, we conjecture:
Hypothesis 1. Pricing capabilities have a positive effect on organizational confidence.
Delegation of Pricing Authority
Under condition of intense competition firms prefer price delegation because
prices set by their sales personnel are higher (Bhardwaj, 2001). In contrast to earlier
literature (Stephenson, Cron, & Frazier, 1979), recent empirical work has identified a
positive relationship between delegation of pricing authority and business unit
performance (Frenzen, Hansen, Krafft, Mantrala, & Schmidt, 2010). Further, delegating
pricing authority can increase sales personnel motivation (Yuksel, & Sutton-Brady,
2006). Our qualitative findings revealed various degrees of authority levels associated with pricing and varying degree of formalization in the approval processes. Further, all firms interviewed did in fact allow their sales personnel to have a certain “room to maneuver” when faced with pricing pressure, as indicated by the following excerpts:
For typical sales, our salespeople have a pricing box. We put in place a very formal pricing box that if you’re going after a deal, (they) have this much room to move in… So they have very clear guidance on what their range is around pricing – CEO of a Firm Using Competition-based Pricing. 156
People at the Profit Desk are quite experienced. They know price points and the different products. They look at profitability and they have certain criteria of what needs to be met. If that's not the case, they have to get an approval. Or they can also have authorization levels themselves so they can release the orders – CFO of a Firm Using Value-based Pricing.
The pricing comes out of a computer at what we call our “list-pricing” which is desired middle-of-the-range markup. Then we have two sales directors internally that have a degree of latitude to go up and to go down based on the bid information that they get on the project – CEO of a Firm Using Cost-based Pricing.
As a corporation, we have delegated limits of authority. Once you exceed a certain dollar value, that has to get elevated – CEO of a Firm Using Cost-based Pricing.
Consequently, we conjecture that:
Hypothesis 2. Delegation of pricing authority has a positive effect on organizational confidence.
Pricing Process Formalization
Well documented, structured and communicated sets of rules, procedures and instructions for the activities attached 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. We posit that pricing process formalization is required to a certain extent to give price decision makers a framework within which they can operate. Respondents in our qualitative inquiry reported various level of process formalization:
...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 – CEO of a Firm Using Value-based Pricing.
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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... – CEO of a Firm Using Value-based Pricing
More the formality is around costing and the stage gates are you either proceed or don’t proceed based on costing – cost targets. We set a cost target based on the margin expectations, then, of the approximate selling price target. So the – much more of the formality is around, ‘Are we gonna hit the cost target? Are we way off the cost target?’ Then we send it back to be re-designed or whatever. So we put more formality around costing analysis, and there’s less formality around the pricing. We – it’s funny how this works. - CEO of a Firm Using Cost-based Pricing.
Therefore, it seems reasonable that pricing process formalization positively reinforces the level of confidence as it creates a structure for account and sales management professionals within which they can receive clear guidelines, objectives and methods.
Hypothesis 3. Pricing process formalization has a positive effect on organizational confidence
Incentives & Goals Systems
Performance oriented goals – such as revenue, margin or new customer acquisition targets – exercise a positive effect on sales personnel performance (Kohli,
Shervani, & Challagalla, 1998). Sales personnel with a high performance goal orientation attribute success largely, if not exclusively, to their ability (Silver, Dwyer, & Alford,
2006). Our qualitative findings also indicate that sales incentives are critical to successful pricing transformation. It is essential for sales and account management to be rewarded based on appropriate performance criteria and also to have “skin in the game” as one respondent mentioned below:
There’s no incentive for them once (price) gets below a certain margin threshold to try to capture as much – Vice President of Marketing of a Firm Using Value-based Pricing. 158
We once had a commission program that supported 10 percent discount breaks and where you would make your commissions. That’s one of the reasons I changed the compensation plan so that commission wouldn’t rule pricing – CEO of a Firm Using Value-based Pricing.
(Sales People) get a bonus based on their OR contribution to the business, their operating profit, if you will. And so they have skin in the game to ensure that they get the best price and result with the best operating margin – CFO of a Firm Using Competition-based Pricing.
We made it very clear to the sales managers that they were going to be held responsible for profitability, as well as for volume, and that was the key. You couldn’t do one without the other. So by making them responsible for profitability and making their compensation contingent on that, they were very careful in the decisions that they made, and they balance it with the opportunity to take on volume – CEO of a Firm Using Competition-based Pricing.
We aligned compensation. It's the No. 1 way people make their number is if they don't sell (value-add services), they're not going to make their number. If they do, they will and they'll make a lot of money. It's the inflection point in their plan the way it's built – Vice President of Sales and Marketing of a Firm Using Competition-based Pricing.
Therefore we conjecture that well aligned performance-oriented goals and incentives have two effects: on one hand, they positively influence firm performance while, on the other hand, they positively impact sales and account managers’ confidence to manage pricing programs and reach pricing goals.
Hypothesis 4. Incentives and goal system have a positive effect on organizational confidence
Hypothesis 8. Incentives and Goal Systems have a positive effect on relative firm performance when controlling for firm size, firm nature, firm geographical zone, respondent’s years of experience, leadership position, market turbulences, and price realization.
Knowledge before Negotiation
Individuals differ widely in their negotiation abilities (Elfenbein, Curhan,
Eisendraft, Shirako, & Baccaro, 2008). Four of 15 firms included in our qualitative 159
inquiry revealed that they conducted specific pricing and negotiation training with their
sales force. Included in these training programs were critical dimensions related to the
understanding of customer value elements prior to negotiation (such as, incumbent’s
price, value position, differential economic value). Supported by extant literature
indicating that an individual performance in negotiations is impacted by their knowledge
and level of preparation (Sebenius, 2001; Zoubir, 2003), we hypothesize that:
Hypothesis 5. Preparation before pricing negotiation has a positive effect on organizational confidence
Pricing Capabilities and Firm Performance
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 et al., 2002). Firms with well-defined pricing practices using advanced pricing
methods have a greater capacity to design and implement structured pricing training
programs and design pricing tools to assist in the decision-making process. The presence
and development of these pricing capabilities, whether formal or informal (Dutta et al.,
2003), generate greater organizational confidence in pricing programs, decision-making
rationality and business performance when combined with other marketing capabilities
(Vorhies & Morgan, 2005). While the pricing and marketing literature have not addressed
the specific relationship between pricing capabilities and firm performance, we
conjecture this relationship is strong and positive.
Hypothesis 6. Pricing capabilities have a positive effect on relative firm performance when controlling for firm size, firm nature, firm geographical zone, respondent’s years of experience, leadership position, market turbulences, and price realization.
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Organizational Confidence and Firm Performance
The adoption of modern pricing practices in firms coupled with the implementation of commercial programs focused on value strategies requires that managers design and implement people development programs to improve organizational confidence. Such programs might include communication initiatives to foster shared beliefs about firm products and technology, coaching of commercial personnel to price and capture value with confidence (Anderson et al., 2007), and training of staff to generate greater courage to stand firm to customers’ pricing objections and be, as one interview respondent stated, “superman for one second” when facing customers’ objections.
...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 – CEO of a Firm Using Competition-based Pricing. 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... – Director of a Business Using Value-based Pricing.
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 – CEO of a Firm Using Value-based Pricing.
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 – Director of Sales in a Firm Using Value-based Pricing.
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CEO’s and top executives need to appreciate the criticality of developing these
internal beliefs and implement specific programs and activities to boost organizational
confidence. These shared beliefs in employees’ “collective power” promote people
working together leading to desired superior outcome (Bohn, 2001). This we conjecture
that:
Hypothesis 7. Organizational confidence has a positive effect on relative firm performance when controlling for firm size, firm nature, firm geographical zone, respondent’s years of experience, leadership position, market turbulences, and price realization.
The Moderating Effect of Primary Pricing Orientation
Our qualitative research uncovered stark contrasts between firms using the three
pricing orientations. Firms organized differently, developed pricing capabilities varying
by nature, intensity, and extent of organizational confidence associated with pricing.
Therefore we hypothesize that the “primary” pricing orientation adopted by the firms
comprised in our sample will moderate the relationship between pricing capabilities and
relative firm performance, between organizational confidence and relative firm
performance, and between incentives and goals systems and relative firm performance.
Specifically we postulate that firms using value-based pricing will exhibit higher levels of pricing capabilities, superior levels of organizational confidence and incentives and goals systems geared towards profit and value creation.
Hypothesis 9a. Primary pricing orientation positively moderates the relationship between pricing capabilities and relative firm performance such that the relationship will be stronger for firms using value-based pricing than for firm using cost-based or competition-based pricing, when controlling for firm size, firm nature, firm geographical zone, respondent’s years of experience, leadership position, market turbulences, and price realization.
Hypothesis 9b. Primary pricing orientation positively moderates the relationship between organizational confidence and relative firm performance such that the 162
relationship will be stronger for firms using value-based pricing than for firm using cost-based or competition-based pricing, when controlling for firm size, firm nature, firm geographical zone, respondent’s years of experience, leadership position, market turbulences, and price realization.
Hypothesis 9c. Primary pricing orientation positively moderates the relationship between incentives and goals systems and relative firm performance such that the relationship will be stronger for firms using value-based pricing than for firm using cost-based or competition-based pricing, when controlling for firm size, firm nature, firm geographical zone, respondent’s years of experience, leadership position, market turbulences, and price realization.
Research Design and Methods Data Collection and Sampling
To test our hypotheses, we designed a cross-sectional self-administered survey.
Commercial, sales and account management professionals and leaders involved in conducting and managing pricing activities for their firms constituted our population. The
Strategic Account Management Association (SAMA), a professional organization dedicated to the education and networking of Strategic Account Managers around the world, supported our research by: 1) providing access to their database of active members; 2) distributing the survey electronically; and 3) conducting follow ups to non- respondents. The survey was email to 7200 SAMA members in June 2011. Responses were returned over a six week period. About 200 “bounced back” and were assumed not to have reached the intended recipients. Of the remaining 7,000, 723 surveys were returned partially or fully completed for a response rate of 10.3%. We determined 507 were usable for further analysis. Our response rate is consistent with surveys targeted at large professional organizations not typically asked to participate in academic research. A series of procedures, shown to enhance survey response rates of managers were undertaken: (1) all respondents were assured of individual and organizational anonymity;
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(2) a cover letter explaining the practitioner and academic nature of the research project was included with the survey; (3) a note of endorsement from SAMA’s Director of
Knowledge Management outlining her personal support of the research encouraged member responses; (4) two further waves of the survey were sent at two week intervals, reminding members to respond; (5) members were offered access to survey results upon completion of the study and incentivized with a raffle prize. Characteristics of the respondents are provided in Table 15.
TABLE 15: Sample Characteristics
Main Activity Count % Position of Leadership (Y/N) Count % Manufacturing Firm 306 60% Yes 346 205% Service Organization 166 33% No 153 91% Distribution/Retail Company 30 6% Missing 8 5% Not Sure 5 1% Geography of Respondent's Location Count % Firm Size - Employees Numbers Count % North America 314 62% Less Than 250 77 15% Latin America 13 3% 251 to 500 42 8% Europe 115 23% 501 to 1,000 48 9% Asia Pacific 41 8% 1,001 to 10,000 138 27% Middle East/Africa 16 3% More than 10,000 197 39% Not Sure 8 2% Not Sure 5 1% Total Respondents 507
Data Screening
We conducted an inspection of the data for outliers and examined the data for skewness and kurtosis and found no threats to the model. All statistical assumptions for using structural equation modeling were met.
Measure Development and Assessment
Although most scale items were adapted from those in the existing literature with slight modifications to reflect our focus, a new scale was developed for pricing capabilities, and pricing realization, then refined through pretests and pilot testing using established item development procedures and guidelines (Churchill, 1979). Other scales
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were adapted, incentive and goal systems and market turbulences, and tested through our
pilot.
Content validity was determined through comprehensive review of the literature,
pilot tests, and assessment by a panel of practitioners and academics to ensure that measurement items covered the domain of the constructs (Churchill, 1979; Nunnally,
1978). To assess the survey’s quality, face-to-face interviews with pricing practitioners were conducted using Bolton’s pretesting methodology (Bolton, 1993). We pretested our scale items with a small panel of academics and pricing and business practitioners. Next, a pilot test involving 150 professionals representing sales, commercial, business and general manager functions from companies in both manufacturing and service industries provided 94 complete and usable responses. The survey was iteratively modified to incorporate all relevant test results.
The survey items are presented in Appendix K and a description of the survey constructs is presented in Appendix L.
Pricing capabilities. A multiple-item scale was developed by the researchers in accord with an operational definition as suggested by Kerlinger and Lee (2000: Chap. 3) and by relying on our qualitative work and on extant research. We used twelve items ranging from 1-‘much worse than competitors’ to 7- ‘much better than competitors’ to operationalize this scale.
Price realization. Since there was little empirical precedent to measure the degree
of pricing realization or discipline in an organization, a multiple-item scale was also
developed by the researchers in accord with an operational definition as suggested by
Kerlinger and Lee (2000: Chap. 3) and by relying on our fieldwork and on extant
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research. We used nine items ranging from 1-‘strongly disagree to 7- ‘strongly agree to operationalize this scale. These items were then transformed into a high versus low categorical variable using the median split of the summated items.
Pricing orientation. To gauge a firm’s pricing orientation, we adapted the scales developed by Ingenbleek et al. (2003) to measure value based pricing (VBP) (5 items), competition based pricing (COB) (6 items), and cost-based pricing (CB) (5 items). Items were measured using a seven-point Likert scale anchored at the extremes by 1: “not at all
taken into account in price setting” to 7: “very much taken into account in price setting.”
Delegation of pricing authority. The five-item scale was based on adapting the
existing measures from Frenzen et al. (2010) We used these items ranging from 1-
‘strongly disagree’ to 7- ‘strongly agree’ to operationalize this scale.
Pricing process formalization. The formalization of pricing process was
measured by the formalization component of structure (Pugh, Hickson, Hinings, &
Turner, 1968). Measures were created by the researchers based on a similar method
proposed in the Aston studies (Inkson, Pugh, & Hickson, 1970; Pugh et al., 1968). The
scale was formed by a sum of the number of ‘ticks’ in a given list of eight bi-serial items
characterizing the degree of formalization such that the higher the measure, the greater
the firm’s formalization.
