Prior literature and studies on pricing capability

The number of empirical studies investigating pricing as an organiza-tional capability is severely limited. Many articles outline conceptual or more general ideas, but few articles present a theoretical structure, and empirical evidence for their conclusions, which is consistent with the research on organizational capabilities presented in the previous chap-ter. Four of the articles (Urbany, 2001; Dutta et al, 2002; Vogel et al, 2002; Richards et al, 2005) reviewed in this section might be character-ized as belonging to this category of less theory-laden and more practi-cally-oriented articles on pricing (-capability). The empirical study by Dutta et al (2003) contrasts the four previously mentioned studies in that the article applies a more formal and theoretically grounded ap-proach to the concept of pricing capability.

Urbany (2001) posits five different areas indicating how firms can re-orient or improve their pricing in terms of managing and maintaining profitability rather than pursuing market share or sales objectives.

a) Data/feedback – Efforts should be made to turn seemingly soft deci-sions into hard quantities, according to the logic that “what gets meas-ured gets done”. One example is, according to Urbany (2001), linking price, cost and demand data in one IT-system, and making sure that

decision makers have access to, and the capacity to understand, com-petitor information.

b) Segmentation logic – Navigating competitive situations is, according to Urbany (2001), intimately tied to understanding customer segments and the different willingness-to-pay of those segments. For example, aggressive competitive pricing action can be off-set by letting price sen-sitive customers go while keeping less price-sensen-sitive customer seg-ments. Urbany (2001) refers to this as a typical decision which is not easily justified internally, but crucial to a firm’s successful pricing.

c) Focus on the sales force – The firm’s sales force plays an important role in most pricing decisions. Naturally, this implies that changes in how prices are managed, at some point; have to work through the sales or-ganization. This indicates the need for extensive sales-force training and tools that aid the understanding of profitability effects and likely com-petitive responses.

d) Higher order thinking skills – Implementing new decision-criteria in an organization relies on the ability of the people who make the deci-sions to apply them in their work. According to Urbany (2001), the firm need to make long-term profitability a justifiable objective within the organization, which might involve such matters as being able to present a vivid picture of the consequences of different actions and ena-bling the courage needed to move ahead even though decisions have to be based on more ambiguous decision-criteria.

e) Commitment and configuration – As a final element of successful pric-ing, Urbany (2001) stresses the importance of top management in-volvement. In particular, this works to justify the types of decisions and trade-offs that have to be made within the organization.

Dutta et al (2002) take on a somewhat different approach in their out-lining of a strategic pricing capability. The main focus of Dutta et al (2002) is the investments that firms can make in three highlighted areas in order to develop a strategic pricing capability: human capital, sys-tems capital and social capital. Dutta et al (2002) posit that investments in these three areas are all necessary and mutually supportive for the formation of pricing capability.

a) Human capital – According to Dutta et al (2002) an effective pricing process requires well trained people who understand such complexities involved in pricing, such as; firm strategy and product-/customer-/competitor attributes. Human capital is primarily acquired by training and recruitment.

b) Systems capital – Dutta et al (2002) emphasize the complementary effects between human and systems capital. Even well-trained and dedi-cated employees will not function effectively if they are operating with insufficient systems. Examples of IT pricing systems that are employed by firms are: systems that allow the firm to react to information about customers in real time, customer price-sensitivity tools, systems for tracking customer purchase history, systems for tracking discounts, and systems for accessing information about product use, comparable com-petitive products and engineering details.

c) Social capital – Social capital is suggested by Dutta et al (2002) as the

“organizational glue” or coordination mechanism that holds the in-vestments in human and systems capital together to form pricing capa-bility. In addition to providing an important coordination mechanism, social capital is also suggested as an important barrier to competitor imitation.

Vogel et al (2002) suggests that the concept of pricing capability con-sists of four key areas: structure and responsibilities, policies and proc-esses, incentives and compliance, and platforms and tools.

a) Structure and responsibilities – According to Vogel et al (2002), pric-ing should be managed at a top management level within the organiza-tion, such as by a pricing council of senior functional and business unit managers. Key tasks for the pricing council are: establishing high-level pricing strategy, monitoring key market changes, assigning clear roles and responsibilities to everyone involved in the pricing process, arbitrat-ing cross-organizational issues, and trackarbitrat-ing net effective price realiza-tion. The pricing council should, according to Vogel et al (2002), man-age a team of pricing analysts who take care of the day-to-day coordina-tion, impact simulacoordina-tion, discount decisions and the monitoring of price performance.

b) Policies and processes – Robust policies and processes enhance the management of pricing (Vogel et al, 2002). This involves clearing pric-ing and discount authority, specifypric-ing the type of customer and com-petitor information on which pricing decisions will be made, and ac-tively managing how pricing decisions and policies are communicated.

