Dynamic Pricing Silver Bullet?

https://www.ibbaka.com/blog/2019/11/7/dynamic-pricing-is-a-two-edged-sword

Fully agree with this great post! When you only have (want to sell) a hammer everything looks like a nail. Every solution has its value and should be applied accordingly and we should avoid to go with the latest trend flow and thoroughly assess the pros & cons and look at the value fundamentals. "...The conflation of willingness to pay and differentiated value has to come to an end. Willingness to pay is an outcome of the creation, communication and delivery of differentiated value. It is an outcome and not a driver. Pretending that you understand value because you can estimate willingness to pay is wrong headed. ..."

Review: The Strategy and Tactics of Pricing: A Guide to Growing More Profitably

The Strategy and Tactics of Pricing: A Guide to Growing More Profitably by Thomas T. Nagle
My rating: 4 of 5 stars

A good text book on pricing in its strategic and tactical perspective. Decided to read it in order to shore-up my Pricing knowledge and it was of great utility. I do recommend its reading for someone that wants to know more about pricing, to the professionals already working to provide a sound framework to their day-to-day activities and allow better decisions that have implicit a tremendous value to the overall organizations they work for.

It provides pricing theory as deemed needed (and if you want to explore more you have a plethora of references you can explore), but it's practical text book that applies the theory presented to actual cases and guides you through such important strategic process. Even in the field on how to determine the pricing level (value, pricing elasticities, etc...) always have a pragmatic and practical approach that one can use immediately.

Pricing is presented where the push comes to shove. i.e. when every company captures the value it has previously created and you can see a lot of value be siphoned away due to bad practices.

From all the applicable concepts presented, i would like to highlight the following:
- The Value Cascade - great representation on how to manage value and then pricing. An how you spill value in each caption
- How to define the best value to your customer;
- How to estimate the economic value estimation (economic vs. psychological);
- How to create break-even sales curves vs. pure elasticities (difficult to estimate in real markets)
- Ethics and law - also a good chapter that push-back some preconceived ideas and limitations,

Do recommend its reading and have it readily available for every pricing professional.



View all my reviews

Review: Competitor Intelligence: How to Get It; How to Use It

Competitor Intelligence: How to Get It; How to Use It by Leonard M. Fuld
My rating: 2 of 5 stars

Read this book based on a recommendation/reference given in another book i was reading, that i liked and do recommend (The Strategy and Tactics of Pricing).

The real classification would be between the 1 and 2 stars, finally i decided to go with a 2 stars due to a couple of good insights and especially to show me that we should always strive to be creative when we do not have readily accessible the intelligence we would find relevant for our own analysis.

It´s a clearly a dated book (1985) and it does not provide sound and practical building blocks to approach the competitor intelligence area of study. It's more a guide where to find data to support such discipline/function, that although most probably relevant for the 1980, it is clearly outdated to a 2020 reader.

The positive, if you take a very positive attitude and try to conceptualize some chapters of the book, you can define your own framework based on the potential difficulties and problems one can find while performing such important task of producing intelligence, mainly by knowing the constraints you have in the public available information on basic sources, and how to find/leverage creative sources of information and even use the some basic sources.

You should strive "mutatis mutandi" to apply some of the tools presented to the reality of 2020 and with that extract the most value of its reading.

In nutshell, if you want to learn something on this subject, this would not be book a i would recommend,

View all my reviews

O-Ring Theory of Development and its importance on a company organization, HR, output & wages

Came across this economic theory by chance (on the Marginal Revolution Blog - Tyler Cowen and Alex Tabarrok) and it was surprisingly insightful, simple and helped to structure my line of thought on the areas of: Management, Organization setup and the importance of Areas of Excellence within an organization. 

Additionally, it also explains the pay gap between excellent (A-players) and very good & below associates (B/C/D - Players).

I strongly advise you to see the video of 19 minutes that provides a great overview of this theory (so you can also understand the math).

So the O-Ring Theory of Development (Michael Kremer, 1993) is underpinned by the following assumptions:

1. Production (broad sense) depends on completing a number of tasks;
2. Failure or quality curtailment of any task reduces the entire product (weakest link problem);
3. Quantity cannot substitute quality (2 mediocre Finance Directors will not do a better job than a great Finance Director)

If you take a broad approach to this production function you have a company or even an entire economy.