Organizational confidence. Sense of collective capability (4 items), sense of mission and future (4 items) and sense of resilience (4 items) were assessed using seven-
point, Likert-type scales anchored with ‘strongly agree’ at the extreme positive end and
‘strongly disagree’ at the opposite end of the scale. The twelve-item scale was based on
adapting existing measures from Bohn (2001).
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Incentives & goal systems. We adapted the eight-item scale developed and validated by Behrman et al. (1982) that focused on targets used by firms to define sales people performance compensation. The seven-point, Likert-type scale was anchored with
‘strongly agree’ at the extreme positive end and ‘strongly disagree’ at the opposite end of the scale.
Knowledge before negotiation. Since there was little empirical precedent to
measure the degree of pricing preparation prior to negotiation, a multiple-item scale was also developed by the researchers in accord with an operational definition as suggested by Kerlinger and Lee (2000: Chap. 3) and by relying on our fieldwork and on extant research. We used four items ranging from 1-‘strongly disagree to 7- ‘strongly agree to operationalize this scale.
Market turbulences. We adapted and combined an eight-point scale developed and validated by Jaworski and Kohli (1993) and Santos-Vijande and Álvarez-González
(2007). The seven-point, Likert-type scale was anchored with ‘strongly agree’ at the extreme positive end and ‘strongly disagree’ at the opposite end of the scale. These items were then transformed into a high, medium and low categorical variable.
Firm performance. In line with previous research we used subjective assessment
of company performance (Ingenbleek, 2007; Morgan et al., 2009; Simsek, 2007)
following the convention of asking managers to compare their firms’ relative
performance to that of their competitors on eight different dimensions for the past year
(e.g., growth in sales, return on investment, return on sales and so forth) using a scale
ranging from 1 (‘much worse’) to 7 (‘much better’) than competitors. Moreover, since
firms in our sample were from various geographical zones, a multidimensional measure
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based on perceptual firm performance facilitates comparisons across firms and contexts,
such as across industries, time horizons, and economic conditions (Song et al., 2005).
Third, earlier studies have shown that perceptual performance measures tend to be highly
correlated with objective indicators, which supports their validity (Dess & Robinson,
1984).
Control variables. We controlled for a number of likely determinants of
performance by including demographic characteristics of the firm, such as firm main
activity (manufacturing, service, retail), firm size measured as the number of employees
(Amburgey & Rao, 1996) and geographical zone. Respondent’s years of experience and
leadership position were also included as controls in out model. Finally, we selected to
add controls related to price realization (low/medium/high) and market turbulences
(low/medium/high) to complete our investigation.
Non-Response Bias
A commonly used method for estimating the bias in strategy research (Armstrong
& Overton, 1977) is to compare early and late responses among the variables. The test
assumed that late respondents were more similar to non-respondents than to their early counterparts. One way ANOVA tests, performed at the item level indicated no significant differences in data derived from early vs. late responders, except on 4 of the 90 (4.4%) variables. Consequently, it appears that bias present from the time of response is due to chance and thus provided some assurance against non-response bias.
Exploratory Factor Analysis
An exploratory factor analysis (EFA) was conducted on the sample dataset using
principal axis factoring with Promax rotation. For all but eight items, communalities
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exceeded the minimal acceptable threshold of .50 (Hair et al., 2010). Additionally, both
the Kaiser-Meyer-Olkin (KMO) value of .925 and Bartlett’s Test of Sphericity (χ2741df
= 11350.7; p = .000), exceeded the acceptable threshold levels indicating the
appropriateness of the data for factor analysis. The EFA resulted in six factors, consistent
with our conceptual model as displayed in Table 16. Each item significantly loaded on its
respective factor with a value greater than .40 and no cross-loadings of more than .20
(Hair et al., 2010; Igbaria et al., 1995). The total variance explained by these six factors totaled 53%.
TABLE 16: EFA Measurement Model
No. of Cronbach Construct Loadings Items Alpha 0.739;0.625;0.613;0.608;0.664;0.790;0.715;0 Pricing Capabilities 11 0.923 .852;0.557;0.830;0.767 0.660;0.803;0.618;0.776;0.756;0.845;0.607;0 Organizational Confidence 9 0.904 .641;0.625
Relative Performance 7 0.589;0.620;0.566;0.619;0.756;0.970;0.817 0.875
Delegation of Pricing Authority 4 0.745;0.618;0.743;0.863 0.826
Knowledge Before Negotiation 4 0.759;0.672;0.683;0.695 0.839
Incentive & Goal Systems 4 0.556;0.612;0.600;0.556 0.739
The final number of items represented by the six factors, after completion of the
EFA analysis, was 39 items. Those items which were dropped from each construct are
identified in Appendix K. Additionally, the reliability of each of the final six factors was
computed as shown in Table 16 and in all cases exceeds the minimum acceptable
threshold of 0.70 (Nunnally, 1978). Table 17 provides the correlations between the factors. All of the average variance extracted values exceed the square of the correlation between the constructs, thus demonstrating discriminant validity.
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TABLE 17: Correlation of Constructs
Delegation of Knowledge Pricing Organizational Relative Incentive & Pricing Before Constructs Capabilities Confidence Performance Goal Systems Authority Negotiation Pricing Capabilities 0.55 Organizational Confidence 0.606 0.53 Relative Performance 0.470 0.505 0.62 Delegation of Pricing Authority 0.082 0.100 0.000 0.56 Knowledge Before Negotiation 0.541 0.578 0.309 0.072 0.57 Incentive & Goal Systems 0.425 0.412 0.173 0.140 0.388 0.49 Bolded values on the diagonal are the AVE's.
Confirmatory Factor Analysis
We conducted a confirmatory factor analysis (CFA) to validate the factor
structure. The measurement model was constructed incorporating each construct and
associated items. The model was further trimmed (Appendix M) and appropriate
covariance relationships were added when theoretically justified (Byrne, 2009). The overall fit for the model is good, as represented by: CMIN/DF = 1.780, CFI = .965,
RMSEA= .039 (90% confidence interval 0.034-0.044), PCLOSE = 1.00. The composite reliability (CR) for each construct is provided in Table 18. The CR values exceed the acceptable threshold level (> 0.70) and the average variance extracted (AVE) values confirming the reliability of the indicators and demonstrating convergent validity. For discriminate validity we show that for all constructs the maximum shared variance
(MSV) and average shared variance (ASV) are less than the AVE (Fornell & Larcker,
1981).
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TABLE 18: Results of Confirmatory Factor Analysis
Standardized Average Maximum Average Constructs and Corresponding Cronbach Standard Standard Critical Composites Mean Regression Variance Shared Shared Items Alpha Deviation Error Ratio Reliability Weights Extracted Variance Variance Pricing Capabilities (PC) 0.923 0.91 0.55 0.37 0.24 PC3 4.85 1.426 0.718 0.055 14.949 PC6 4.61 1.413 0.704 0.059 14.812 PC7 4.33 1.334 0.801 0.054 17.401 PC8 4.27 1.356 0.772 0.054 16.944 PC9 4.45 1.511 0.755 0.049 20.078 PC10 4.50 1.474 0.694 0.06 14.962 PC11 4.08 1.551 0.750 0.051 20.078 PC12 4.59 1.461 0.730 0.046 20.285
Relative Performance (RP) 0.875 0.86 0.62 0.27 0.14
RP3 5.00 1.233 0.669 0.07 12.279 RP6 4.96 1.282 0.777 0.048 21.419 RP7 4.77 1.195 0.805 0.095 12.279 RP8 4.85 1.263 0.875 0.075 15.376 Organizational Confidence 0.904 0.90 0.53 0.38 0.26 (OC) OC1 5,25 1.338 0.696 0.066 15.945 OC2 4.84 1.388 0.765 0.076 15.746 OC4 4.83 1.372 0.770 0.075 15.841 OC6 5.36 1.422 0.696 0.061 18.242 OC7 5.22 1.148 0.770 0.053 15.746 OC10 5.03 1.427 0.699 0.082 13.779 OC11 5.13 1.439 0.725 0.090 13.071 OC12 4.94 1.336 0.716 0.079 13.760 Delegation of Pricing 0.826 0.83 0.56 0.02 0.01 Authority (DPA) DPA1 2.73 1.746 0.748 0.045 17.335 DPA2 4.10 1.886 0.633 0.05 14.434 DPA3 3.60 1.498 0.710 0.07 16.441 DPA5 3.20 1.900 0.878 0.097 14.434 Knowledge Before 0.839 0.84 0.57 0.38 0.21 Negotiation (NegoPrep) PR10 4.96 1.194 0.740 0.073 14.421 PR11 4.91 1.233 0.684 0.066 14.421 PR12 5.35 1.204 0.767 0.065 16.123 PR13 4.97 1.347 0.815 0.073 16.964 Incentives & Goal Systems 0.739 0.73 0.49 0.25 0.16 (IGS) IGS1 5.21 1.488 0.472 0.063 9.417 IGS6 4.21 1.611 0.738 0.067 9.396 IGS7 4.12 1.623 0.835 0.087 13.141
We tested for metric and configural invariance to identify whether the factor structure is equivalent across different groups. The good model fit demonstrated configural invariance across the three types of pricing orientation. Further analysis of
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metric invariance suggested that group were also invariant. We concluded that groups are equivalent and adequate for further analysis.
Common Method Bias
Surveys from a single set of respondents can introduce common method bias
(CMB) in the data. Consequently, we took several steps to mitigate, detect, and control
for a common method bias. We carefully constructed all survey items, and wherever
possible, used pre-tested, valid, multidimensional constructs (Huber & Power, 1985). We
varied the scale anchors and format in the questionnaire, performed a series of scale-
validation processes before distributions, and invited business professionals to rate the
measures.
Several post hoc tests determined the extent to which common method bias was
present in our data. Using Harman’s single-factor test, all 39 items were entered into an unrotated principal components factor analysis to determine the number of factors necessary to account for the variance in the variables. If a single factor emerged or a single general factor explained more than 50% of the variance between the independent and dependent variables, common method variance may be present (Podsakoff et al.,
2003). Our results indicated the presence of six potential factors (all with eigenvalues greater than one) that explained a total of 53 percent of the variance. The first factor explained 31% percent of the variance. These results provide initial evidence response bias does not appear to exist in the data (Podsakoff & Organ, 1986).
Next, we conducted a CFA-based Harman’s single-factor test in which we hypothesized a single common methods factor as causing all the indicators. The common methods factor extracted 32.9% of the variance. Additionally, an unrelated construct, a
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marker variable, determined ex post to have no signification correlation with other items in the constructs was added to the measurement model (Lindell & Whitney, 2001). Since we did not measure an unrelated construct a priori, we used a modified test in which a weakly related construct scale comprised of four unrelated items rejected during the EFA process (Pavlou & Gefen, 2005). The marker variable extracted 9% of the variance.
We also examined multicollinearity and CMB with linear regression analysis on the study constructs and found low variance inflation factors. Multicollinearity can be ruled out because no two predictor variables correlated more strongly than .70 (Hair et al., 2010). Finally, we examined the correlation matrix and found no highly correlated factors (highest correlation is r = .606), whereas evidence of common method bias should have resulted in extremely high correlations (r > .90). Based on these tests, multicollinearity is not present and common method bias does not appear to pose a problem with our analysis.
Hypotheses Testing and Structural Model
Our next step was to conduct a structural analysis on the hypothesized causal model, using the constructs and items from the CFA analyses. SEM was particularly appropriate because it allows estimation of multiple associations, simultaneously incorporates observed and latent constructs in these associations, and accounts for the biasing effects of random measurement error in the latent constructs (Medsker et al.,
1994).
We used AMOS for two reasons: First AMOS is useful in studying models with latent variables and measurement errors. Second, AMOS is an effective tool for testing complex simultaneous equations. The AMOS model is used to construct the structural
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model and establish its validity. The final trimmed SEM model was developed by reducing insignificant paths, adjusting modification indices and adding covariance paths where there was theoretical justification (see Appendix N). Data supported this model with a good fit as shown in Table 19.
TABLE 19: Final SEM Model Fit Statistics
Model Fit Measures Threshold Structural Model References Chi-Square / Df 5.906/5 p-value <0.05 0.315 Non Significant CMIN/DF <2 1.181 (Tabachnick & Fidell, 2007) PCFI >0.5 0.139 (Hu & Bentler, 1999) CFI >0.95 0.999 (Hu & Bentler, 1999) RMSEA <0.06 0.019 (Hu & Bentler, 1999) Pclose >0.5 0.82 (Jöreskog & Sörbon, 1993)
The adequacy of the psychometric properties in the measurement model enables us to further test our direct effect hypotheses (H1–H9a,b,c) shown in the research model depicted in Figure 31.
Findings
The results of the 11 tested hypotheses are presented in Table 20. Three hypotheses were not supported.
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TABLE 20: Result of Hypothesis Test
Regression Critical Hypothesis Hyp Hypothesized Paths Standardized Estimate Estimates Ratio Supported H1 Pricing Capabilities to Organizational Confidence 0.237 0.304*** 0.033 Yes H2 Delegation of Pricing Authority to Organization Confidence 0.029 0.053* 1.805 Yes H3 Pricing Process Formalization to Organizational Confidence 0.005 0.012(ns) 0.356 No H4 Incentive & Goal Systems to Organizational Confidence 0.136 0.173*** 4.665 Yes H5 Knowledge Before Price Negotiation to Organizational Confidence 0.335 0.345*** 7.255 Yes H6 Pricing Capabilities to Relative Firm Performance 0.318 0.381*** 7.990 Yes H7 Organizational Confidence to Relative Firm Performance 0.446 .415*** 8.607 Yes H8 Incentive & Goal Systems to Relative Firm Performance (+) -0.143 -.169*** -3.840 No Value = 0.265*** Primary Pricing Orientation Moderates Pricing Capabilities to Firm H9a Cost = 0.400*** No Performance Competition = 0.458*** Value = 0.373*** Primary Pricing Orientation Moderates Organizational Confidence to H9b Cost = 0.403*** No Firm Performance Competition = 0.472*** Value = -.142 (ns) Primary Pricing Orientation Moderates Incentive * Goal Systems to Firm H9c Cost = - 0.181** Yes Performance Competition = -0.248***
R Square Relative Firm Performance 0.417 R Square Organizational Confidence 0.583 ***p<0.01; **p<0.05; *p<0.1
Direct Effects on Dependent Variables
First, pricing capabilities had a positive and significant impact on relative firm performance (b = 0.381, p < .01) and on organizational confidence (b = 0.304, p < .01).