Controlling the execution of these activities, in turn, require that im-portant factors are isolated and quantified so that decisions can be evaluated and used to improve future decisions.

c) Incentives and compliance – Incentive systems should be aligned with pricing objectives in order to ensure organizational compliance. Vogel et al (2002) stress the importance of adopting incentives systems and performance indicators that support objectives related to contribution margin and price realization.

d) Platforms and tools – The implementation of integrated, automated IT platforms, and highly visible pricing metrics are suggested by Vogel et al (2002) to be important measures for ensuring organizational com-pliance to pricing objectives. Thus, the goal of such systems is to ensure that the correct information reaches the decision-maker, but also to control employee behavior.

Richards et al (2005) posit a strategic pricing capability as an answer to three common pricing challenges that firms face: over-delegation, un-der-analysis, and relying on a single technological solution. The ele-ments of the strategic pricing capability outlined by Richards et al (2005:28) involve five specific areas.

1. Talent (technical pricing expertise, knowledge of firm strategy, training program)

2. Strategic management process (linkage to strategic decisions, fo-cus on price position relative to competitors)

3. Roles and decision rights (elevated role for pricing managers, re-defined expectations of senior management)

4. Information and technology (understanding of customer attitude, behaviors and economics; decision support information)

5. Mindset and culture (senior management role models, common language and standards, new definition of “success”)

By drawing on the RBV (Barney, 1991) and the behavioral theory of the firm (Cyert & March, 1963), the case-study by Dutta et al (2003) produces a detailed and theoretically grounded account of the routines, coordination mechanisms, systems, skills, resources, and activities, un-derlying pricing capability. Dutta el al (2003) argue that even though economic rents have been created firms need to have a capability in or-der to be able to appropriate them. According to Dutta et al (2003) such a pricing capability faces two basic objectives, being able to appro-priate rents and balance competing internal interests.

The study of Dutta et al (2003) reveals two major sub-capabilities of pricing capability at the studied company. These are in turn broken down into activities consisting of a combination routines, coordination mechanisms, systems, skills, and resources.

(1) Price setting capability within the firm is described as comprising three activities: (a) identifying competitor prices, (b) setting pricing strat-egy, and (c) translation from pricing strategy to price.

(2) Price setting capability vis-à-vis customers is described as comprising two activities: (a) convincing customers on the price change logic and (b) negotiating price changes with major customers.

The two more tangible assets that were identified in the study were a spreadsheet of competitor prices and a data system for tracking customers purchase history (discounts, etc.). The importance of more tangible in-formation systems in pricing is emphasized by Dutta el al (2003:625) who state that the “[…] system anchored the pricing capability at the firm we studied.”. The major elements of the pricing capability identi-fied by Dutta et al (2003) are displayed in Table 3.1.¹⁶

16Note that Dutta et al (2003) account for routines, skills/know-how and coordina-tion mechanisms divided across four groups of activities, while in the text, discuss-ing five different activities (Settdiscuss-ing pricdiscuss-ing strategy and Translation from pricdiscuss-ing strategy to price are accounted for as one activity when accounting for routines, skills/know-how and coordination mechanisms). Further, the different forms of systems discussed in the text are not included as a category when accounting for other elements of the capability (routines, skills/know-how and coordination mechanisms).

Table 3.1 Pricing capability within the firm and vis-à-vis customers (adapted from Dutta et al, 2003:622; 624).

Activities Routines Skills/know-how Coordination

mechanisms Identifying

com-petitor prices

Defining functionally equivalent products Nested routines for tracking competitive prices (e.g. special discounts)

Accessing competitive price information

Technical know-how about competitive prod-ucts, product changes Sales force tacit know-how of field sources for reliable competitive price information

Cross-functional teams to generate equivalent competitive product comparisons

Coordination between sales force and select customers to establish competitive prices Setting pricing

strategy and translation from pricing strategy to price

Collecting customer purchase history Nested conflict resolu-tion routines

Tracking past pricing actions

Pricing action analysis

System development expertise

Pricing strategy expertise Database skills

Financial analysis skills Customer price sensitiv-ity

Scenario analysis of customer response

Coordinating knowledge of differing assumptions Developing consensus on assumptions about customers

Coordinating knowledge of different pricing strategies

Channelling informa-tion of pricing acinforma-tions Convincing

cus-tomers on the price change logic

Information exchange with customers’ pric-ing systems

Identify effect on cus-tomers’ customers Send information to pricing team

Preparer price change presentation

Technical skills: pricing tool kit and price change effects

Know-how on customer response

Tacit know-how to separate sincere concerns from negotiating pos-tures

Learn about different perspectives

Develop consensus within firm and sales force on new prices Learn of customer re-sponse

Negotiating price changes with major customers

Organizational hierar-chy approval of new prices

Customers assessment Development of nego-tiation materials (re-peat overall firm analysis at customer level)

Knowledge of firm members biases and relations with customers Know-how about com-petitive offerings Knowledge of customer negotiation strategy Cross-functional nego-tiation expertise Customer price sensitiv-ity analysis

Consensus among par-ticipants on new prices Consensus in negotia-tion team on negotianegotia-tion strategy