Pricing is a complex process (Monroe, 1990; Nagle & Holden, 2002). Many industry managers consider pricing a headache and many firms have “thrown in the towel” on pricing. They complain that they have no control over prices since “the market sets the price and (they) have to figure out how to cope with it” (Dolan & Simon, 1996). Lancioni et al. (2005) proposed that pricing strategy has implications for stakeholders both within and outside the firm. For them, pricing is a difficult and complex process due to the plethora of internal and external economic and political influences that shape the firm’s pricing decisions. The tasks of price setting and implementation have numerous implications throughout the organization. These tasks involve “multidimensional processes affecting customers, products, cost recovery efforts, produce margin levels, customer retention, market share, and domestic and international sales” (Lancioni, et al., 2005, p. 125).
So what makes pricing so complex? Can pricing management be considered as a complex system? How do firms manage the complexity generated by the multidimensionality and multileveledness?
Our research work in the area of pricing management led us to conclude that one of the critical elements of the organizational journey towards pricing excellence is the organization capacity to change. Moving from a formula-based pricing orientation to a customer-value orientation requires deep changes and an overall organizational mobilization to achieve desired goals (Liozu, Boland, Hinterhuber, & Perelli, June 2011). This combination of change and complexity dimensions in pricing led us to the work of Richard Boyatzis and especially his 2006 paper on Intentional Change Theory from a complexity perspective.
Boyatzis refers to complex systems as “multi-level combination of systems that may behave in a way independent of any one of the component systems” (Boyatzis, 2006, p. 608). Later in his paper, he explores the aspect of his change theory that makes it a truly complex system: its multileveledness. We adopt these dimensions of system combination and multileveledness and apply to pricing management in organizations. We actually go one step further by stating that pricing is much more complex than that. Our figure below paints a complex picture. Complexity in pricing management is nested at various levels across multiple dimensions and cultures, and requires the convergence of multiple languages. Complexity is the result of complex interactions between internal sub-systems (functions and departments) exposed to the internal/external on-going opposition.
We conjecture that pricing management is multi-functional, multi-dimensional, multi-cultural, multi-lingual, and multi-leveled. Pricing requires the careful management of the multitude of agents involved in pricing decisions and the plethora of information that need to be consider to set price levels. Because all agents and actors act independently, tensions, conflicts, misunderstandings, difficult negotiations, and internal arguments are part of this complex price setting process. There is plenty of room for failure, for poor decision making and for break downs in the process. That is may be why most managers “throw in the towel”.
Stephan Liozu is President & CEO of Ardex America Inc (www.ardexamericas.com), an innovative and high-performance building-materials company located in Pittsburgh, PA. He is also a PhD candidate in Management at Case Western Reserve University and can be reached at email@example.com.