Our findings support H1 and H6.
Second, the hypothesized impact delegation of pricing authority (b = 0.053, p <
0.1), incentive and goal systems (b = 0.173, p < .01) and knowledge before price negotiation (b = 0.345, p < .01) on organizational confidence were all significant.
However, pricing process formalization did not have a positive and significant influence on organizational confidence (b = 0.012, p = 0.356). These results provide support for
H2, H4 and H5 but not for H3, respectively.
Third, organizational confidence had a positive and significant influence on relative firm performance (b = 0.415, p < .01) thereby validating H7a.
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Finally, incentive and goal systems was found to be negatively and significantly related to relative firm performance (b = -0.169, p < 0.01). Since we hypothesized a positive relationship between these two variables, H8 was not supported. Overall, all but two of our eight direct-effect hypothesized relationships were supported.
R Square Decomposition
All hypothesized latent variables linked to relative firm performance (H6, H7,
H8) had a significant relationship with it. The decomposition of the relative firm performance R Square, as shown in Table 21, revealed that pricing capabilities explained
43 percent of its variance, while organizational confidence explained 50 percent.
Incentive and goal systems explained only 7% of the total variance.
TABLE 21: R Square Decomposition for the Dependent Variables
Portion of Standardized Independent Variable Dependent Variable Correlations Variance Estimates explained by IV
Pricing Capabilities Relative Performance 0.47 0.381 43% Organizational Confidence Relative Performance 0.505 0.415 50% Incentive & Goal Systems Relative Performance 0.173 -0.169 -7% Controls Relative Performance 14% Total 100% Relative Firm Performance R Square Decomposition 0.417
Portion of Standardized Independent Variable Dependent Variable Correlations Variance Estimates explained by IV
Pricing Capabilities Organizational Confidence 0.606 0.304 32% Delegation of Pricing Authority Organizational Confidence 0.100 0.053 1% Incentive & Goal Systems Organizational Confidence 0.412 0.173 12% Knowledge Before Negotiation Organizational Confidence 0.578 0.335 33% Controls Organizational Confidence 22% Total 100% Organizational Confidence R Square Decomposition 0.583
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Similarly, the decomposition of the R Square for organizational confidence
revealed the strong contribution of pricing capabilities (32%) and knowledge before
negotiation (33%) in explaining its total variance. Finally, incentive and goal systems and
delegation of pricing authority had a lower contribution to the R Square of organizational
confidence with 12% and 1% of explained variance, respectively.
Analysis of Moderation
Our analysis revealed that primary pricing orientation did not moderate the
relationship between pricing capabilities and relative firm performance. This relationship
remained positive and significant when firms adopted value, cost or competition as their
primary pricing orientation of as shown in Table 20. H9a was not supported. Similarly
the relationship between organizational confidence and relative firm performance
remained positive and significant for all three pricing orientations. Thus H9b was also not
supported. However, we did find significant moderation for primary pricing orientation in
the relationship between incentive and goal system and relative firm performance. For
pricing orientation based on competition (b = -0.248, p < 0.01) and cost (b = -0.181, p <
0.05), incentive and goal systems was negatively and significantly related to relative firm
performance. These results were not found for pricing orientation based on customer
value (b = -0.141, p = 0.073). H9c was supported.
Controls
Table 22 shows the relationship of the control variables to the dependent variables.
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TABLE 22: Controls
Standardized Controls Dependent Variables P Value Estimates Nature Relative Firm Performance -0.190 0.574 Nature Organization Confidence 0.033 0.265 Geozone Relative Firm Performance -0.041 0.241 Geozone Organization Confidence -0.039 0.18 Years of Experience Relative Firm Performance 0.020 0.563 Years of Experience Organization Confidence 0.025 0.39 Size Relative Firm Performance -0.002 0.954 Size Organization Confidence -0.031 0.295 Leadership (Y/N) Relative Firm Performance -0.033 0.353 Leadership (Y/N) Organization Confidence -0.230 0.432 Pricing Realization Category Relative Firm Performance -0.017 0.784 Pricing Realization Category Organization Confidence 0.096 0.075* Market Turbulence Category Relative Firm Performance -0.104 0.002*** Market Turbulence Category Organization Confidence -0.034 0.246 ***p<0.01; **p<0.05; *p<0.1
We found that pricing realization category (high versus low) had a significant influence on organizational confidence (b = 0.096, p <0.1) but not on relative firm performance (b = -0.017, p = 0.784). Similarly, market turbulence category (low, medium and high) had a negative and significant influence on relative firm performance (b = -
0.104, p < 0.01) but not on organizational confidence (b = -0.034. p=0.246).
Final Structural Model
The final structural model is provided in Figure 32 along with a representation of the significant paths.
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FIGURE 32: Final Structural Model
Discussion
This study sought to improve our understanding of what drives organizational confidence for pricing and whether firms might design specific organizational elements to affect their pricing confidence and achieve superior relative performance. Our hypotheses were based on the results of an initial qualitative inquiry that developed a framework for firm pricing orientation. The study’s theoretical underpinnings are in the areas of pricing, organizational theory, capabilities and resource-based view of the firm.
Our intention was to construct a strong and unique bridge between the fields of pricing and organizational behavior.
Our results support the proposition that a unique organizational design for the pricing function (emphasizing capabilities, confidence, and knowledge) leads to greater relative firm performance. Our ability to statistically link these organizational
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characteristics to firm performance is an important contribution to knowledge about pricing. Our findings are unique in that prior research had not linked the construct of organizational confidence to pricing and subsequently to firm performance. Our findings also elaborate on the findings of previous studies related to pricing and offer four substantive contributions.
First, our results demonstrate the need for firms to raise the profile of their pricing function and to intentionally adopt pricing strategies that may increase internal organizational efficacy. The role of executives in the corporate suite is essential for the design and sustainable implementation of a pricing orientation. Top executives will need to pay more attention to pricing, to develop a pricing vision, and to create a distinctive organizational architecture for pricing. By investing in the development of pricing capabilities that generate a sustainable and inimitable competitive advantage (Dierickx &
Cool, 1989; Dutta et al., 2003), champions of pricing forge a shared vision, a collective
“can do” mentality and a sense of resilience in the firm that lead to superior levels of organizational efficacy (Bohn, 2001) and superior outcomes. Dutta et al. (2002: 66) posit that “most CEOs will never set a single price. They can, however, give their managers the ability to win price wars, maintain price leadership and hold a competitive edge in pricing.”
Second, our results support a resource-based theory of the firm in that pricing capabilities positively and significantly influence firm performance vis-à-vis competition.
Previous studies on marketing capabilities suggest a positive link between pricing capabilities—a subset of marketing capabilities—and firm performance (Morgan et al.,
2009; Vorhies & Morgan, 2005). However, these studies measured pricing capabilities as
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part of a much wider set of marketing capabilities. In other studies, pricing capabilities
were investigated using case study or qualitative—but not quantitative—research methods. Our inquiry is unique in providing a robust pricing capabilities construct that can be used in future studies, as well as a causal model linking pricing capabilities to relative firm performance.
Third, our findings suggest that firms which design purposeful strategies and programs to boost organizational confidence in their sales and account management teams can achieve significantly greater firm performance. The unique combination of the organizational elements related to pricing explored in our research (capabilities, delegation of pricing authority, incentive and goal systems and knowledge before negotiation) might be able to create a higher level of comfort and confidence in the pricing function and pricing activities for those in sales and account management.
Previous research on pricing has suggested that it is a very complex function (Dolan &
Simon, 1996) that is subject to internal conflicts and tensions (Lancioni et al., 2005).
Establishing a confident climate for sales and account management to deal with this complexity might lead to greater performance outcomes. Therefore we conjecture that the development and the deployment of unique intellectual capital in pricing (Dutta et al.,
2002), also characterized as “brain ware” (Liebowitz, 2000: 1), throughout the
organization, creates superior pricing intelligence that leads to superior firm performance.
Fourth, our study reveals that increasing the level of pricing process formalization
does not increase the confidence of sales and account management professionals who
deal with pricing. We expected that there would be a positive relationship between these
two constructs, and that process formalization would lead to a greater degree of adoption
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by sales and account professionals. That phenomenon was not supported by our research
findings.
In aggregate, our findings show that the five organizational and behavioral
elements we identified as being related to pricing (four antecedents and organizational
confidence) can create a competitive capability which in turn leads to better firm
performance. Our findings suggest that the importance of organizational behaviors in the
marketing and pricing literature has been underestimated and that multi-disciplinary
research may be needed to further investigate the relationships.
Limitations
We explored a topic that has previously received little attention in either
practitioner or scholarly literature. Several potential limitations of our work should be
acknowledged. The performance measures we utilized are perceptual, although using
perceptual or subjective data has been advocated in the strategic management literature
(Dess & Robinson, 1984). Our respondents included a large number of Strategic Account
Management Association member firms but may not necessarily be representative of all
firms conducting account and sales management activities with respect to their management of their pricing process.
Because our survey was self-administered, results may not reflect what respondents actually do when managing the pricing process. Babbie said, “Surveys cannot measure social action: they can only collect self-reports of recalled past action or of prospective or hypothetical action” (2007: 276). In other words, to truly understand how organizational and behavioral dynamics affect pricing process and how pricing
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decisions are made in firms, it might be useful to augment our results with field observations and qualitative inquiry.
Finally, no statistical test can assure a bias-free analysis (Podsakoff et al., 2003).
We made a purposeful effort to minimize common method bias. Still, it would have been preferable to include multiple respondents from each participating company and to have used different objective measures for the dependent variables. Recognizing the difficulties of this, we used an “informed observer” approach to best reflect firm behavior.
Implications for Practice and Future Research
Our findings, which support previous observations that the pricing function is often neglected, under-utilized and under-managed (Cressman, 1999; Hinterhuber,
2008b; Noble & Gruca, 1999a; Shipley & Jobber, 2001), have implications for both pricing practice and future research. Firm managers in charge of pricing activities may find our findings useful with respect to designing and organizing pricing roles and responsibilities, developing specific pricing capabilities with their account and sales management staff, and designing aligned and relevant incentives and goals systems. Most importantly, our results imply CEO’s and top executives should adopt a more mindful approach to pricing by paying more attention to it, allocating more resources for it and leading the organization in the development of a strong vision for the future, a sense of resilience in pricing and generating a strong sense of “yes can do” attitude when it comes to price implementation. The data suggest that organizational confidence positively influence relative firm performance.
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Our findings point to the need for more research on pricing preferences and
practices: today, fewer than 2% of all articles published in major marketing journals
focus on pricing (Malhorta, 1996). The void is especially evident with respect to industrial firms and we recognize, among the myriad of research opportunities, the following: the dimensions of the three pricing orientations (cost, competition and customer value) need to be clearly articulated and empirically validated. Second, although the marketing literature has documented the relationship between market orientation and firm performance, little has been said about the relationship between pricing orientation and firm performance. Finally, the roles and responsibilities of sales and account management teams in the internalization of modern pricing practices in firms begs further inquiry.
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CHAPTER V: INTEGRATED FINDINGS AND DISCUSSION
Integrated Summary of Findings
The findings of my three research studies reveal the transformational nature of the pricing journey, the pivotal role of pricing champions, the significant influence of the firm’s organizational change capacity, the importance of organizational confidence in pricing to fuel the organizational mobilization, as well as the design of a unique organizational architecture to support the transformation. These are the most critical findings of this dissertation, and are further developed below.
Transformational Journey towards Pricing Excellence
My research journey reveals that a deep level of change is required to undergo pricing transformation. Changes start at the very beginning of the transformation process, when leaders and practitioners realize a need to do something different. The evidence shows that the process starts with a stimulus for change (Liozu et al., 2012a), as shown in
Table 23, and can last up to 7 years.
TABLE 23: Stimulus and Duration of Change
VALUE-BASED PRICING ORIENTATION CODE STIMULUS FOR TRANSFORMATIONAL MAIN VALUE-BASED CHANGE JOURNEY PRICING METHODS VB1 • Product Launch Failures 5 Years • Total Cost of Ownership • Issues in Unmet Needs Identification • Economic Value Analysis • Conjoint Analysis VB2 • Technological & Materials Change Ongoing • Value-in-Use Analysis • Acquisition of Method & Skills • Engineering Project ROI through M&A • Total Cost of Ownership VB3 • Lack of Segmentation 4 to 5 Years • Total Cost of Ownership • Price Inconsistency by Trade & • Customer Acceptance Test Segment • Conjoint Analysis • Unstructured Pricing • Economic Value Analysis VB4 • Cost Plus Mentality 7 Years • Conjoint Analysis • Cyclical Approach to Market Factors • Economic Value Analysis • Too Much Focus on Asset Utilization • Value-in-Use Analysis • Sensitivity Analysis Note. M&A = mergers and acquisitions; ROI = return on investment; VB = value-based pricing. 185
Change is a critical dimension in all stages of the pricing transformation journey
towards pricing excellence, as shown in Figure 33. The organization and its actors are
faced with waves of change that will be multi-level and punctuated (Lyytinen &
Newman, 2008). These waves of change are created when new technological components of pricing are introduced in the organization and specific supporting activities are implemented. Pricing practitioners are presented with pilot projects, special programs, and revised roles, responsibilities, and tasks to perform in order to support the pricing transformation. The change process includes phases of discontinuity (Gersick, 1991) followed by phases of stability when organizational actors adopt, absorb, and transform.
The end result is that change in this transformational framework “emerges as a continuous oscillation between periods of incremental adaptation and moments of system upheaval” (Lyytinen & Newman, 2008: 594).
FIGURE 33: Process of Cultural Transformation
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The Pivotal Role of Pricing Champions
My integrated findings also indicate that pricing champions promote the change and transformation agenda by displaying a constellation of behaviors, as shown in Figure
34. Champions of pricing from the executive suite display enthusiasm and drive to support the constant need to adapt and assimilate. Champions break down barriers, remove pockets of resistance, pay close attention to transformational pace, and constantly communicate the vision to reinforce the need for change. My research also suggests that champions of change must possess charisma and the credibility that accompanies organizational status in order to have the required influence. I conjecture that pricing champions must be members of either the top leadership team or the executive suite. This was supported by my qualitative findings. The four firms that adopted value-based pricing have executive champions. In two of these firms, the CEO led the cultural transformation (Liozu et al., 2012a).