Main practical deliverables of such theory:

• Quality matching - you should put your high quality workers together (preferentially allocated to the company areas of excellence, based on its value chain) and the other workers (B/C) also together, instead of mixing them up, as the results will be significantly better;
• Higher quality it will imply better results (i.e. better outputs)
• Higher outputs/results will result in better wages (macroeconomics 101) for any organization & that the function Output/Wages is not linear

• The wage distribution is severely skewed to the right and the talent distribution follows a normal distribution (that is why small incremental talent on the top decile can have a significant impact on the associates wages);

• Workers performing in high-skill firms will have higher wages than low-skill firms (look at the wage gap of tech/pharma companies compared with other industries);
• Talent attracts Talent - High quality worker will want to work with other of the same standards (virtuous cycle)
• There is an tremendous incentive to invest in skills/quality of the workers (company and and associates)
• This theory has several "equilibria", meaning that if your are surrounded by high quality workers it pays-off to invest in becoming one, but if you are within a non-high quality organization it does not pay-off to invest, as your higher potential output will be severely curtailed by the others;
• Capital will be allocated to high quality organizations or within the organization to the areas with the highest quality potential - so if you are investing within your organization make sure you have your A-team on that area.

You can think your organization is performing several activities throughout your value chain, thus applying this theory you can identify bottlenecks, linkages and complementarities and don't forget where are your areas of excellence based on the Value Proposition so you can have your A-players on it!

IMF - Europe 18/10/2019

IMF - Europe 18/10/2019 takeaways:

• Slowdown across advanced Europe from 1,4% to 1.3% specially in Germany, Italy and UK, due to trade tensions and Brexit. 2020 modest recovery of the grwoth rate to 1,5%;
• Demand is strong and it's underpinned by a strong labor market;
• Fiscal policy should be used for the countries with potential expansionary policy slack (Germany / Netherlands) however there are countries that still should be focusing on fiscal consolidation (southern countries);
• Monetary policy should be accommodative as is being implemented by ECB to avoid a recession, however such policy is depletive of potential future monetary policies;
• Emerging Europe is also reducing its growth prospects, still expected to grow at 3,7% and on 2020 at 3,1%;
• Long-term problems remain - productivity and demographics in advanced Europe should be addressed and  Emerging Europe should improve macro-economic policies to tackle structural problems and promote institutions reforms & its governance k«

World Economic Outlook, October 2019 - IMF - Synchronized Slowdown

IMF published on October, 15th 2019 the World Economic Outlook, that reinforces the projections of a synchronized slowdown for the world economy.

My key takeaways:

• 2019 growth rate at 3% for 2019 (below PIIE forecast) and 3,4% for 2020 vs. 3,8% in 2018 due to trade barriers, low productive growth and aging demographics in advanced economies; 
• Advanced economies should slowdown to 1,7% and converging to their potential;
• Downside risk to this projection has significantly increased (trade barriers, geopolitical tensions and Brexit)
• 2020 is expected to go at a slighter better pace driven by emerging markets and base effect, i.e. that global trade activity and manufacturing is so slow in 2019 that 2020 is just picking-up to normal values resulting in a increase of the global growth;
• No recession is foreseen for the next 12 months;
• Trade tensions between US/China (self-inflicted) produced a toll of 0.8% on the world economy,
• Monetary easing in the main economies (USA/EU) is providing a tail wind to the world economy by 0,5%, although it creates additional risks as this preemptive accommodative monetary policy reduce space to fight a potential future recession
• If world economic growth drops to 2,5% it would imply that several advanced economies would be in a recession, thus there is no space to policy missteps;
• Monetary policy cannot not be the only answer to offset this downward trend and fiscal policy should be brought into the game in countries with budget space to accommodate such expansionary policies

World Economic Outlook, October 2019 - IMF

Ideas on solving the Pricing Puzzle - Based on a BCG article

Excellent BCG article on Pricing based on a Wealth management example, although in my opinion applicable to any industry.

What are my main conclusions:

1. Pricing (in all its dimensions) is a key component of a company strategy, not just a tactic lever one should/could use;
2. The top quartile pricing performers have significant better overall results
3. Smart pricing has 4 main components:
• Proper client segmentation (avoid broad-based segmentation on external characteristics easy to define, but on customer behavior and required service levels) ;
• Have a clear value proposition for each segment;
• Optimize the price structure for each segment
• Constantly reassess the above, making it a process and not a 1 time yearly event
• have a clear pricing strategy;
• favor quality over quantity - start small, test, pivot (if needed) and only then deploy. Each company, division, product has its own story;
• Obtain sponsorship within the organization and buy-in (quick wins are important)
• Pricing is a core strategic competence not just a tactic one within marketing
• Embrace Data Analytics - target pricing algorithms, pricing intelligence, etc
4. The Exhibit 6. is self-explanatory and is a great infographic over the key roles and responsibilities of any Pricing team.

Solving the Pricing Puzzle (aWealth management example)