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Iveroth et al. (2013) who also clearly differentiate between price strategies and price- setting practices, propose a five-dimension model that identifies the influential pricing factors (Figure 3). Thereby, their research defines pricing models as a system of price

elements in an agreement between the customer and the vendor. Any agreement between the customer and the vendor uses a pricing model that can be described through five important dimensions, which are present in any agreement. Depending on the individual agreement, some dimensions may be more dominant than others.

Figure 3: A five-dimension pricing model

Source: Iveroth et al. (2013)

As there is little research that tries to theorize and conceptualize the influential pricing factors, Iveroth et al. (2013) make a valuable contribution with regard to the theory- practice gap. The five dimensions can be described as follows:

Scope refers to the granularity of an offer. The spectrum starts with a package that is a bundle of products or services and ends with an attribute that represents the lowest level of a unit that is priced.

Base is a dimension that is very similar to the pricing discretion model developed by Monroe (2003). It describes the type of information that dominates the pricing decision. Firstly, cost is considered and found reasonable as the price floor by both, sellers and buyers. As basing the price level simply on cost information is suggested as not advisable, Iveroth et al. (2013) set the competition price for comparable products as an alternative starting point. Thirdly, the information about the customer’s willingness to pay assists in the determination of the price ceiling. This customer-value approach tries to find the proper balance between the customers’ perceptions of obtaining and sacrificing. While cost

and competition dominate price determination and price negotiation in practice, the customer-value approach is difficult to implement, though theoretically it appears attractive.

Influence is a dimension that is concerned with the extent to which either a seller or a buyer can influence the price. The most extreme situation of this dimension is the seller’s ability to set the price depending on their own criteria and communicate this via a pricelist. The buyer is not able to influence the process of price generation in this situation. The next step in this dimension is negotiation where the power balance between the buyer and seller is more even. In this case, the buyer can challenge the pricelist due to his buying power. One step further is based on an observable outcome of the use of a product or service, namely a result-based price. As the price is set according to the result of use, usually the buyer is more in control than the seller. This approach necessitates agreements on result measurement and monitoring. The next step in the influence dimension set in this model is pay-what-you-want. Hereby, the pricing decision is delegated to the buyer. This type of pricing gives either the buyer the possibility to accept or decline a price recommendation by the seller or make the decision himself on the offer value. The next step along the influence dimension is the auction, where the buyer and the seller relinquish the right to determine the price level. The price is set in relation to the willingness to pay of several buyers, so the single buyer cannot determine the price himself. The last extreme in this dimension is exogenous pricing. This means that circumstances beyond the control of the buyer and seller determine the realized price. This pricing is usually applied in long-term contracts of complex products and links prices to e.g., indexes that contain inflation, GDP, wages, stocks, etc.

Formula is the dimension that connects price with volume. The one extreme of this dimension shows a fixed price regardless of volume. The other extreme is a fully variable unit price. When volume turns out to be low, the buyer has a lower risk when paying a price per unit instead of a fully fixed price regardless of volume. The latter is attractive to the seller as a certain level of income is guaranteed. It also comprises the risk that the seller must deliver higher volumes at an equal price. In between the two extreme positions within this dimension, variations of fixed and variable elements are combined. The next formula defined by Iveroth et al. (2013) is fixed fee plus unit price followed by assured purchase

volume plus unit price followed by unit rate with a ceiling. Fixed fee plus unit price consists of a fixed component regardless of volume and a volume component. Assured purchase volume plus unit price has a similar function and guarantees the seller a minimum contracting volume regardless of quantity and simultaneously defines a unit price in the case of a higher quantity. The unit rate with a ceiling formula means that the buyer pays per unit up to a pre-defined level above which the seller does not charge for additional volumes.

Temporal rights is the last of the five defined dimensions. It focusses on the period the buyer can use the service. The axis of this dimension starts with perpetual and represents the classical type for goods you buy and theoretically can use endlessly. The further you move on the axis, the shorter the period of the use is. Leasing combines a time-limited and perpetual element. The buyer has the use rights for a specified period followed by the right to buy the good for a pre-determined price. Rent represents an offering that signifies the temporary right to use a product or service. This right ends after the rental period.

Subscription as the fourth type of temporal right includes upgrades and enhancements of a product or service during the subscription period. This is a common price strategy for software having the right to receive updates in the future. Pay per use is the other extreme of the temporal dimension, limiting the right of use to each occasion, e.g., streaming a film.

Besides their contributions to the theorization and conceptualization the influential factors of pricing, Iveroth et al. (2013) show by their empirical application of the proposed five- dimension model that pricing models are in fact connected to various explicit and implicit features. Thus, they narrow the theory-practice gap by ensuring that researchers and managers can benefit from their model.