FIGURE 34: Constellation of Championing Behaviors
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Championing behaviors are not enough. Champions of pricing transformation
engage in specific activities to support the transformational agenda. The literature search
and qualitative findings suggest a significant difference between being involved in
pricing and championing the pricing process, as shown in Figure 35. These specific
activities positively influence the adoption and assimilation of pricing resources and
programs being implemented. Perhaps the most significant activity is sponsoring the pricing council and participating in all council meetings.
FIGURE 35: Contract between Involvement in Pricing vs. Championing of Pricing
Championing the pricing transformation is a purposeful and proactive approach aimed at showing commitment and dedication to the pricing change agenda. By contrast, becoming involved in pricing itself is more reactive, more focused on problem solving, and less inspirational.
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Organizational Confidence in Pricing
Perhaps one of the most powerful organizational factors to support the overall pricing transformational journey is organizational confidence in pricing. The concept of organizational confidence was significant across all studies presented in this dissertation.
The research shows that confidence in pricing at the organization level fuels the transformation. I often refer to it as “drinking the Kool-aid” to generate excitement and emotional connections between organizational actors. The findings reveal the positive influence of organizational confidence on the development of pricing capabilities and on relative firm performance. They also highlight six critical dimensions of organizational confidence in pricing supported by the research evidence and previous limited literature on the subject (Bohn, 2001, 2002, 2010), as shown in Figure 36.
FIGURE 36: Dimensions of Organizational Confidence in Pricing
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The combination of these six dimensions of organizational confidence in pricing
has a primary objective of creating a common shared vision and generating a common
belief system that is adopted by organizational actors to join the transformational
program and participate fully in pricing activities and programs.
Beliefs are important in developing the sense of collective power (Bohn, 2001).
Beliefs influence the individual member’s willingness to invest money, reputation, and
emotional energy to shape the ability to perform (Kanter, 2006: 7) and to transform.
Figure 37 depicts a shared belief network that needs to be built in specific training programs. Respondents in firms using advanced pricing practices purposefully integrated these dimensions in their training initiatives to boost confidence levels.
FIGURE 37: Developing a Strong Belief System
Organizational Change Capacity
This dissertation also reveals that firms engaged in the design and deployment of
modern pricing technologies require a superior organizational capacity for change.
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Moilanen (2005: 71) defined an organization with change capacity as “a consciously
managed organization with ‘learning’ as a vital component in its values, visions and
goals, as well as its everyday operations and assessment.” I conjecture that it is the combination of organizational learning and the development of managerial capabilities that allows firms to adapt more quickly and effectively than competitors to changing situations. The implementation and internalization of modern and advanced pricing technical resources require a strong, firm-wide knowledge foundation in pricing. Prior knowledge confers “an ability to recognize the value of new information, assimilate it, and apply it to commercial ends” (Cohen & Levinthal, 1990: 128). Changes in pricing knowledge and capabilities are incrementally developed over time (Dutta et al., 2003), and depend on organizational absorptive capacities (Cohen & Levinthal, 1990; Szulanski,
1996; Zahara & George, 2002) of pricing process actors. Therefore, the more a firm can accept, adapt, and absorb changes in internal pricing systems, the greater its confidence and the greater its relative performance versus competition.
Unique Organizational Design for Pricing Excellence
The integrated findings strongly suggest that the role of executives in the corporate suite is essential for the design and sustainable implementation of pricing technologies and resources in firms. A unique organizational architecture for pricing and the promotion of a culture of change and pricing knowledge diffusion should become a top priority for CEOs and other senior executives. The research identified that a center- led design for pricing management contributes positively to the development of technical pricing capabilities. Center-led pricing management is a hybrid organizational
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architecture that combines the strength of a centralized and a decentralized structure, as shown in Figure 38.
The centralization of pricing expertise and knowledge allows pricing and business professionals in decentralized structures to make better pricing decisions, to better implement technical pricing resources (systems, models, and tools), and to manage their tactical pricing operations. In this hybrid model, compliance is gained through communication, coordination, conversation, and consensus. Firms that adopted center-led teams often called them pricing excellence teams, marketing excellence teams, or simply internal consulting teams. The roles and activities of specialized experts, as shown in
Figure 39, can strongly and positively impact the adoption of the change agenda as long as pricing champions design and communicate a corporate pricing vision that both centralized and decentralized teams can adhere to.
FIGURE 38: Center-Led Management Design for Pricing
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FIGURE 39: Activities of Center-Led Pricing Teams
Integrating the Findings
The integration of all major findings allows me to develop a concept called the “5
C” model of pricing transformation. Along with technical capabilities, the organizational
factors champions, change, confidence, and center-led management design for pricing are
necessary for a successful organizational transformation towards pricing excellence. All
five factors emerged during the qualitative inquiry as strong contributors to the adoption and internalization of a modern pricing approach. They were then tested in a follow-up quantitative study, which provided a snapshot in time that the unique design of these five
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organizational factors significantly and positively influences firm performance, including
pricing performance.
Development of an Integrated Model
I propose a model for the adoption and internalization of pricing over time. This
model depicts the interconnection between technical pricing capabilities and
organizational capabilities at every stage of the pricing transformation. Based on my
research findings and my practical experience in conducting such a pricing
transformation, in the next section I discuss five stages of transformation towards pricing
excellence.
Stages of Transformation
There are five distinct stages of transformation (see Figure 40). During each stage,
technical pricing resources are deployed and necessary pricing activities are
implemented. Stage 1 is a stage of realization and exploration during which a firm’s
managers understand the nature of their problems and engage in search (Cyert & March,
1992) and mindful scanning behaviors (Fiol & O’Connor, 2003) to explore potential
solutions.
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FIGURE 40: Stages of the Transformation Process
From Stage 1 on, and assuming they have found potential solutions, firms proceed to stage 2 to build a knowledge foundation in pricing to prepare the future. At this stage, technical pricing activities might include conducting training on basic technical concepts.
This stage is critical for initial cultural appropriation of future pricing resources (Geels,
2004). Stage 3 is the phase of experimentation during which pilot projects are conducted.
Firms stay in experimentation mode until success is demonstrated across several pilot projects. Stage 4 is a step of increased adoption once technical pricing capabilities prove successful in delivering the intended outcome. Finally, Stage 5 is an acceleration of the transformation process with the deployment of pricing resources at the enterprise level.
At this stage of the transformation, pricing has become embedded in the fabric of the firm. The journey through the stages is different for each firm. Firms will adopt various pricing resources at different stages, and each stage may be longer or shorter depending 195
on the organization’s capacity to change and learn. There is no copy-and-paste template for this process. Each firm will have to design a specific roadmap in order to undertake this journey and reach the desired level of performance.
Constant Interaction between Technical and Social Dimensions
As technical pricing resources are deployed in the organization, constant interactions occur between the technical and social dimensions of change. Organizational change is a learning process that requires the development of a learning community inside the firm (Pasmore, 1995) and among users of technology. Because deployed pricing resources become increasingly technical and complex at each stage, the intensity of learning must remain high level at each stage. Two organizational capabilities associated with pricing—organizational confidence and organizational change capacity— will also grow in intensity from stage to stage, as depicted in Figure 41. The increase in intensity is correlated with the increase in organizational scope of the programs as well as the increased level of complexity. The third organizational capability, related to championing behaviors, remains constant throughout the journey to provide sustained support and drive to the overall implementation.
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FIGURE 41: Towards a Model of Pricing as a Socio-Technological Innovation
Dynamic Learning Environment
A critical element of this model is the feedback loop between the various stages indicating a need to experiment with pricing concepts and resources. Experimentation may lead to increased success and therefore increased adoption. But it may also lead to failures and a need to modify the roadmap for this difficult transformation. Pilot studies and projects happening in Stage 3 of the transformation are therefore critical to ensure that pricing technologies are deployed successfully and supported by the appropriate capabilities. Feedback loops are important to ensuring that the pace of change is controlled and that firms move from stage to stage when ready. Pacing changes and ensuring high levels of absorptive capacity (Cohen & Levinthal, 1990) are part of the 197
required behavioral repertoire leaders must adopt to promote knowledge assimilation and
cultural appropriation (Geels, 2004).
Role of Champions
Again, top executives play an essential role in the purposeful design of this
pricing transformational roadmap in the organization, in setting the cultural change
agenda, and in controlling the pace of change. Based on this roadmap, they have to pay
close attention to the constellation of organizational dimensions that positively influence
organization intelligence in pricing. The unique design and assembly of various pricing
sub-systems (strategy, culture, structure) (Halal, 1999: 69) generate superior problem- solving capacity and increase the overall adoption rate of pricing technologies at each stage of the process. In this model, each organizational sub-system contributes to organizational intelligence by developing, adopting, and linking procedures, patterns, and know-how in pricing that “allow the organization to do well in the face of constraints imposed by such things as scarce resources and competition” (March, 1999: 1).
Therefore, I conjecture that the development and deployment of unique intellectual
capital in pricing (Dutta et al., 2002), also characterized as “brain ware” (Liebowitz,
2000: 1), throughout the organization create superior pricing intelligence that leads to
superior firm performance.
Discussion
My dissertation data contradict the widely held assumption (Cressman, 2010;
Hinterhuber, 2008a; Ingenbleek, 2007) that pricing can simply be “adopted.” Rather, they
strongly suggest that implementation and internalization of technical pricing resources
and activities requires deep organizational changes that transform the fabric of the firm.
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Therefore, I argue that pricing should be considered a socio-technical innovation and not just a function or a methodology. I begin by discussing pricing as a socio-technical innovation, then I examine the multi-level perspective of pricing that it suggests. Next, I discuss the pricing transformation from a learning theory perspective. Finally, in the overall context of my dissertation, I propose the pricing skills of the future that will be required to expand a pricing orientation across a growing number of firms.
Pricing as a Socio-Technical Innovation
The findings strongly suggest that pricing is an organizational innovation comprising a combination of technical and social components. For example, the methods and tools required to implement value-based pricing are advanced ones requiring strong capabilities and an organizational capacity for change. Other pricing resources are equally complex: pricing systems, pricing models, and so forth. I conjecture, therefore, that modern pricing, as a socio-technical innovation at the organizational level, cannot simply be adopted but needs to be internalized and embedded in the fabric of the firm
(Liozu & Hinterhuber, 2012). It must become a way of life (Forbis & Mehta, 1981), be slowly and purposefully integrated into the firm’s DNA.
Considering pricing as a socio-technical innovation is in itself an innovation.
Pricing has traditionally been viewed as a clerical, administrative, or accounting function.
Lately, pricing has moved into the marketing and strategic spheres. Yet, too often, pricing is a neglected function that is mostly considered in terms of the tactical dimension, is buried in the marketing mix, and rarely reaches the C-suite (Liozu & Hinterhuber, 2011).
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Multi-level Perspective of Pricing
As a technological innovation, I propose a multi-level perspective of pricing that sheds light on the complexity of such a transformation. Figure 42 portrays the three levels
of analysis that are critical to the assimilation of pricing as an innovation.
FIGURE 42: Multi-Level Perspective on Pricing Technological Innovation
At each level (practitioner, organization, and environment) are factors that may
impede or support the adoption and assimilation of pricing as a technological innovation.
These behavioral and environmental forces reinforce the need to adopt a socio-technical
perspective in the implementation of all necessary pricing resources and in the design of
all pricing activities. The dynamic interactions between these three levels suggest a
dimension of system innovation requiring close attention to tensions and mismatches
being created by change (Geels, 2004). Multi-leveled-ness in pricing innovation cannot
be ignored and needs to be included in the overall design of the pricing transformation.
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Multi-leveled-ness in pricing management highlights how complex pricing and value
management can be.
Pricing and Mindful Learning
A key characteristic of transforming organizations is their ability to learn (Weick
& Sutcliffe, 2007) and to continuously aim to learn from their success and failures. The transformational nature of pricing requires that the organization learn through a process of experiential learning (Kolb, 1984; Kolb et al., 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 what does not, and provides a valid way for managers to interpret past experiences (Green & Taber,
1978). Consistent with experiential learning theory (Kolb, 1984), the learning process related to the integration of pricing resources and the deployment of pricing activities requires both assimilation and accommodation learning styles. The organization and its members incrementally assimilate knowledge that will “stick” (Szulanski, 1996) to existing pricing knowledge. However, because of the innovative, complex, and sometimes contentious nature of pricing, organizational actors will modify their frames of reference, learning patterns, or schemas (Stein, 1995) to accommodate the integration of unexpected and novel knowledge.
Mezirow (1997) refers to transformative learning as the process of effecting changes in a frame of reference or in the structures of assumptions through which we understand our experiences. Our findings suggest that in many firms, frames of reference
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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 transforming these
frames of reference, routines, norms, and schemas to make them more inclusive, open,
and “emotionally capable of change” (Mezirow, 2000). This process of transformation is
equivalent to a reformulation of the structure of meanings (Mezirow, 2000) that requires
critical reflection and a higher level of mindfulness (Langer, 1997). Mezirow has
identified ten phases of transformation (Mezirow & Welton, 1995: 50) that parallel key
factors revealed in our data as critical in VBP internalization—experimenting with new
roles, acquiring skills and knowledge, and building confidence in new roles and relationships. Mezirow’s conception of transformative learning touches on two critical elements of a successful transformation to pricing as a technological innovation: 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 raison d’être (Slater, 1997).
Pricing Skills of the Future
The socio-technical perspective of pricing as an innovation technology uncovered the changing requirements for pricing skills that are happening due to increased complexity in the business world but also due to the constant emergence of new pricing technologies. Technology evolves rapidly, and the field of pricing is not immune to this phenomenon. Pricing practitioners may not realize it yet, but future technologies will perform most of the analytical and predictive activities, as shown in Figure 43. As
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machines and software handle more and more of the technical aspects of pricing, pricing
practitioners will have to embrace the social and organizational dimensions of pricing.
FIGURE 43: Pricing Skills of Today and Tomorrow
The skill balance, therefore, is moving toward the more social, behavioral, and emotional dimensions. Pricing practitioners, in firms desiring to acquire more technologies and to embark on this technological transformation, must become change agents, as shown in Figure 44.
