Farmers do not take it easy at harvest time. Nor should firms. In our mind, it is simply an untenable management strategy to focus on value creation without thinking about how that value will be captured. The sooner firms recognize this, the sooner they will be on their way to bringing in a bumper crop.
We're not saying that pulling the price lever is a cinch. You must know what you are doing before you even think about pulling that lever. Once pulled, everything can change. Profits either rise spectacularly or fall in a traumatic, humiliating way. Whether you succeed or fail, the effect of your "hand" will be very "visible." Clearly, pricing is not a game for the fainthearted or someone with a trembling hand. But that doesn't mean you should not try. Risks and difficulty are inherent in any important corporate decision. They have not stopped managers from making those decisions and pulling the costs and sales levers in the past. They should not stop managers from facing up to their responsibility to examine the price lever now.
However, pricing is an unfamiliar subject for most managers. Until recently, pricing was scarcely taught except as a unit of microeconomics and a subtopic of marketing. For the longest time, business education everywhere focused primarily on the other three profit levers. Business students learned that in a competitive market, prices should be set so that marginal revenue matches marginal costs. They also learned that competing on price is generally a last resort and probably a bad idea. Unfortunately, neither precept offers much guidance to pricing managers. For these managers, they need more actionable pricing knowledge.
Over the past decade, nearly a dozen books have been published on pricing to help disseminate that knowledge, but most are quite specific, lacking general interests. In this book, we aim to make pricing knowledge more tangible, concrete, and fun by showing how innovative pricing strategies have helped leading companies create and capture value as well as new customers. We visit restaurants where the customer sets the price and see a famous rock band that made money by giving away its album for free. We look at how Google and other high-tech companies have used pricing to remake whole industries, and at China, where executives have made an art out of initiating and fighting price wars—in spite of the conventional Western wisdom that price wars are risky, stupid, and sometimes even fatal.
From these stories and many others, you will see that companies price their products in many different ways—through high prices, low prices, even no price—and you will learn how, why, and when each method works. We hope that as you read these stories, you will learn something not just about how to set prices, but about the importance of thinking about prices. We believe you will agree with us that the possibilities of pricing are endless, limited only by the need to retain some value for future harvest and the bounds of creativity.
Our experience has taught us that pulling the price lever demands courage and confidence, the kind best built on your knowledge about what pricing can do, how you can price your goods or services, and how consumers and your competition might react to your pricing decisions. If this book helps you gain more confidence in pulling the price lever and perhaps sparks an idea about an innovative way to price your own product or service, we will have achieved our main objective.