2.3.2.2 Pricing capabilities (Dutta et al., 2003; Johansson et al., 2011; Kienzler, 2017; Liozu, 2015)

Normative research and thus neoclassical economics have strongly dominated pricing literature (Ingenbleek, 2014). Under given conditions, normative pricing literature helps to understand price strategies and prices. However, the processes of value creation and value assessment are not examined in this literature (Ingenbleek & van der Lans, 2013).

Dutta, Zbaracki, and Bergen (2003) pay more attention to these processes and identify that pricing is a capability from a resource-based perspective. They argue that pricing as a capability is the ability to set the right prices, and a company needs to invest in resources, routines, and skills to develop this ability. Furthermore, they show in that a company creates a competitive advantage in creating this value. Their criticism focusses on marketing and economics literature, which considers price-setting a costless and simple task. Their research reveals that, in contrast to the predominant view, pricing managers consider price-setting as a surprisingly difficult process. Particularly, pricing managers face two obstacles when responding to competitor prices: Firstly, when handling a huge variety of products and being able to set individual prices for various customers in different competitive situations, pricing managers find it difficult to decide when it is appropriate to match a price or not. Secondly, due to the pricing system that handles a wide variety of products, the pricing manager can usually only offer a single discount level for the entire product selection.

In the end, the ability to change a price depends on the processes set up by the pricing manager. The price-setting process has three major components: the identification of competitor prices, the price-setting strategy, and the commitment to new prices. The identification of competitor prices requires routines like finding comparable products and tracking competition prices and their changes in a database. Simultaneously, the person who performs these routines needs technical and sales skills and tacit knowledge to be able to evaluate reliable competition price information. Moreover, this function also serves to coordinate information flows between the different departments and customers regarding the identification of competitor prices. Setting the price strategy and making the translation to the price also requires routines like e.g., the customer purchase history, know-how about the customer’s price sensitivity, financial analysis skills, and coordination knowledge about assumptions that a price might be based upon (Dutta et al., 2003).

Researchers like Ingenbleek et al. (2013), Johansson, Hallberg, Hinterhuber, Zbaracki, and Liozu (2011), Liozu and Hinterhuber (2013), and Liozu and Hinterhuber (2014) also highlight the pricing competence and pay particular attention to the value assessment procedures within this competence. In particular, Johansson et al. (2011) outline the strategic importance of the concept of pricing capabilities for the understanding of

strategical and organizational challenges of pricing, as it focuses on different resource types and their use. Liozu and Hinterhuber (2014) consider pricing capabilities as a set of complex and distinctive activities, processes, and routines that affect business

performance. Their empirical mixed-methods research approach develops a pricing capabilities scale (PRICECAP) that consists of ten items that measure amongst others the use of pricing skills, the knowledge of competitor pricing tactics, the quantification of the customer’s willingness to pay, the design of tools to support pricing decisions etc. Their construct covers the three critical dimensions in pricing: the customer perspective (price- elasticity, value-in-use, maximum willingness to pay), the competitor perspective (market knowledge), and the company perspective (the development of employee skills in pricing and the availability of pricing tools). They contribute by naming pricing capabilities explicitly and thereby underline their importance in the pricing process (Hinterhuber, 2004).

Kienzler (2017) examines the pricing manager personality’s influence on pricing decisions. He explores the relationship between the three basic pricing practices (cost-, competition-, value-informed pricing) and the five-factor model’s personality traits (conscientiousness, openness to experience, extraversion, neuroticism, agreeableness). The results indicate that characteristics like the conscientiousness and openness for experience are positively associated with the preference for value-informed pricing. Similarly, the agreeableness of pricing managers positively relates to their preference for competition-informed pricing. Furthermore, agreeableness and openness to experience are positively related to a cost- informed pricing preference. These findings are relevant to managers who need to assign pricing authority within firms, as they raise awareness of the personality’s influence on pricing.

Liozu (2015) examines the influence of the five organizational factors (pricing capabilities, incentive and goal systems, delegation of pricing authority, knowledge, negotiation) on the collective confidence in sales and account management teams in his quantitative B2B study. Regarding pricing capabilities, the study supports the resource-based theory of the firm where pricing capabilities significantly impact on the company’s performance. In addition, the study concludes that pricing confidence can lead to superior financial outcomes and promote competitive advantages.

In unison, the referred studies recommend economics and marketing research to extend their resource-based view of pricing. This might alter the economists’ understanding of model pricing, price rigidity, and price strategy, because pricing requires both, expertise and social interaction.

The researcher makes comparable observations of the importance of resource-based capabilities in his professional role as a pricing manager and therefore supports the previously identified research results. Thus, the conceptual framework (see section 2.4) explicitly involves the resource-based capability aspect as influential on the critical success factors, respectively a critical success factor itself. As this research inter alia seeks to identify the critical success factors for internal and external pricing, the pricing managers’ evaluation of the importance of the individual price-setting capability needs to be

considered as one influential factor as well.