Pricing capability at Gamma

The part of the local packaging industry serviced by Gamma was char-acterized by service differentiation and close relationships between packaging suppliers and customers (partly upheld by the geographically delimited character of the market). Gamma’s strategic position was based on a close relationship with the local spirits segment, which

cre-ated differentiation opportunities based on the specific requirements of this segment. This resulted in a product portfolio that was not directly comparable to competitive offers and hard for customers to benchmark based on price.

Gamma’s pricing policy can be labeled Opportunity pricing. The objec-tive and outcome of this policy was price discrimination (and capturing commercial opportunities as they occur). This outcome was achieved by setting price in a highly flexible manner according to an assessment of the individual customer’s willingness-to pay in each situation. Spe-cific attention was given to the opportunities that arise once a customer had been acquired, often under very competitive circumstances, to in-crementally increase prices as opportunities occur. Naturally, this re-sulted in prices that varied significantly across customers and their will-ingness-to-pay. The key characteristics of the pricing policy at Gamma are displayed in Table 6.11.

Table 6.11 Key characteristics of pricing policy at Gamma.

Characteristic Observation at Gamma

Label Opportunity pricing

Key dimensions Price discrimina-tion

Prices are highly flexible to individual customer’s willingness-to-pay and competitive situation

Price elasticity leverage

Prices are based on an assessment of market factors affecting the customer’s willingness-to-pay and the competitive situation (using price/KSM and price index of full costs as a key parameters)

Operating lever-age

The full cost calculation is used as a benchmark for evaluating and justifying prices

Reported benefits

Price discrimination

The pricing process at Gamma was characterized by a strong focus on activities related to the project definition phase conducted in a CBS en-vironment, and the preliminary pricing decision made by the commer-cial manager. Desired levels of price discrimination were achieved through relying extensively on the pricing authority centralized to the commercial manager, and his personal experience and ability to judge commercial opportunities. The organizational structure with a single commercial department with one person managing all day-to-day

pric-ing accordpric-ing to his personal judgment made the pricpric-ing decision reli-ant on personal knowledge. Thus, explicit properties of sub-activities were hard to single out in this process because they were carried out in the head of one person. However, the commercial manager himself at-tributed the success of these activities to his personal experience in the business and the particular organization Gamma has in place. Key pric-ing activities are outlined in Table 6.12.

Table 6.12 Pricing activities at Gamma.

Pricing activities Observation at Gamma Evaluation and

planning

(not a key activity) Customer

assess-ment

Key activity

Highly flexible and idiographic assessment of each new account is made by the commercial manager

Preliminary pricing decision

Key activity

Price is set based on the individual customer’s willingness-to-pay which is estimated by the commercial manager

Negotiation (not a key activity)

The key pricing activities summarized above were enabled by a particu-lar set of capability elements that have been introduced throughout the case. These capability elements are listed in Table 6.13.

Table 6.13 Type of pricing capability elements observed at Gamma.

Type of capability elements

Observation made at Gamma

1. IT-based systems National pre-cost calculation system 2. Price parameters Price/KSM and price index (full cost) 3. Commercial

organiza-tion

National-level organization with responsibility split between com-mercial department responsible for price and the national sales de-partment responsible for sales/turnover

4. Pricing authority Pricing authority held by commercial manager 5. Incentive controlling

arrangements

(not a key element) 6. Commercial

experi-ence

Judging the maximum willingness-to-pay of individual customers (i.e. taking advantage of commercial opportunities)

The pricing capability at Gamma was, as indicated by the type of pric-ing activities performed, centered on the preliminary pricpric-ing decision in terms of order costing and the judgment made by the commercial man-ager. The key elements enabling these activities are stated in Table 6.13. The most fundamental elements identified in the case were the personal experience and skill of the commercial manager together with different elements of the organizational set-up, including the delegation of all day-to-day pricing responsibility to one commercial manager and the divide in responsibility between a national commercial department handling issues related to price and a national sales department respon-sible for turnover.

A striking attribute of the elements identified at Gamma was the spe-cific role of the costing system. The costing of incoming orders in CBS was routinely executed by the commercial manager and the routines surrounding these procedures were emphasized as a natural part of the pricing process. However, although routinely executed, the commercial manager and several other respondents emphasized that the costing sys-tem was only of limited importance in arriving at specific price points.

Rather, the costing system provided a form of baseline security to the process that enabled Gamma to justify sorting out unprofitable orders, and thus, increasing confidence and commitment to the unit’s pricing policy.

The case presents several indications of the dynamic process by which Gamma’s pricing capability emerged. Central to this process were the early established ties to key segments in the local corrugated market, such as the local spirits industry, and the events around 1999 when SCAP merged with another packaging company. This induced Gamma to develop, and make explicit, the current strategic focus (extended ser-vice, and a close relationship with key customers), pricing policy (commercially oriented opportunity pricing) and organizational set-up (national commercial and sales organization, centralized pricing author-ity, and responsibility split between commercial and sales departments).