This is an old Mesa Associates [the forerunner to Axis Associates] pricing paper that was published in The Journal of Professional Pricing.
It reminds me of the old George Santayana [philosopher, essayist, poet, and novelist] quote from his work titled The Life of Reason (1905-1906):
“Progress, far from consisting in change, depends on retentiveness. When change is absolute there remains no being to improve and no direction is set for possible improvement: and when experience is not retained, as among savages, infancy is perpetual. Those who cannot remember the past are condemned to repeat it.”
Introduction
There are four major categories of models — quantitative, mental, narrative, and graphical — of importance to a price manager hoping to perform at optimum effectiveness and creativity. The models that price managers apply to problem solving obviously vary considerably from firm to firm. No doubt the most commonly-used pricing models today are those which can be input into spreadsheet software in order to perform sensitivity (“what if”) analysis. However, sensitivity analysis is only one window to the inner workings of the complex system called “price.” Complex systems and series of events can only be understood through patterning of data, which reveals relationships, symmetries and sometimes anomalies. In patterning data and in problem solving, formulas, words and graphics are analogous to the three legs of a stool.
Quantitative Models
Management scientists most often think of a model as a quantitative approximation of reality, which can be used to explain past behavior and predict future behavior. Applying knowledge from mathematics, statistics and other disciplines, they have produced such elegant pricing tools as conjoint analysis and simulation analysis. However, no matter how dazzlingly complicated quantitative models appear to be on the surface, they are based on simplistic assumptions. Hence, over reliance on number-crunching approaches to solving pricing problems would be a grave mistake.
Mental Models
What MITs Peter Senge calls “mental models,” i.e., shared mindsets or stereotypes, are far more prevalent representations of reality than quantitative models.1
Moreover, because they block insightful thinking, mental models often have extremely detrimental effects on business outcomes. To illustrate, consider the recent upheaval in Sears Roebuck & Co.’s mail order catalog business. Sears’ decision to shed its century-old catalog represents a prime example of the inability to replace one mental model with another. The mail order catalog industry, as a whole remains profitable and continues growing at a healthy clip. Yet rather than make changes necessary to emulate the success of competitors, Sears pulled the plug on a catalog, which contributed $3.3 billion in sales in 1992. Now that the cost-plus pricing paradigm is crumbling after centuries of blind acceptance, Senge might advise price managers to examine their mental models further to see what other flawed views and practices need to be shed.
“Sears’ decision to shed its century-old catalog represents a prime example of the inability to replace one mental model with another.”
Nonquantitative Models
Creativity experts have yet a third view of models. They think of models as tools for communicating ideas and developing new ones. Creativity models are often based on narrative and graphical rather than quantitative techniques. Most of these techniques are word-based and rely upon the power of words for creative insight.
Graphical patterns structure and stimulate new thinking in ways that verbal and numerical reasoning cannot.2 In short, graphical techniques can help to define a problem, model a concept, communicate a thought, reveal a pattern, reach a solution and stumble upon new insights. To demonstrate the potential power of graphical techniques, creativity expert Margaret Boden reminds us that gaps in Mendeleyev’s periodic table of the elements hinted the existence of elements not yet discovered.3
Conventional graphical tools such as line graphs, bar graphs and pie charts illustrate only quantitative relationships. Other graphical techniques are useful for analyzing linkage, flow and other nonquantitative relationships. For instance, Alfred Oxenfeldt introduced the idea of using “consequence nets” as a means of diagramming immediate and delayed effects of pricing decisions upon interest groups and dependent variables.4 Though the consequence net concept has been around for a long time and is perhaps one of a price manager’s most powerful tools, it seems to be buried in the toolbox. Would American Airlines have introduced its four-tier pricing strategy in 1992 or would Phillip Morris have slashed the price on its Marlboro brand in 1993 if consequence nets had been constructed first?
The power of graphical techniques stems largely from their usefulness in recording expert judgments, and thought processes. This is why they are growing in popularity among business managers who find themselves bumping up against the analytical limitations of computers and computer software and groping for new paths to problem solving.
“Would American Airlines have introduced its four-tier pricing strategy in 1992 or would Phillip Morris have slashed the price on its Marlboro brand in 1993 if consequence nets had been constructed first?”
Business executives are just now beginning to discover the utility of a graphical technique called “mind mapping” invented by creativity expert Tony Buzan in the 1970’s.5 The San Francisco-based consulting firm High Gain and others are introducing this technique to corporate clients as a new method of problem-solving. Mind mapping taps into the pattern-making powers of the human brain, which still far exceed that of the most sophisticated supercomputer. Mind mapping, once discovered by price managers, is destined to either become analytical essential or a dust collector like the consequence net.
“Focusing on profit, market share, and ROI numbers, we tend to forget that how often these performance numbers are a function of ideas expressed in words.”
Although we express written and verbal thoughts mainly in linear fashion, neither the brain nor other complex systems (such as the price variable) operate that way. Mind maps can be thought of as crude external representations of thought patterns and processes, but also, and more importantly, they are a means of defining and changing reality. Whereas geographical maps aid us in getting from starting point A to destination B, mind maps help us to define destination B, i.e., create the future.
To construct a mind map one starts with a mind idea at the center of a blank page and expands outward as additional ideas emerge. A variety of devices can be used to increase the explanatory and discovery potential of mind maps. Lines show connections between ideas, arrows indicate direction of influence or sequence, and geometrical shapes outline ideas having a common thread (e.g., threats, opportunities, solutions, causes, symptoms, effects) or a certain order of importance. Creativity images such as a snowball rolling downhill can be used to concisely communicate concepts. Mind maps can either be hand-drawn or created with the aid of computer software. A software application called Inspiration marketed by Ceres Software of Portland, Oregon is one of several programs designed solely for the purpose of providing computer-generated mind mapping graphics based on user input. Use of such software greatly streamlines the mapping and remapping processes.
Summary
Modem business culture places a higher value on numbers than words. Focusing on profit, market share, and ROI numbers, we tend to forget that how often these performance numbers are a function of ideas expressed in words. One of the biggest marketing success stories of the 1980’s was MCI’s ‘Friends and Family” discount program. Who can deny the important role words played in the success of MCI’s innovative price promotion?
If words stored in human memory are thought of as multi-ordinate or, as Buzan suggests, balls with hooks to which other words can be attached, it is easy to understand why verbal pattern-making possibilities are infinite. To appreciate the contribution of creative word linkage to the pricing domain, consider such pricing terminology as “competitive upgrade,” “baker’s dozen,” and “anticipation discount.”
Until more business managers begin embracing nonquantitative analytical tools such as consequence nets, perspective of the complex price variable will remain myopic. And until creativity techniques such as mind mapping are vigorously applied to the price element, a false mindset will persist that product Innovation is more important than price innovation.
- Peter M. Senge, The Fifth Discipline: The Art & Practice of The Learning Organization (New York: Doubleday/Currency, 1990).↩
- Keith Albem and Jenny Miall Smith, Diagram: The Instrument of Thought (London: Thames and Hudson Ltd., 1977), 7-11, 34.↩
- Margaret A. Boden, The Creative Mind: Myths & Mechanisms (Basic Books, 1991), 48.↩
- Alfred R. Oxenfeldt, Pricing Strategies (New York: AMACOM, 1975), 22, 72.↩
- Tony Buzan, Use Both Sides of Your Brain (New York: E. P. Dutton, 1991).↩