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FIGURE 44: A Balance of Skills
This is a reality. Software companies in the pricing sphere are currently developing state-of-the-art technologies to automate most of the basic and advanced pricing analytics. The role of pricing professional is rapidly evolving, and its nature is changing dramatically as well.
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CHAPTER VI: CONCLUSION
Limitations of Research
This dissertation presents a number of common limitations. The specific limitations of each of the individual studies are presented as part of the individual chapters and therefore are not repeated here. There are a number of broad limitations that
might be relevant across all three studies. These limitations are presented in the next four subsections under the categories: research design, survey biases, situational biases, and researcher’s biases.
Research Design
The overall research design for this work involved the combination of process and variance models (Hair et al., 2010; Van de Ven, 2007). The qualitative study uncovered a transformational journey potentially lasting several years, thus requiring the design of a longitudinal study in order to validate the findings quantitatively. Due to time constraints,
I elected to test the qualitative conceptual model as a snapshot in time. The integration and interpretation of findings should account for this unique hybrid research design and its inherent limitations.
Other limitations to this work emerged from the selection of a sequential exploratory mixed method research design. First, while this design is highly straightforward, it also presents some weaknesses (Creswell et al., 2003). One of the most relevant of these is related to the time dependencies between the sequential implementation of the two studies, potentially introducing contextual bias. One might wonder whether the selection of another mixed method design would yield significantly different results, especially related to the quantitative validation of the qualitative 205
findings. This limitation is further highlighted by the use of both process and variance models in the overall research design. Second, the process of triangulation of the qualitative and quantitative data presents some shortcomings (Jick, 1979). While the mixed method design gives equal balance to the qualitative and quantitative strands of the research, my subsequent work is mostly based on the initial conceptual model uncovered during the qualitative process. This relative dominance begs the question of the replicability of the qualitative findings on which further quantitative work is based. It is clear that the findings of both qualitative and quantitative studies strongly converged, indicating that the triangulation strategy yielded positive results. However, this issue of replication and possible design limitations of the qualitative work needs to be kept in mind.
Survey Biases
The quantitative surveys might suffer from several forms of bias related to data collection, sampling design and scale construction, and data analysis.
First, the performance measures I used are perceptual, although use of perceptual or subjective data has been advocated in the strategic management literature (Dess &
Robinson, 1984). The respondents included a large number of Professional Pricing
Society member firms as well as member firms from the Strategic Account Management
Association, but may not necessarily be representative of all firms conducting pricing activities, managing the pricing process, or engaging in pricing activities.
Second, because the surveys were self-administered, results may not reflect what respondents actually do when managing the pricing process. As Babbie said, “Surveys
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cannot measure social action: they can only collect self-reports of recalled past action or of prospective or hypothetical action” (2007: 276).
Third, no statistical test can ensure a bias-free analysis (Podsakoff et al., 2003). I made a purposeful effort to minimize common method bias. Still, it would have been preferable to include multiple respondents from each participating company and to have used different objective measures for the dependent variables. Recognizing the difficulties of this, I used an “informed observer” approach to best reflect firm behavior.
Situational Biases
I started this dissertation work in the middle of the worst economic recession in the history of global economics. Recessionary dynamics might have a severe influence on how companies operate, how they manage their resources, and how they invest in capabilities. Managers in firms have experienced greater pressure and stress levels that have increased the level of uncertainty in the future of their businesses as well as their personal careers. Despite my efforts to reduce the impact of situational biases, I might never fully know the impact of these environmental pressures on respondents’ behaviors.
In addition, these pressures might help explain our average response-rate levels for both quantitative studies as well as the high rate of partially completed surveys.
These studies were conducted at a point in time. They were not designed to be longitudinal studies that might dynamically measure the progression of our relationship over time. As a result, the findings represent only a snapshot of the pricing and organizational capabilities in firms and their impact on relative firm performance. A longitudinal approach might have uncovered other research findings and might have helped explain the influence of environmental context and market situation on the
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adoption of pricing as a technological innovation. They also might have helped me
understand the stages of integration of pricing resources and the importance of social
influences in their internalization in the fabric of the firm.
Researcher’s Biases
Although special attention was paid to the potential risks of researcher bias, it is
important to mention that the principal researcher has significant experience in and
knowledge about pricing, in particular, value-based pricing. However, during the
qualitative phase of the inquiry, 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. Generally speaking, and in order
to conduct an objective analysis of the multiple data sets, the role of the dissertation
committee proved valuable to obtaining objective and independent reviews and critiques.
Their insights, thoughts, and suggestions provide overall validation of the findings and
strongly improve the objectivity of the overall conclusions.
Summary of Main Contributions to Theory
Despite the above limitations, this dissertation offers several contributions to
theory. I present these contributions below.
Validation of the Importance and Power of Socio-technical Concepts
The overall research work reinforced the powerful contributions that socio-
technical approaches can make to the adoption and assimilation of technological innovation. In the 1970s and 1980s, socio-technical approaches had gained in popularity and visibility around the world (Mumford, 2006). Projects were spreading from
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manufacturing to service industries on the base of a new social and ethical movement. At
the end of the 1980s and 1990s, socio-technical concepts had lost their appeal as a result
of the emergence of stronger capitalistic forces that pushed socio-technical theory to a pure academic research agenda sprinkled with a few case studies. Today, with the emergence of revived ethical and social considerations, socio-technical theory can draw new breath. My work clearly shows that socio-technical concepts are rooted in real life, with practical activities and resources that leaders can use to change the world and humanize the working environment. It also shows that practitioner scholars are in the best position to study socio-technical phenomena by conducting action research rooted in practice and guided by a strong problem of practice. As businesses embrace the sustainability agenda and adopt a more mindful position vis-à-vis the planet and the human species, values of socio-technical theories can also be adequately adopted to
“humanize the potential impact of technology in the world where consistent organizational and economic change are the norm” (Mumford, 2006: 317).
Pricing from a Socio-technical Perspective
I have been able to borrow some of the most relevant concepts related to socio- technical systems, socio-technical change, and socio-technical design and uniquely apply them to the field of pricing. My exploration reveals that the values and concepts of socio- technical systems can have a powerful impact on firm performance. Many firms fail in their pricing transformational journey because they focus solely on the technical dimension of pricing. My dissertation suggests that the social and organizational dimensions of pricing transformation are equally important. Most practitioners complain about the complexity of the pricing function (Dolan & Simon, 1996; Lancioni et al.,
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2005). This complexity does not arise from the technological side of pricing. It emerges from breakdowns in change management (Lyytinen & Newman, 2008), from the
difficulty of interactions between departments and teams (Lancioni et al., 2005), from the
lack of support from top management (Hinterhuber, 2008a), and from a lack of
confidence to capture value through pricing (Anderson et al., 2007). The main values of
change, confidence, mindful championing, and human developments in the field of
pricing fit well in the socio-technical framework.
Advancement of Pricing Capabilities Theory
The most significant contribution to be expected from this work is the
advancement of the theory of pricing capability as it relates to increased relative firm
performance. I first established a strong empirical and statistical link between pricing
capabilities and firm performance. Second, I developed a quantitative pricing-capability
measurement scale to be used by future researchers. The third major contribution is the
demonstration that firms wishing to build organizational and strategic capabilities should
focus attention and resources on both tangible and intangible capabilities. They should
pay equal attention to the organization design for superior capabilities that might lead to
superior organizational intelligence and greater organizational capital in pricing (Dutta et
al., 2002).
Organizational Confidence Construct Operationalization
To the best of my knowledge, the construct of organizational confidence
developed by James Bohn (2001) was never operationalized and applied to the field of
practice. Another major contribution of my work is the uncovering of the critical role of
organizational confidence in pricing as a key driver of a pricing transformation in firms
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and as a key positive contributor to relative firm performance. Using grounded theory, I
was able to uncover the criticality of organizational confidence in pricing in firms that
adopted value-based pricing. I then operationalized the construct of organizational
confidence in pricing in two quantitative studies. In both qualitative and quantitative
studies, organizational confidence played a significant role in boosting team confidence
and firm performance.
New Measure Development
This dissertation has also contributed to pricing theory by thoroughly developing
two new measurement scales: pricing capabilities, shown in Figure 45; and pricing
center-led management, shown in Figure 46. I developed both scales following
established item-development procedures and guidelines (Churchill, 1979; Spector,
1992). These guidelines involved construct definitions, interpretation and item generation based on the literature, item refinement using think-aloud exercises proposed by Bolton
(1993) and pre-tests, and scale and psychometric analysis based on a large-scale pilot test.
FIGURE 45: A Pricing Capabilities Scale
Final List of Items
Using pricing skills and systems to respond quickly to market changes Knowledge of competitors’ pricing tactics Doing an effective job of pricing products/services Monitoring competitors prices and price changes Quantifying customers’ willingness to pay Measuring and quantifying differential economic value versus competition Measuring and estimating price elasticity for products/services Designing proprietary tools to support pricing decisions Conducting value-in-use analysis or Total Cost of Ownership Designing and conducting specific pricing training programs Developing proprietary internal price management process 211
FIGURE 46: A Center-Led Pricing Management Scale
Final List of Items Manages specific pricing projects or programs to support divisional marketing programs
Assists in the design and/or implementation of pricing tools
Conducts pricing research activities to support pricing decision making process Assists decision makers with price setting process as part of the formal product development process Provides knowledge with overall pricing process (for example, pricing increases, pricing reviews)
Both measurement scales can now be used by future researchers in pricing. They can also be considerably improved to include additional dimensions and items.
Contribution to Other Research Domains
My findings may provide theoretical and practical support to research in domains that require transformational and socio-technical change management. As companies implement difficult change programs or intend to internalize forward-thinking approaches and technologies, they may require technical and social capability–building programs as well as unique organizational designs to accomplish their goals. Other research has touched on the concept of technology adoption but has never adopted a socio-technical approach to the phenomenon. Wouters, Anderson and Wynstra (2005) explored the adoption of the total-cost-of-ownership (TCO) approach in firms. Their conclusions showed a combination of technical and organizational elements that supported or impeded TCO adoption. I propose that the socio-technical approach may be applied to other emerging technologies such as radical innovation and R&D systems, advanced talent development methodologies combined with technology, cloud-based environments and technologies, or any other forward-thinking methodologies or
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technologies significantly ahead of traditional approaches. I also conjecture that our
socio-technical capability framework, including both tangible and intangible resources
and capabilities, can be associated with the emerging field of big-data analytics. In a recent book on analytics, Davenport, Harris and Morison (2010: 17) made the following statement: “What makes analytical organizations so interesting is the combination of human and computational perspectives. Analytical decision making is at the intersection of individual and organizational capabilities.” These authors also propose a framework to embed analytics into the core processes and systems of the organization. They recognize the difficulty of embedding such capabilities in the fabric of the firm and propose a transitional model called DELTA (data, enterprise, leadership, targets, and analysis) to bring the organization from no analytics to a best-in-class analytics. Their approach embraced some of the concepts and components I uncovered here, particularly those related to leadership support and capabilities development. They fall short, however, of deeply exploring other potential organizational capabilities potentially related to change and confidence, for example.
Implications for Practice
This dissertation suggests several implications for practice that may be highly relevant for two key audiences—top executives and pricing practitioners—but that may also resonate with the pricing profession as a whole.
Top Executives in Firms
The results imply that CEOs and top executives should adopt a more mindful approach to pricing by paying greater attention to it (Hinterhuber & Liozu, 2012; Liozu et al., 2012a), allocating more resources to it, and leading the organization in the
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development of robust technical and social pricing capabilities (Dutta et al., 2003). Top executives will benefit from this work by considering pricing as a technological innovation and not just as another technological component of the IT function or the marketing construct. By adopting my transformational model and implementing the specific activities I have recommended, leaders might increase the chance of designing a powerful transformation roadmap and the probability of reaching pricing excellence at some point. My findings suggest that the rewards are worth the efforts and investments.
The process of transformation is long, tenuous, and full of potential obstacles along the way (Anderson et al., 2007; Liozu et al., 2011). Once committed to the transformation journey, top executives must show consistency in the strategy, in the allocation of resources, and in the charismatic championing of the transformation.
Pricing Practitioners
The contributions of this dissertation lend insights to practitioners as well. By developing conceptions of technical and social pricing capabilities, I hope that pricing practitioners might realize the complex nature of technical and social pricing capabilities.
This realization then may lead to a desire to further explore both dimensions of these capabilities and request additional training focused on social and organizational elements of change. I also hope that pricing leaders in charge of pricing resources, programs, and activities will find my results useful with respect to designing and organizing pricing roles and responsibilities, and to reinforcing their firm’s pricing sophistication by adopting modern pricing methods and organizational design.
My intention was to promote a socio-technical agenda to pricing as a technological innovation. By doing so, I aimed to increase the attention paid to novel
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work designs, to flexible design approaches, and to how teams might interact within the
firm. It is imperative that pricing leaders in charge of designing the overall pricing
transformation roadmap do so by working closely with the information technology team,
the human resources team, the commercial team, and the innovation and R&D team. As
demonstrated in my work, pricing transformation requires an organizational mobilization.
All parties involved in the transformation need to participate in the design of this
roadmap so that, when it is presented to senior executives and potential sponsors, strong
messages of alignment, team commitment, mindful change management approach, and
shared vision are easily communicated.
Finally, previous papers have shown the difficulties in selling pricing investments
to the executive suite (Liozu, 2012). One of these difficulties is the definition of a project
scope that accurately reflects all behavioral and organizational components of the
journey. I hope my work will help pricing roadmap designers take into consideration all
the technical and social resources and activities needed to undertake all steps of the
journey.
Pricing Profession
My reflections also led to the identification of five elements critical to the future
of the pricing profession. The list of elements is non-exhaustive but, based on my exploration, I can make strong predictions about what is needed for the future of the
profession.
Greater use of technology. As with other professions, pricing is benefiting from great advances in technology. From powerful computers to the more advanced versions of analytical software, the pricing function has gained in analytical skills, speed of
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execution, and quality of team interactions. Pricing decisions are taken with more
scientific support, more team interactions via video conference or other collaboration
tools, and a greater ability to be tested in the field with customers. Feedback and data can
be received in real time via ERP or CRM platforms. In short, it is just the beginning. The
technological developments we have witnessed in the last few years can only offer
immense possibilities for pricing experts. Working closely with IT departments, pricing
professionals can have access to the best communication and analytical tools to make the
best pricing decisions.
