A Typology of Pricing Orientations: Sensemaking and Making Sense of Organizational Pricing

1. A Typology of Pricing Orientations:Sensemaking and Making Sense ofOrganizational Pricing Gerald Smith Boston College February 2002

2. Pricing Decisions How Organizations Make Pricing Decisions: Rational decision-making vs. Sensemaking

3. Relevant Literatures • Managerial pricing literature • Organizational and social psychology • Marketing implementation

4. Field Research • Exploratory Research • 5 Focus groups • 46 managers • 23 companies • Depth interviews • 28 managers • 10 companies • Industries • Computer, medical devices, telecom, petroleum, steel, auto parts, consumer goods, software, HVAC, ag equipment, publishing

5. 18 Marketing 5 Fin/Acctg 10 Engineering 13 Pricing 7 Sales 12 Gen Mgmt 3 Other 6 Unknown Sample Composition • 5 CEO, COO • 3 EVP, SVP • 12 VP • 16 Directors • 26 Managers • 6 Analysts • 6 Unknown

6. Contrasting Models Rational / AnalyticSensemaking • Concrete, analyzable, hard, measurable • Formalized, guided • Info is analyzed, prior to action, rationality is prospective, anticipated consequences, linear thinking and logic • Analysis precedes action, goal oriented • Equivocal, emergent, ambiguous, enacted • Informal scanning, noticed, extracted cues in context • Interpretations shared, fluid, open, disorderly social, retrospective sensibility • Action precedes interpretation Environment Information Gathering Decision Processing Behavior

7. INTERNAL Production inputs -- costs, unit margins, unit VC, unit FC, overheads, burdens Defended by Accounting and Finance Key to survival: Cost Recovery Centers of Knowledge Influence EXTERNAL • Competitor focus -- relative SOM, rank, wins/losses, price/perform • Defended by marketing or engineering • Key to survival: Competitive response

8. INT/EXT Quality/Value focus -- perceived quality, value, EV, loyalty Defended by Marketing Key to survival: Quality and value Customer-Focused Centers of Knowledge Influence EXTERNAL • Customer Volume focus - sales growth, price, sales volume, price sensitivity, price elasticity • Defended by Field Sales • Key to survival: Likelihood of purchase

9. Systematic Analytical Competitive Driven Analytical Cost Driven Analytical Quality/Value Driven Analytical Customer Volume Driven Analytical Organizational Decision Processes Competitive Driven Sensemaking Cost Driven Sensemaking Quality/Value Driven Sensemaking Customer Volume Driven Sensemaking Social Sensemaking Internal Knowledge Focused External Knowledge Focused Centers of Knowledge Influence Decision Process and Centers of Knowledge Influence

10. Illustration: Competitive-Driven Sensemaking “We try to find out how our competition is pricing and we very much let the market price drive [our price]. . . [We track] what the latest deals are going down. . . I get that from our customers, either the ones we lose or the ones we win. . . [Y]ou have to live within the market to get the [business] . . . I just bring [our employees] back to the market. My objective is . . . to win the bid. Its competitive . . . [and] to convince [other employees] I . . . directly quote what our competitors are pricing at, and size of those competitors, and how major of a player they are in the market that we have to compete with to give them a sense of what is going on in the market, who our competition is, and how we are to compete against that.” [T4:11-12,18-19]

11. Illustration: Cost-Driven Analytical “We have an estimating [computer] program and in it [is] everything we can possibly think of in this industry . . . [I]t lists equipment, heaters, diffusers, the pipes, flex, and everything . . . Everything is [calculated in terms of] a crew day . . . What we do is we take an average installer at [$20] an hour and an average [assistant] say at [$15]. We add those two numbers together and lets say its [$35], and we have what we call a burden on our labor. We have a burden factor for every dollar we sell, every dollar we make and our burden is calculated roughly [25] cents on a dollar. OK, now burden - I just got a report - burden is things on labor that we would pay if they didn’t work . . . So we take that [$35] . . . We take it times [1.25]. That’s [$350] a day. . . I don’t know how anyone can [set] price . . . without calculating overhead, OK. Period. . . [S]ure we look at [competitors’ prices], but do we adjust? Am I high or is the other guy low? . . . I can tell you this: for a six month period ending my company has a 15 percent net profit. That’s what all the classes and schools I’ve ever gone to [say] -- that’s textbook . . .” [D1:17-18, 20, 26-28]

12. Illustration: Customer Volume-Driven Sensemaking “[T]he first contract [with customer A] was at [$60] per unit. And that squeezed us really, because we have to pay [our contract workers] on the other side, and boy we were sailing I would say close to the wind on that one. . . But [Lisa, a field manager] she did all the work [with customer A], but she would sort of throw out “I’m going to go for [$75] -- we’re in it to get [$75], why the hell shouldn’t we get [$75]. And they’re not paying us overtime. She would bounce it off me, and I would say: [expletive], go for it [Lisa], but be careful -- we don’t want to lose the [sales volume] there if we get too pricey. . . I would tend toward the school of lets keep . . . the [volume] numbers up. I’m happy as long as we’re over the [2 million unit volume mark for the company]. We’re making money -- I know that. I just keep that in my mind ‘0 when we go below [1.6 million units]’ -- we’re not making money. . . but [now customer A] . . . [is] into reducing the cost of their [outsourcing] . . . and trying to cut back a bit and we might have to surrender the boat. . . Do I consciously sit down and look on [pricing] in a scientific managerial way? I would have to say no. I’d say, you know what do you think we’ll get away with? . . .” [O1/O2:7-10]

13. Illustration: Customer Volume-Driven Analytical “Using time-series forecasting . . . managers make a first cut at determining the levels of demand that exist at [different] prices . . . Customer segments are identified . . . and demand projections are made for those subsegments . . . Managers determine which price[points] to announce initially for each submarket . . . [for example, by querying] salespeople such as reservations agents who know customer sensitivities to different prices from first-hand experience. . . As reservations are made, they are tracked closely, and statistically significant deviations from the [segment] seat demand forecast are reported. . . to determine whether actual bookings have deviated so far from forecast as to warrant reallocation of capacity. . . For example, if reservations for business class airline seats . . . come in more rapidly than anticipated, reservations for leisure class airline seats . . . [will] be denied earlier in the booking process. . . [Or, initial] prices often turn out to be less than optimal when orders are actually placed . . . [which] call[s] for resetting price as well as reallocating capacity . . .” (Harris and Peacock 1995, pp. 37-39, 45)