The American writer Alfred Kazin remarked that "One writes to make a home for oneself, on paper, in time and in other's minds."
Well, Reed Holden certainly has had a place in my mind since I first read him back in October 1998. His book, co-authored with Thomas T. Nagle, The Strategy and Tactics of Pricing (STP) is a seminal work, adorning the bookshelves of anyone who takes pricing seriously. With this influential book, Holden and Nagle are probably more responsible than any other individuals for putting pricing on the organizational charts of companies around the world.
I was fortunate enough to receive an advance copy of Reed Holden and Mark Burton's new book, Pricing With Confidence, spending a couple of days after the New Year absorbing its many lessons. Of course, there is no possible way to do justice to this work in such a short space, so instead I will simply share with you some of the more brilliant insights that struck me like a thunderbolt.
In addition to a brief synopsis of the Ten Rules of Engagement, the Introduction starts out with a discussion of the pricing death spiral, a never-ending process whereby the buyer continuously gets the seller to offer more and deeper discounts. A process, the authors teach, with no winners, only survivors. The Ten Rules offered in the book are effective strategies to counter this trap--along with capturing more of the value a company creates.
The Introduction also contains a discussion on "What Is Your Pricing Purpose?" offering this advice: "In Reality, pricing is far from simple. Setting the optimum price is one of the most difficult decisions managers ever make."
Amen. This statement recognizes that pricing is not a science, it is an art; but it's also a skill, meaning the more we do it, the better we get. The authors also suggest that the highest purpose of pricing is to increase profits.
The summary of Rule Two proffers this sage advice: "You can't have confidence in your pricing until you have confidence in the financial value that your offerings create for customers. Even though many managers are convinced they can't get this information, the reality is that most of your customers are eager to tell you. All it takes is asking the right questions and being willing to listen."
Yet how many firms truly understand this? It's much easier to sit around and lament the fact that what they sell is increasingly a "commodity," complaining about the procurement process, and whining that customers simply don't understand the value they create. But that's the cowardly way out, shifting blame and responsibility onto others.
If companies themselves don't take responsibility for comprehending, communicating, creating, convincing and capturing value, who will? How can you change something if you don't accept responsibility for the underlying causes?
The discount habit--what they label discount creep--is usually the result of either selling to customers who don't value what is offered, or a wrong customer to begin with--as they write, "the price isn't wrong; the customer is."
Rule Four identifies four types of customers: price buyers, value buyers, relationship buyers, and a group they call poker-playing buyers. The chapter goes on to discuss strategies--honed by real-world experience--on how to deal with each type that are worth the price of admission.
Lest anyone accuse me of writing a hagiographic review, I don't agree with everything in this book, a source of endless exchanges of emails between Reed and myself.
My biggest disagreement is with Rule Nine: "Take Simple Steps to Move From Cost-Plus to Value-Based Pricing." It's not that I disagree with the necessity of an incremental approach--since the cultural change required for any company to move to real Value Pricing is massive--it by necessity must be incremental.
My issue is with this statement: "There is nothing wrong with cost-plus pricing as long as it does a good job of leveraging the financial value you create for customers." Yet, it's highly unlikely that cost-plus pricing does this, except by coincidence.
My worry with this statement is that some leaders will use it as an excuse to delay, or put off entirely, making the transition to VP. Replacing cost-plus theory with value-based theory is hard enough without some people clinging to any last vestige of the proprietary of the old model, especially from someone as prominent as Reed Holden.
But then they write: "An important point about cost-plus pricing is that most organizations are comfortable with it," all I can say is a lot of people are comfortable being fat, but that doesn't make it optimal. I also reject their notion that "If an organization sharpens the quality of its costing data, it is always in a superior position." And "Applying incremental costing produces what we call value-enhanced cost-plus pricing." Huh? That's a enhanced contradiction in terms--like jumbo shrimp.
But becoming more accurate cost accountants isn't going to make a company become better pricers. Toyota doesn't even use a standard cost accounting system, but rather a process they call target costing.
These technical disagreements aside, they take nothing away from this work--a fantastic book that should be read by anyone who considers themselves serious about creating and capturing value through better pricing. Reed and Mark have created another permanent home in my mind with this work.