The increasing importance of pricing software. Over the past ten years, we have witnessed the emergence of robust and modern pricing software that allows firms to systematize and optimize their pricing activities. These software platforms have made great inroads with Fortune 500 companies and are very relevant in the pricing sphere.
The next generation of pricing software is being created as I write this. The cloud computing environment offers many opportunities for smaller firms to benefit from pricing software at a fraction of the cost, without a long and difficult implementation process. Companies will be able to rely on proven, systematic, and robust platforms instead of Excel-based, internally designed static tools and methods. The increased adoption of software also benefits the pricing profession, as skills and competencies can be transferred from firm to firm, creating opportunities for advancement.
More coordination and professionalization of the pricing function. The
transformation of the pricing profession in firms requires the combined positive impact of
the five elements, shown in Figure 47 (Liozu & Hinterhuber, 2011).
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FIGURE 47: Framework for Transformation
More academic research. Generally speaking, there is a need for more robust and systematic academic research in the areas of value and pricing management to support the proliferation of new pricing knowledge in the marketing construct. Recent academic research undertaken at Pennsylvania State University’s Institute for the Study of Business Markets and at Georgia State University’s Center for Business and Industrial
Marketing (Ulaga, 2001) is critical for the pricing profession to create knowledge, to bring documented and tested evidence of its positive impact on firm performance, and to educate practitioners.
Systematic academic curriculum. Tomorrow’s marketing leaders should be equipped with the most relevant and rigorous academic knowledge on pricing. Pricing
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should become an integral and systematic part of the marketing curriculum: currently,
only about 9% of business schools offer a course that has a significant emphasis on
pricing (McCaskey & Brady, 2007).
Greater levels of innovation in pricing. Pricing is evolving in certain areas such
as revenue management, yield management, and mostly in the service, e-commerce, and software sectors. We need to see more innovation, experimentation, and new training methodologies in business-to-business (B2B) pricing. Experimentation is an important
requirement for the internalization of new pricing concepts, strategies, language, and
overall theories. B2B pricing may be more static. By creating more excitement in the
pricing field, we can attract the best minds and researchers in the field.
Collaboration among academia and practice. The profession requires a
coordinated and collaborative profession-wide transformation process that involves
academia, practitioners, consultants, and professional associations such as the
Professional Pricing Society. This dialogue and collaboration among these parties leads
to the definition of a research agenda and common goals for the profession.
Professionalizing the pricing function. Joe Podolny, a former dean of the Yale
School of Management, states: “An occupation earns the right to be a profession only
when some ideals, such as being an impartial counsel, doing no harm, or serving the
greater good, are infused into the conduct of people in that occupation” (Podolny, 2009:
64). The professionalization of the pricing function requires the establishment of a code
of ethics for the pricing community, the development of social and technical capability
matrices and of formal entry requirements for pricing professionals, pricing governance
mechanisms and dedicated career paths for pricing professionals in companies, and
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emphasis on continuous formal learning. Some of these activities are already underway;
much, I feel, remains to be done for pricing to become a true profession.
Pricing in the executive suite. The next frontier for the pricing profession also
involves the elevation of executive suite positions such as chief pricing officer and chief
value officer representing the pricing and value management functions. We have a long
way to go. First of all, in most companies, the pricing and value management function
receives limited attention. Data from the Professional Pricing Society, the world’s largest organization dedicated to pricing, reveal that fewer than 5% of Fortune 500 companies have a full-time function exclusively dedicated to pricing (Mitchell, 2011).
The skills of the future. Last but not least, I project that the pricing skills of the future will evolve. With the advent of pricing software and greater access to technology, pricing professionals will have to show a combination of hard and soft skills. Pricers will be required to gain organizational and behavioral skills in order to accompany firms through their transformational activities. Soft skills such as change management, emotional intelligence, and communication intelligence will be increasingly needed.
How, then, do we equip pricing professionals with these skills? Firms will have to create more balanced profiles to be able to speak with computers and software for data analysis but also to lead humans on tough and sometimes tenuous transformational journeys.
Future Research Agenda
This dissertation suggests multiple directions for additional research in the areas
of pricing, pricing capabilities, and organizational capabilities related to the assimilation
of technological innovation. First, the two quantitative studies used a pricing capabilities
construct composed of 12 items. The development of a more robust and comprehensive
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pricing-capabilities measurement scale might be needed in order to include both technical
and social dimensions of pricing as well as multiple dimensions of the pricing function. A
dedicated inquiry for the sole purpose of developing this scale might benefit the theory of
pricing capabilities. Second, my 5-C model of pricing transformation joining both pricing capabilities and other organizational capabilities (champions, confidence, change, center-
led management) needs further exploration. I have provided additional insights into the
antecedents and consequences of organizational confidence in pricing. A similar
quantitative approach might be needed for the role of champions and for the construct of
organizational change capacity. Additional exploratory studies on this construct might
strongly enrich and reinforce my overall argument. Thus, additional organizational
capabilities might influence the adoption and assimilation of technical pricing resources
and their related pricing activities and programs. My research approach favored a
parsimonious model and may have missed some important organizational dimensions
such as organizational agility, organizational culture, organizational learning, and
organizational mindfulness. All these examples might become relevant at some point to
explain some of the characteristics of an organizational transformation. The quantitative
models were informed by my qualitative findings. These findings were based on seven
major relevant themes using 781 codable moments (Boyatzis, 1998) that helped me
conceptualize the story of pricing transformation (Liozu et al., 2011). The qualitative
data, however, provided additional codable moments, categories, and themes that I
purposefully decided not to exploit. Further exploration of these quantitative might
provide useful support for my overall argument.
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Closing Thoughts
I hope that my research work and this dissertation will trigger further interest in
the field of pricing and in the development of novel concepts and theories. I hope to
inspire other scholars and future researchers to bring another brick to the wall of pricing
knowledge. The wall is being built, slowly but steadily. Much more exploration is
required. This overall research inquiry was solidly anchored by a real problem of practice
that remains relevant to this day: why is pricing such a neglected field and function when
it can have such a powerful impact on the bottom line? This problem of practice remains
the flame of inspiration lighting the fire within to uncover answers and explanations. I
discovered that pricing is a complex topic and one that generates many emotions and much tension in firms. I also discovered that managers severely underestimated the complexity of assimilating and internalizing pricing practices and approaches once they decided to do something about it. The research journey reinforced my desire to continue the exploration to ensure that pricing takes its well-deserved place at both the marketing and management tables of discussion. My dissertation is the result of four years of intense research work. But the journey continues, and the mission remains the same: to shed light on the power of pricing as a technological innovation.
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APPENDIX A: Detailed Sample Information
Criteria Characteristics Firms Firm Size Small 8 Medium 7 Industry Building Products 4 Transportation Products 5 Resins and Plastics Products 6 Pricing Orientation Cost-based Pricing 6 Competition-based Pricing 5 Value-based Pricing 4 Total Firms 15 Criteria Characteristics Respondents Functions Executive Leadership 15 Sales and Marketing 18 Finance and Accounting 11 Nature Face-to-face Interviews 37 Phone Interviews 7 Total Interviews 44 Pennsylvania, North Carolina, South States Carolina, Oklahoma, Michigan, Massachusetts, Georgia, Wisconsin, Delaware and Kentucky
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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.”
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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”.
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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.”
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APPENDIX C: Themes and Sub-Themes
Definitions
Themes Definition Sub-themes (Derived from Informant's Interview Data)
Organizational Confidence People 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.
Champions Vision 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.
Change Change 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.
Capabilities Training 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 Structure Firm 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.
Rationality Margin 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 Factors Competitive Intensity Level of competitive intensity and threat impacting pricing strategies and tactics. Market Turbulences Recessions and economical crisis impacting pricing strategies and tactics.
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Themes and Sub-Themes Number of Mentions of Codable Moments
Themes Total Firm Size Industry Pricing Approach Function of Respondents Cost- Competition- Value- Sub-themes Small Medium Plastics Transport Building based based based Leadership Sales Finance
Organizational Efficacy People Development 16 6 10 11 0 5 0 2 14 13 3 0 Internal Beliefs 20 6 14 11 2 7 2 5 13 9 9 2 Communication 11 8 3 3 5 3 0 5 6 5 6 0 Success Stories 20 7 13 15 2 3 0 5 15 10 10 0 Resilience 10 4 6 4 5 1 0 2 8 6 3 1 Data Accuracy 8 1 7 2 4 2 1 0 7 4 4 0 Energy 5 2 3 3 1 1 0 1 4 2 3 0
Champions Vision 7 0 7 2 0 5 0 2 5 3 3 1 Emphasis 15 5 10 8 3 4 0 4 11 6 8 1 Commitment 5 0 5 4 0 1 0 2 3 4 1 0 Driver 5 0 5 0 2 3 0 2 3 3 1 1
Change Change Management 8 1 7 2 1 5 1 0 7 3 2 3 Learning Curve 9 3 6 9 0 0 1 7 1 2 4 3 Journey/Transition 19 3 16 9 4 6 2 6 11 6 9 4 Mindfulness 22 9 13 15 5 2 4 9 9 10 11 1 Stimulus 17 5 12 5 4 8 2 7 8 7 7 3 Lessons Learned 10 5 5 3 2 5 5 4 1 4 5 1
Capabilities Training 40 14 26 28 4 8 1 12 27 18 21 1 Pricing Training 8 0 8 4 1 3 1 1 5 2 6 0 Lack of Training 9 4 5 2 4 3 7 3 0 5 4 0 Sales Force Skills 53 27 26 33 9 11 17 14 22 21 22 10 Market Research 24 7 17 11 3 10 3 4 17 9 12 3 Pricing Research 16 9 7 9 0 7 0 3 13 6 10 0 Proprietary Tools 33 9 24 17 10 6 5 10 18 13 10 10
Organizational Structure Firm Size & Resources 18 9 9 7 4 7 8 4 6 3 10 5 Role Specialization 26 5 21 11 10 5 0 2 24 12 13 1 Centralization 9 2 7 7 0 2 0 0 9 2 6 1 Pricing Responsabilities 31 7 24 15 9 7 15 3 13 13 10 8 Process Formalization 45 9 36 14 13 18 0 12 33 23 18 4 Informal Pricing Review 18 8 10 8 2 8 10 8 0 11 3 4 Pricing Process Discipline 8 2 6 4 4 0 1 2 5 4 3 1
Rationality Margin Targets 36 22 14 16 9 11 24 10 2 17 9 10 Cost Models 21 10 11 10 9 2 11 9 1 8 6 7 Gut Feeling & Intuition 24 8 16 9 11 4 12 11 1 18 3 3 Guess & Call 9 8 1 3 4 2 3 5 1 5 4 0 Knowledge & Experience 52 20 32 25 16 11 18 25 9 25 15 12 Scientific Pricing Process 16 6 10 13 3 0 0 2 14 4 10 2 Unscientific Pricing Process 30 19 11 7 13 10 10 16 4 16 9 5
Exogenous Factors Competitive Intensity 26 8 18 13 9 4 13 6 7 4 17 5 Market 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
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Themes and Sub-Themes Number of Mentions by Firm and Respondent
Firm Pricing Function of Sales & Finance & Themes Total Si ze Industry Approach Resp Leadership Marketing Accounting Sub-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 Efficacy People Development 4 1 3 3 0 1 0 1 3 3 1 0 0 0 3 0 1 0 0 0 0 Internal Beliefs 8 3 5 4 2 2 2 2 4 5 5 2 0 1 4 1 2 2 1 1 0 Communication 6 4 2 2 2 2 0 3 3 3 5 0 0 2 1 0 2 3 0 0 0 Success Stories 7 3 4 3 2 2 0 4 3 4 5 0 0 1 3 0 3 2 0 0 0 Resilience 6 1 5 2 3 1 0 3 3 3 3 1 0 1 2 0 2 1 0 0 1 Data Accuracy 6 1 5 2 2 2 1 1 4 3 3 1 0 1 2 0 0 3 1 0 0 Energy 4 2 2 2 1 1 0 1 3 2 3 0 0 0 2 0 1 2 0 0 0
Champions Driver 2 0 2 0 1 1 0 1 1 2 1 1 0 1 1 0 0 1 0 0 1 Emphasis 7 3 4 4 2 1 0 3 4 3 6 1 0 1 2 0 1 5 0 0 1 Commitment 3 0 3 2 0 1 0 1 2 3 1 0 0 1 2 0 1 0 0 0 0 Vision 2 0 2 1 0 1 0 1 1 2 1 1 0 1 1 0 0 1 0 1 0
Change Change Management 4 1 3 1 1 2 1 1 2 3 2 2 0 1 2 0 0 2 1 0 1 Learning Curve 4 3 1 4 0 0 1 2 1 2 3 2 1 1 0 0 2 1 0 2 0 Journey/Transition 8 2 6 4 1 2 1 3 4 4 5 4 0 2 2 0 2 3 2 2 0 Mindfulness 7 4 3 4 1 2 2 2 3 3 6 1 1 0 2 1 3 2 1 0 0 Stimulus 8 4 4 3 2 3 2 3 3 5 3 3 0 2 3 0 2 1 2 0 1 Lessons Learned 5 3 2 2 1 2 2 2 1 3 4 1 2 0 1 1 3 0 0 1 0
Capabilities Training 7 2 5 4 2 1 1 2 4 6 10 1 0 2 4 1 3 6 0 1 0 Pricing Training 4 0 4 1 1 2 1 1 3 2 3 0 1 0 1 0 0 3 0 0 0 Lack of Training 6 2 4 2 2 2 4 2 0 5 4 0 3 2 0 3 1 0 0 0 0 Sales Force Skills 13 5 8 5 4 4 5 4 4 8 8 5 3 2 3 1 4 3 4 1 0 Market Research 9 3 6 3 3 3 2 3 4 6 6 3 1 2 3 1 2 3 1 0 2 Pricing Research 5 3 2 3 0 2 0 2 3 4 5 0 0 2 2 0 2 3 0 0 0 Proprietary Tools 11 4 7 4 4 3 4 3 4 8 6 3 3 1 4 1 1 4 2 1 0
Organizational Structure Firm Size & Resources 9 4 5 3 3 3 5 1 3 3 6 3 1 0 2 3 1 2 2 0 1 Role Specialization 7 2 5 4 2 1 0 3 4 7 7 1 0 3 4 0 1 6 0 0 1 Centralization 3 1 2 2 0 1 0 0 3 2 4 1 0 0 2 0 0 4 0 0 1 Pricing Responsabilities 13 4 9 6 4 3 5 4 4 7 9 5 3 2 2 3 2 4 4 0 1 Process Formalization 7 3 4 3 2 2 0 3 4 6 7 2 0 2 4 0 3 4 0 0 2 Informal Pricing Review 9 5 4 4 2 3 5 4 0 6 3 3 3 3 0 2 1 0 2 1 0 Pricing Process Discipline 6 2 4 4 2 0 1 2 3 2 4 1 1 1 0 0 1 3 0 0 1
Rationality Margin Targets 11 5 6 4 3 4 6 4 1 8 6 6 4 3 1 4 2 0 5 1 0 Cost Models 10 5 5 4 5 1 4 4 2 7 6 5 3 3 1 3 3 0 2 2 1 Gut Feeling & Intuition 6 2 4 1 4 1 3 2 1 5 3 2 3 2 0 1 2 0 1 0 1 Guess & Call 6 4 2 2 2 2 3 2 1 5 3 2 2 2 1 1 2 0 2 0 0 Knowledge & Experience 14 7 7 5 5 4 6 5 3 9 8 4 3 4 2 3 4 1 2 1 1 Scientific Pricing Process 6 2 4 4 2 0 0 3 3 2 4 1 0 1 1 0 2 2 0 0 1 Unscientific Pricing Process 14 7 7 5 5 4 5 5 4 9 5 5 4 4 1 0 3 2 2 2 1
Exogenous Factors Competitive Intensity 13 5 8 4 5 4 6 4 3 3 10 5 1 0 2 4 4 2 3 1 1 Market Turbulences 10 4 6 4 3 3 5 2 3 4 6 6 2 0 2 3 0 3 3 2 1
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APPENDIX D: Raw Understanding of Value-Based Pricing in Firms
Firms Using Value-based Pricing "It’s understand your value of the product compared to the best competitor, and then put a price tag on that VB1 - EL 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." "(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 VB1 - SM this market, we address the value-based market.... for different regions and also different requirements in the same applications." "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 VB1 - SM2 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? " "It means to take the product and break it down in terms of the value that it's providing for the customer, and VB2 - EL 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."
