Cover of Pricing Bible, Chinese version of Power Pricing: How Managing Price Transforms the Bottom

A new book has soon become a best seller in China today. Its name is Pricing Bible and its original English title is Power Pricing: How Managing Price Transforms the Bottom Line.

As a coauthor of this book, Mr. Hermann Simon is founder and chairman of Simon, Kucher & Partners Strategy & Marketing Consultants in Germany. Simon is also a Permanent Visiting Professor at the London Business School. Robert J. Dolan, the coauthor of this book, was the Edward W. Carter Professor of Business Administration and Senior Associate Dean at Harvard University's Graduate School of Business Administration. Today Dolan is the Dean of the School of Business Administration at the University of Michigan in America.

Yong Tang, People's Daily correspondent based in Washington DC, has recently conducted an exclusive email interview respectively with these two world famous management masters.

Yong Tang: Have you ever been to China? What is your impression?

Hermann Simon: I have been to China many times. My last trip to Beijing, Guangzhou and Shanghai was in March 2004, where I gave talks to thousands of Chinese entrepreneurs. Each time I return to your country I see a lot of progress. I am impressed by Chinese entrepreneurs and particularly by young Chinese. I met many of them during my last trip. They will change the world, not only China.

Robert J. Dolan: I have been to China but not recently. I am hoping to visit (China) next year as part of my duties as Dean (of the University of Michigan School of Business).

Yong Tang: Have you expected the Chinese edition of your book Pricing Bible to be sold so well in China?

Hermann Simon: Of course, I am positively surprised, what author wouldn't be? On the other hand, I expected a good reception after my first book in Chinese Hidden Champions (Xinhua Publishing House, Beijing 2nd edition 2003) became a bestseller, and a second book Aphorisms for Managers (Yunnan Science and Technology Press, Beijing 2003) was also very well received. The Chinese people are very interested in modern management concepts, and interestingly they do not confine themselves to America. They also want to learn what is going on in countries such as Germany. And the Chinese market is huge. I talked to many publishers and was always surprised about the number of books they sell.

Yong Tang: What is the most popular definition of Pricing IQ? What are the basic elements of Pricing IQ?

Hermann Simon: Pricing intelligence has two components: First, the basic understanding of the pricing mechanisms, and, second, its application to the practical problems of the company. Astonishingly, the second part is by far the most difficult one. Applying pricing theory to practice is my life's mission. After 16 years as a professor specialized in pricing research, I became a full-time pricing consultant. A leading American magazine BusinessWeek (January 26, 2004) called our company, Simon, Kucher & Partners, "world leader in giving advice to companies on how to price their products." Companies throughout the world perceive pricing as an increasingly critical intellectual challenge and competence.

Robert J. Dolan: The basic elements of the Pricing IQ are as I set them out in my book and the basic steps to build are also there. But here is what I think is most important. First, recognize that pricing is the most powerful element for impacting profit. This means you should invest a great deal in developing the data needed to make good decisions. Second, manage all elements of the pricing program not just the list price. The "price waterfall"concept in the book is vital.

Yong Tang:What specific steps could be taken to improve a person's Pricing IQ?

Hermann Simon: You must understand the basics of pricing, concepts such as the effect price has on sales volume, revenue and profit, price elasticity and sophisticated structures such as price differentiation, bundling, etc. This can either be learned in studies of economics and business or from books. Our book Power Pricing provides a short introduction to these concepts without using complicated formulas. But beyond this you must develop an understanding of your specific market. This understanding can only be based on experience and on asking simple, concrete questions. Furthermore, the best companies call on specialized pricing consultants. In essence, pricing IQ is a combination of theoretical and practical knowledge, while relying on internal and external sources.

Yong Tang: There are a large number of small and medium-sized enterprises in China today. They produce a variety of products. What is the basic skill of pricing for such small and medium �Csized enterprises?