"The term “value-based pricing” to me would be based on any value added, things we’re doing over our VB2 - SM competitors. What are we adding to our floor price or our standard price?" "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 VB2 - FA 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." "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 VB3 - EL 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."
"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 VB3 - SM 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." "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 VB3 - FA 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." "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 VB4 - EL 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." "My own definition of value-based pricing is to understand the value that you deliver to your customers through VB4 - SM 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."
"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 VB4 - SM2 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?”
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Firms Using Cost-based Pricing
"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 CB1 - EL 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."
"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 CB1 - SM 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."
"I would say I could assume what I think that it is, which is the – value based pricing, meaning I’m going to – CB1 - FA 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. " "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 CB2 - EL 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. " "If you’re saying value-based, it’s a good product at the right price delivered on time that you provide service for, CB2 - SM and you help the customer any way that you can to make them successful, yeah, I understand that. And that’s what we do." "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 CB2 - FA 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." "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 CB3 - EL 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."
"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 CB3 - SM 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."
"I understand it in terms of the value that it brings to the customer. So I guess it goes beyond just a product, but CB3 - FA 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." "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 CB4 - EL 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."
"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 CB4 - SM 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."
"If I were to hear the term "value-based pricing," it would be the cost of the product plus the service that we CB4 - FA provide to the product to make sure that it works for our particular customer's application." 231
"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 CB5 - EL 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." "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 CB5 - SM probably talking about is understanding the value of your product in the marketplace, and then pricing appropriately." "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 CB5 - FA 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.”
"What it means to me is getting the maximum price for the type of value that our product offers. Okay. And the CB6 - EL 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."
"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 CB6 - SM 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"." "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 CB6 - FA 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
"I guess from all the education I’ve had, I would look at that being that you establish the value of every part of COB1 - EL 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."
"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 COB1 - SM 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." "You know, you’re selling on like the benefits and features of the products or the company, you know, and you COB1 - FA should be getting a premium for that if there is a perceived premium for that in the marketplace."
"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 COB2 - EL 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." "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 COB2 - SM 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. "
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"I would think about our value added products we sell with the value add services we add into the business. But I COB2 - FA don’t get involved with the pricing of that at all."
"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 COB3 - EL 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."
"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 COB3 - SM 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? "
"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 COB4 - EL 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."
"Value based pricing to me means that you understand what your product brings to a certain application and what COB4 - SM value it really brings. And you are able to get the pricing that you believe the value deserves."
"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 COB5 - EL 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."
"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 COB5 - SM 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." "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 COB5 - SM2 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." "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 COB5 - FA 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."
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APPENDIX E: Stimulus for Change and Duration of Transformation for Firm Which Adopted Value-Based Pricing
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APPENDIX F: Survey Items
Items Pricing Capabilities (PC) PC1 Using pricing skills and systems to respond quickly to market changes PC2 Knowledge of competitors’ pricing tactics PC3 Doing an effective job of pricing products/services PC4 Monitoring competitors prices and price changes PC5 Sticking to price list and minimizing discounts PC6 Quantifying customers’ willingness to pay PC7 Measuring and quantifying differential economic value versus competition PC8 Measuring and estimating price elasticity for products/services PC9 Designing proprietary tools to support pricing decisions PC10 Conducting value-in-use analysis or Total Cost of Ownership PC11 Designing and conducting specific pricing training programs PC12 Developing proprietary internal price management process Items Relative Performance (RP) RP1 Acquisition of new customers RP2 Increase of sales to current customers RP3 Growth in total sales revenues RP4 Absolute price levels RP5 Pricing power in the market RP6 Business Unit profitability RP7 Return on sales (ROS) RP8 Return on investment (ROI) Items Organizational Change Capacity (OCC) OCC1 Protect the core values while encouraging change OCC2 Consistently articulate an inspiring vision of the future OCC3 Show courage in their support for change initiative OCC4 Values innovation OCC5 Values change OCC6 Attracts and retains creative people OCC7 Provides resources to experiment with new ideas OCC8 Allows people to take risks and occasionally fail Items Champion Behavior (CBE) CBE1 Enthusiastically promotes the pricing function CBE2 Expresses strong conviction about the importance of pricing CBE3 Expresses confidence in what pricing can do CBE4 Shows tenacity in overcoming obstacles when changes in pricing are needed CBE5 Knocks down barriers and obstacles to pricing implementations CBE6 Gets pricing problems into the hands of those who can solve them CBE7 Gets the right people involved in pricing discussions CBE8 Gets key decision makers involved in the pricing process CBE9 Acts as a champion of pricing Items Center-led Pricing Management (CLED) CLED1 Conducts pricing training with divisional decision-makers and top executives CLED2 Manages specific pricing projects or programs to support divisional marketing programs CLED3 Assists in the design and/or implementation of pricing tools CLED4 Conducts pricing research activities to support pricing decision making process CLED5 Assists decision makers with price setting process as part of the formal product development process CLED6 Provides top management with pricing reports and trends CLED7 Provides knowledge with overall pricing process (for example, pricing increases, pricing reviews). Items Organization Confidence (OC) OC1 We can take on any challenge OC2 Because our departments work together well, we can beat our competition OC3 We are more innovative than most organizations I have worked in OC4 Everyone works together effectively OC5 People here have a sense of purpose to accomplish something OC6 We have a strong vision of the future OC7 We are very certain about what we will accomplish together as a company OC8 We are confident about our future OC9 We believe in the value of our products/services OC10 We have the necessary courage to stand firm to customers’ pricing objections OC11 We have the necessary courage to implement difficult price changes in the market OC12 We have a strong sense of resilience with pricing
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APPENDIX G: Construct Table
Construct/ Definition Items Source Dimensions ORGANIZATIONAL The existence of a centralized team of Indicate the degree to which this central team support your organization Construct and item STRUCTURE expert focusing on the diffusion of with the following activities . . . definition was done Center-Led knowledge and expertise throughout (1= Rarely to 7= Frequently) following the researcher Management the firms and on the support of 1. Conducts pricing training with divisional decision-makers and top executives (D) qualitative research (Liozu, business unit leaders in making the 2. Manages specific pricing projects or programs to support divisional marketing Boland et al. June 2011). appropriate pricing decisions. Center- programs Result of the pilot survey led also indicates that decision- 3. Assists in the design and/or implementation of pricing tools with 70 responses yielded an making authority remains 4. Conducts pricing research activities to support pricing decision making process AC of 0.745 with these 7 5. Assists decision makers with price setting process as part of the formal product decentralized with business unit items. development process managers. 6. Provides top management with pricing reports and trends (D) 7. Provides knowledge with overall pricing process (for example, pricing increases, pricing reviews). PRICING Pricing capabilities are part of Rate your organization relative to your major competitors in terms of its capabilities in Construct definition CAPABILITIES marketing capabilities which concern the following areas: included Morgan et al. the firm’s adequate management of (1 = Much Worse Than Competitors to 7 = Much Better Than Competitors) (2009) and the researcher individual “marketing mix” processes 1. Using pricing skills and systems to respond quickly to market changes qualitative research (Liozu, such as product development and 2. Knowledge of competitors’ pricing tactics Boland et al. June 2011). management, pricing, selling etc. as 3. Doing an effective job of pricing products/services Result of the pilot survey 4. Monitoring competitors prices and price changes well as marketing strategy with 70 responses yielded an 5. Sticking to price list and minimizing discounts (D) development and execution. These 6. Quantifying customers’ willingness to pay AC of 0.885 with these 12 capabilities may be rare, valuable, 7. Measuring and quantifying differential economic value versus competition items. non-substitutable, and inimitable 8. Measuring and estimating price elasticity for products/services source of advantage that can lead to 9. Designing proprietary tools to support pricing decisions (D) superior firm performance. 10. Conducting value-in-use analysis or Total Cost of Ownership 11. Designing and conducting specific pricing training programs 12. Developing proprietary internal price management process ORGANIZATIONAL Organizational confidence is a To what extent do you agree or disagree with the following statements about your Adapted from Bohn (2001) CONFIDENCE generative capacity of an organization organization. Overall Bohn questionnaire to cope effectively with the demands, (1=Strongly Disagree to 7=Strongly Agree) AC is 0.93 with 20 items. challenges, stresses and opportunities 1. We can take on any challenge (D) Sense of Collective it encounters within the business 2. Because our departments work together well, we can beat our competition Capability (AC: 0.92) (Items environment. It exists as an 3. We are more innovative than most organizations I have worked in (D) 1-7, 9 and 10) 4. Everyone works together effectively aggregated judgment of an Sense of Mission and Future 5. People here have a sense of purpose to accomplish something (D) 2
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organization’s individual members 6. We have a strong vision of the future (D) (AC: 0.84) (Items 11, 12, 14, about their (1) sense of collective 7. We are very certain about what we will accomplish together as a company 15 and 16) capacities, (2) sense of mission or 8. We are confident about our future (D) Sense of Resilience (AC: 9. We believe in the value of our products/services purpose, and (3) a sense of resilience. 0.86) (Items 13, 17-21) 10. We have the necessary courage to stand firm to customers’ pricing objections (D) In its most basic form, organizational 11. We have the necessary courage to implement difficult price changes in the market (D) efficacy is a sense of “can do” (Bohn 12. We have a strong sense of resilience with pricing (D) 2001; Bohn 2002). CHAMPIONING Transformational leaders motivate To what extent do you agree or disagree with the following statements about your top Adapted from Howell, Shea BEHAVIORS followers to achieve performance management involvement with pricing (1=Strongly Disagree to 7=Strongly Agree). et al.(2005) based on Avolio, beyond expectations by transforming 1. Enthusiastically promotes the pricing function Bass & Jung (1999) MLQ followers’ attitudes, beliefs and 2. Expresses strong conviction about the importance of pricing scales. values. They take on the role of 3. Expresses confidence in what pricing can do Champion Behavior Scale 4. Shows tenacity in overcoming obstacles when changes in pricing are needed organizational champions by (15 items and overall AC of 5. Knocks down barriers and obstacles to pricing implementations demonstrating specific behaviors to 6. Gets pricing problems into the hands of those who can solve them scale: 0.94): lead and support organizational 7. Gets the right people involved in pricing discussions Expresses enthusiasm and implementations. 8. Gets key decision makers involved in the pricing process confidence:6 items (AC: 9. Acts as a champion of pricing 0.91) Persists under adversity: 6 items (AC: 0.90) Gets the right people involved: 3 items (AC: 0.83)
ORGANIZATIONAL The organization’s capacity to To what extent do you agree or disagree with the following statements about from Judge and Douglas CHANGE manage the change process your organization. (2009):Trustworthy CAPACITY from a dynamic capabilities (1=Strongly Disagree to 7=Strongly Agree). Leaders: 4 items (AC:0.92) In this organization, business unit leader(s)… Innovation culture: 4 items prospective 1. Protect the core values while encouraging change (AC:0.89). 2. Consistently articulate an inspiring vision of the future 3. Show courage in their support for change initiative In this organization, our organizational culture… 1. Values innovation 2. Values change 3. Attracts and retains creative people 4. Provides resources to experiment with new ideas 5. Allows people to take risks and occasionally fail PRODUCT Relative superiority of product over To what extent do the following statements apply to your products/services? Adapted from Ingenbleek et ADVANTAGE competition. (1 = Does Not Apply to 7 = Strongly Applies) al.(Ingenbleek, Debruyne et 1. Our products/services offer higher quality that competing ones al. 2003) 2. Our products/services solve problems customers have with competing Product Advantage: 3 items products/services (AC:0.74) 2
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3. Our products/services are very innovative and can substitute for an inferior competing alternative COMPETITIVE Competitive behavior or rivalry To what extent do the following characteristics apply to your primary market? Adapted from Ingenbleek et INTENSITY between competitors (1 = Does Not Apply to 7 = Strongly Applies) al.(2003) 1. Intense price competition Competitive Intensity: 3 2. Strong competitors sales, promotion and distribution systems items (AC:0.73) 3. Strong and high quality competing products and services PERCEIVED Respondents’ perceived evaluation of Please evaluate the performance of your major line of business over the past year Adapted from Ingenbleek RELATIVE their organization’s performance relative to your major competitors. and Morgan et al. (2007, PERFORMANCE relative to their competition. (1 = Much Worse/lower Than Competitors to 7 = Much Better/higher Than Competitors) 2009). 1. Acquisition of new customers Morgan et al. Market 2. Increase of sales to current customers Effectiveness: 3 items 3. Growth in total sales revenues (AC:0.90) and profitability: 4. Absolute price levels 3 items (AC: 0.95).Our pilot 5. Pricing power in the market 6. Business Unit profitability survey with 70 respondents 7. Return on sales (ROS) yielded an AC of 0.929. 8. Return on investment (ROI) (D) = Items were dropped during the EFA process
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APPENDIX H: CFA Model in AMOS
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APPENDIX I: Trimmed SEM Model in AMOS
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APPENDIX J: Conceptual Model for the Internalization of and Transformation towards Value-based Pricing
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APPENDIX K: Survey Items
Items Pricing Capabilities (PC) PC1 Using pricing skills and systems to respond quickly to market changes PC2 Knowledge of competitors’ pricing tactics PC3 Doing an effective job of pricing products/services PC4 Monitoring competitors prices and price changes PC5 Sticking to price list and minimizing discounts PC6 Quantifying customers’ willingness to pay PC7 Measuring and quantifying differential economic value versus competition PC8 Measuring and estimating price elasticity for products/services PC9 Designing proprietary tools to support pricing decisions PC10 Conducting value-in-use analysis or Total Cost of Ownership PC11 Designing and conducting specific pricing training programs PC12 Developing proprietary internal price management process Items Relative Performance (RP) RP1 Acquisition of new customers RP2 Increase of sales to current customers RP3 Growth in total sales revenues RP4 Absolute price levels RP5 Pricing power in the market RP6 Business Unit profitability RP7 Return on sales (ROS) RP8 Return on investment (ROI) Items Knowledge Before Negotiation (NegoPrep) PR10 Before we negotiate, we know the competitive product/service that the customer views as better than ours PR11 Before we negotiate, we know the price level of the customer's current product/service PR12 Before we negotiate, we know the differentiated value of our vs. the customer's current product/service PR13 Before we negotiate, we know the financial benefit ("dollar value") of our vs. the customer's current product/service Items Incentive & Goal Systems (IGS) IGS1 Increase market share by acquiring new customers IGS2 Increase gross dollar sales IGS3 Sell customer on products with the highest profit margins IGS4 Identify and sell to major accounts IGS5 Exceed sales targets and objectives during the year IGS6 Support voice-of-the-customer activities IGS7 Identify customer value information IGS8 Increase sales volume Items Organization Confidence (OC) OC1 We can take on any challenge OC2 Because our departments work together well, we can beat our competition OC3 We are more innovative than most organizations I have worked in OC4 Everyone works together effectively OC5 People here have a sense of purpose to accomplish something OC6 We have a strong vision of the future OC7 We are very certain about what we will accomplish together as a company OC8 We are confident about our future OC9 We believe in the value of our products/services OC10 We have the necessary courage to stand firm to customers’ pricing objections OC11 We have the necessary courage to implement difficult price changes in the market OC12 We have a strong sense of resilience with pricing Items Delegation of Pricing Authority (DPA) DPA1 Our sales people have the authority to set prices and discounts for all customers DPA2 Our sales people have the authority to set prices for some customers DPA3 Our sales people have more authority than our competitors to set prices and discounts DPA4 Our sales people are authorized to reduce prices only after consulting with a superior DPA5 All our sales people are provided with pricing authority
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APPENDIX L: Construct Table
Construct Definition Items Source Dimensions PRICING PROCESS The degree to which a firm is Which of the following describes your organization? My company has . . . (Yes/No Adapted from Miller & FORMALIZATION formalized is an indication of the question) Dröge (1986). The perceived capabilities of its 1. A communicated corporate pricing vision measure of structural members in exercising judgment and 2. A communicated corporate pricing strategy variables and their self-control (Hall 1977:95). 3. Formal pricing objectives and targets dimensions Formalization involves control to 4. Published pricing rules and internal guidelines (formalization, make sure members follow defined 5. Special pricing approval forms specialization and and standardized rules, roles and 6. Formal pricing reviews with key performance indicators centralization) were procedures (Hage and Aiken 1967, 7. Training programs specific to pricing drawn from the scales Hall, Johnson et al. 1967, Hall 1977) 8. Long term pricing agreement templates of the Aston studies as well as instructions and (Pugh, Hickson et al. communications (Pugh, Hickson et 1963, Pugh, Hickson et al. 1963). We define formalization al. 1968, Inkson, Pugh as the emphasis placed on following et al. 1970). defined or standardized rules, roles Formalization: 5 items and procedures in conducting firm (AC:0.65) pricing activities, making pricing decisions and implementing pricing process in a formalized way.
PERCEIVED Respondents’ perceived evaluation Please evaluate the performance of your major line of business over the past year Adapted from RELATIVE of their organization’s performance relative to your major competitors. (1 = Much Worse/lower Than Competitors to 7 = Much Ingenbleek (2007), PERFORMANCE relative to their competition. Better/higher Than Competitors) Morgan et al., (2009). 8. Acquisition of new customers (D) Market Effectiveness: 3 9. Increase of sales to current customers (D) items (AC:0.90) and 10. Growth in total sales revenues Profitability: 3 items 11. Absolute price levels (D) (AC: 0.95) 12. Pricing power in the market (D) Pilot survey with 70 13. Business Unit profitability respondents yielded an 14. Return on sales (ROS) AC o 0.929. 15. Return on investment (ROI)
ORGANIZATIONAL Organizational confidence is a To what extent do you agree or disagree with the following statements about your Adapted from Bohn CONFIDENCE generative capacity of an organization. (2001) organization to cope effectively with (1=Strongly Disagree to 7=Strongly Agree) Overall Bohn 243
the demands, challenges, stresses 1. We can take on any challenge questionnaire AC is and opportunities it encounters 2. Because our departments work together well, we can beat our competition 0.93 with 20 items. within the business environment. It 3. We are more innovative than most organizations I have worked in (D) Sense of Collective exists as an aggregated judgment of 4. Everyone works together effectively Capability (AC: 0.92) an organization’s individual 5. People here have a sense of purpose to accomplish something (D) (Items 1-7, 9 and 10) members about their (1) sense of 6. We have a strong vision of the future Sense of Mission and collective capacities, (2) sense of 7. We are very certain about what we will accomplish together as a company Future (AC: 0.84) mission or purpose, and (3) a sense 8. We are confident about our future (D) (Items 11, 12, 14, 15 of resilience. In its most basic form, 9. We believe in the value of our products/services (D) and 16) organizational efficacy is a sense of 10. We have the necessary courage to stand firm to customers’ pricing objections Sense of Resilience “can do” (Bohn, 2001; Bohn, 2002). 11. We have the necessary courage to implement difficult price changes in the market (AC: 0.86) (Items 13, 12. We have a strong sense of resilience with pricing 17-21) PRIMARY PRICING The primary orientation used by To what extent does your organization take into account the following factors when Adapted from ORIENTATION firm respondents based on customer setting prices for its products and services? (1= Not at all Taken Into Account In Price Ingenbleek et al., value, cost and competition Setting to 7 = Very Much Taken Into Account In Price Setting) (2003) information. Because the use of Value-based Pricing Value-based Pricing: 5 customer value, competition and 1. Advantages of the product compared to competitors’ products/services items (AC: 0.81) cost information are a matter of 2. Customer perceived value of the products/services Competition-based degree rather than mutually 3. Customer willingness to pay for the unique benefits of the product/services Pricing: 6 items (AC: exclusive categories, the result of 4. Balance between advantages of products/services and price 0.91) the measure will report a primary 5. Differentiated value drivers of our products/services compared to substitutes Cost-based Pricing: 4 firm orientation. Competition-based Pricing items (AC:0.75) 1. Price of competitors’ products/services 2. Competitors’ current price strategy 3. Likelihood of competitors’ strength to react 4. Market structure (number and strength of competitors) 5. Degree of competition on the market 6. Competitive advantage of competitors in the market Cost-based Pricing 1. Variable costs of products/services 2. Price necessary to break-even 3. Investments in products/services 4. Target margin guidelines 5. Target return on sales levels PRICING Pricing capabilities are part of Rate your organization relative to your major competitors in terms of its Construct definition CAPABILITIES marketing capabilities which capabilities in the following areas: included Morgan et al. concern the firm’s adequate (1 = Much Worse Than Competitors to 7 = Much Better Than Competitors) (2009) and the management of individual 13. Using pricing skills and systems to respond quickly to market changes (D) researcher qualitative “marketing mix” processes such as 14. Knowledge of competitors’ pricing tactics (D) research (Liozu, Boland product development and 15. Doing an effective job of pricing products/services et al. June 2011). management, pricing, selling etc. as 16. Monitoring competitors prices and price changes (D) Result of the pilot well as marketing strategy 17. Sticking to price list and minimizing discounts (D) survey with 70 development and execution. These 18. Quantifying customers’ willingness to pay responses yielded an
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capabilities may be rare, valuable, 19. Measuring and quantifying differential economic value versus competition AC of 0.885 with these non-substitutable, and inimitable 20. Measuring and estimating price elasticity for products/services 12 items. source of advantage that can lead to 21. Designing proprietary tools to support pricing decisions superior firm performance. 22. Conducting value-in-use analysis or Total Cost of Ownership 23. Designing and conducting specific pricing training programs 24. Developing proprietary internal price management process DELEGATION OF Degree to which a sales force To what extent do you agree or disagree with the following: Adapted from Frenzen PRICING employee is empowered to negotiate (1=Strongly Disagree to 7=Strongly Agree) et al. (2010). AUTHORITY and change a product's or service's 1. Our salespeople have the authority to set prices and discounts for all customers Pricing Authority: 5 list price without consulting the 2. Our salespeople have the authority to set prices and discounts for some customers items (AC: 0.84) sales manager. 3. Our salespeople have more authority than our competitors to set prices and discounts
4. Our salespeople are authorized to reduce prices only after consulting with a superior (D) 5. All of our salespeople are provided with pricing authority GOALS AND Targets and systems used by firms In our company, salespeople are compensated on the basis of their ability to. Adapted from Behrman INCENTIVES to define and drive salespeople (1=Strongly Disagree to 7=Strongly Agree) & Douglas (1982) SYSTEMS performance compensations 1. Increase market share by acquiring new customers Sales performance 2. Increase gross dollar sales (D) objectives: 5 items with 3. Sell customer on products with the highest profit margins (D) AC between 0.51 to 4. Identify and sell to major accounts (D) 0.77. 5. Exceed sales targets and objectives during the year (D) Pilot with 94 6. Support voice-of-the-customer activities respondents yielded 7. Identify customer value information 47% variance extracted 8. Increase sales volume (D) and an initial AC of 0.793. PRICE Pricing realization relates to how To what extent do you agree or disagree with the following statements about your Developed from REALIZATION close a firm sticks to list price company? literature (Hoang through its pricing tactics and how (1=Strongly Disagree to 7=Strongly Agree) 2007); (Davey, Childs pricing discipline helps the firm 1. Pricing rules and guidelines are strictly followed et al. 1998); (Hanson, maximize absolute pricing levels 2. Price deviations must be justified for approval Coleman et al. 2009); versus competition. Price realization 3. We are encouraged to follow discounting guidelines (Simon, Butscher et al. is about decreasing price leakage, 4. Pricing flexibility gives us a competitive advantage 2003);(Marn, Roegner increasing pocket price and hence 5. We establish target prices before negotiating with customers et al. 2004) and from keeping a higher proportion of the 6. We walk away from a deal if target prices are not met the researcher’s list price that adds to the bottom line 7. We will sell at other than list price in order to meet sales targets qualitative interviews. (profit). Strong pricing realization 8. We create new service options to match customer requests Tested in pilot study helps avoid profit leaks in pricing 9. We will change customer service options rather than provide price discounts with 94 respondents tactics and in deal negotiations with yielded a 49% variance customers. Pricing realization extracted and an initial includes dimensions of pricing AC of 0.756. discipline and pricing compliance. KNOWLEDGE Pricing and value knowledge held To what extent do you agree or disagree with the following statements about your Developed from BEFORE by sales and account managers prior company? (1=Strongly Disagree to 7=Strongly Agree) - Before we negotiate price, we know . literature (Hoang NEGOTIATION to entering in pricing negotiation . . 2007); (Davey, Childs 245
with customers. 1. The competitive product/service that the customer views as better than ours et al. 1998); (Hanson, Coleman et al. 2. The price level of the customer’s current product/service 2009);(Simon, Butscher 3. The differentiating features of our vs. the customer’s current product/service et al. 2003); (Marn, 4. The financial benefits (“dollar value”) of our vs. the customer’s current product/service Roegner et al. 2004) and from the researcher’s qualitative interviews. Tested in pilot study with 94 respondents yielded a 49% variance extracted and an initial AC of 0.756. MARKET Market turbulences relate to rate the To what extent do you agree or disagree with the following statements? In our Adapted from Jaworski TURBULENCES changing and unpredictable primary market/industry . . . & Kohli (1993) and characteristics that may influence (1=Strongly Disagree to 7=Strongly Agree) Santos-Vijande and the pricing intensity and speed of 4. Our customer’s preferences are constantly changing Alvarez-Gonzalez change in a market or an industry. 5. Our clients change on a regular basis (2007). These market turbulences might be 6. We can predict the future competitive environment Market turbulences: 6 short term in nature or more 7. We have intensive price competition items (AC: 0.68) structural. 8. Government regulations change frequently Market Turbulences: 8 9. We have chronic production over capacity items (No AC 10. We face a high rate of product/service obsolescence Communicated) 11. We can predict environmental forces Pilot study with 94 respondents yielded an initial AC of 0.604 with 38% variance extracted. (D) = Items were dropped during the EFA process
2 46
APPENDIX M: CFA Model in Amos
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APPENDIX N: Trimmed SEM Model in AMOS
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