Hermann Simon: This is indeed a very important observation. I became fully aware of this when I gave talks to thousands of Chinese entrepreneurs during my most recent trip. Almost all attendees were from small and mid-sized companies, many of them with the ambition to become "Hidden Champions", i.e. companies that play a leading role in their world markets. Typically these entrepreneurs make pricing decisions based on gut feeling or competition. They often lack a profound understanding of the impact that price has on profit. They tend to sell their products too cheaply in order to make the sale or to build market share. They need a clearer notion about the positioning of their company and their products, a well thought-out pricing strategy. One of our Chinese clients with substantial exports into Europe and the US was able to increase his price by 20% without a loss in volume. This was possible because the company had managed to gain a reputation for quality and reliability. In general, even small and mid-sized Chinese companies should not sell at low prices alone. The must strive to build a long-term market position and a strong brand; quality will become more and more critical. All this will be reflected in the price.

Yong Tang: The price wars among Chinese enterprises, in the sector of consumer electronics in particular, are extremely intense and widespread. Could Pricing IQ still work under such circumstances? Why or why not?

Hermann Simon: Indeed, the price wars in consumer electronics are legendary, but they are not confined to China. Pricing IQ is absolutely critical under these conditions. A company must fully understand what the value of its brand is, whether its own price moves induce subsequent moves by competitors and what the consequences for profit and survival are. In a situation of price wars most companies do not remain sober and think thoroughly, rather they react impulsively and spontaneously, often with disastrous consequences. Personalities, their aggressiveness and moods, play a decisive and too often destructive role in these situations. Sober analysis and thinking, intelligent simulation of alternative scenarios, procuring better information on the price's effects are actions that improve the pricing IQ in this situation.

Yong Tang: The big multinationals in the world usually have a much higher pricing IQ. Why and where does their Pricing IQ excel? What should Chinese enterprisers learn most from such big companies in the field of Pricing?

Hermann Simon: Not all big companies have a high pricing IQ. Industries differ a lot in that regard. Airlines, many automotive companies, also consumer electronics continuously destroy their profits through suicidal pricing. Other industries are much more sophisticated. The pharmaceutical industry is the clear leader in this field. Pharmaceutical companies invest a lot of money in measuring the value of their products. And the value is always the foundation for the optimal price. Only if I precisely understand the value of my product will I get the price right. But as I said above, most Chinese companies are relatively small compared to the big multinationals. For them, simpler approaches are necessary. Small concrete studies of price effects in export markets are a good start, also workshops under the guidance of experts where the optimal price is established, so-called expert judgment is another simple method to get the price right.

Yong Tang: I have been to Europe and traveled frequently in the United States. One thing puzzling me is that most European and American supermarkets seem having a very strange pricing strategy. They tend to price their commodities at odd prices. For instance, if you buy a loaf of bread, the price may be about US$1.99. I feel this is very inconvenient for me. Why don't they price the bread at US$2.00? What is the difference between US$1.99 and US$2.00? Do they simply want to make consumers feel like they are paying much less?

Hermann Simon: This is a good observation. The policy of "odd" or "broken" prices is indeed widespread. It's probably a self-fulfilling prophecy. Because may people �C both retailers and consumers - believe in it, it works. If everybody would apply round prices the outcome would essentially be the same, but �C as you say �C the world would be simpler. But if some competitors apply the technique and others don't, the scale may turn in favor of the ones who use it. Therefore, practically everybody uses it. But strategically it's not really important.

Robert J. Dolan: The research does suggest that in certain product categories, the consumer is not always an economic agent; but there are important behavioral issues to consider. For example, the "difference" between US$.99 and US$1.00 is a lot more than the difference between US$1.11 and US$1.12. It shouldn't be; but in fact, it is. Pricers should take these behavioral factors into account.

Yong Tang: What suggestions do you have for Chinese MBA education?

Hermann Simon: Of what I have seen, the Chinese MBA education is already very good. I favor a combination of the European and American styles. The European style is more systematic and theoretical, the American style is more practical and case study-driven. Combining both seems like a good solution and well in tune with the Chinese tradition of the middle way.

Robert J. Dolan: MBA Education must be grounded in underlying disciplines of economics; It should have a global view and be focused on developing students' leadership capability.

By People's Daily Online