Many of us are pinning our hopes for economic renewal on innovation and the innovation economy. Companies like Apple and Google are seen as beacons of hope in troubling economic times. And many companies in more traditional sectors continue to invest in innovation and in bringing new value-added products to  market. Given upward trends in commodities prices this is a good thing. Even with a 100% pass through of increased commodities prices companies will see profit margins decline if they are unable to execute prices increases.

Innovation without pricing excellence is fruitless, and companies like Apple and Google are known for their pricing excellence as well as innovation. When their pricing practices falter, their stock prices suffer punishment. See for example the recent post on this blog “Google Earnings — A Pricing Challenge?” by Patrick Schneidau. So what is ‘pricing excellence’ and how does it combine with innovation to generate economic health?

There are three core competencies underlying pricing excellence.

Pricing is Data Driven – Know your actual prices, including the price waterfall, and the granular trends by configuration, customer and competitor (it is surprising how few companies actually have this kind of insight into pricing data). Only by knowing your prices can you identify risks and opportunities.

Pricing is Context Dependent – Understand how you create value for your customers. Specifically, what is the differentiated value of each configuration for each customer relative to competitors? Only by understanding value can you build value into your offerings and capture it in prices.

Pricing Implements Strategy – Connect pricing strategy to corporate strategy. There should be line of site visibility between corporate goals and pricing. How does your pricing strategy reflect your corporate values? Is your pricing strategy delivering your margin goals? Are you using pricing to target market segments? Almost every corporate goal maps to one or more pricing actions.

Pricing excellence is necessary to deliver a return on innovation. Google and Apple are often held up as companies with world-beating product and technology innovation. But they marry this with pricing excellence. Google is the company that executed on — not invented —  the pricing metric of pay per click, generating billions of dollars in shareholder value in the process. Apple manages to  capture a lot of its differentiated value back into prices. Companies that invest in innovation without appropriate investments in pricing excellence will not capture the value of the innovation and over time will be unable to sustain these investments. This is the path into a downward cycle of increasing commoditization. (See my post:  Value-Based Pricing Driving Innovation in the Supply Chain.)

The importance of pricing excellence can only grow over the next decade. Increasing global competition and accelerating innovation are two reasons for this, but even more important are underlying trends in commodities prices and demographics. The rise of the Brazilian, Chinese, Indian and other economies is likely to continue — let’s hope so as they are the main engines of economic growth – and this will put pressure on commodities prices. So will environmental concerns and the move to factor environmental costs into commodities costs. The power of demographics is less well understood. Most of the world’s industrial democracies have entered or are about to enter a period of population decline.  Japan is the most advanced example of this trend, and Japanese companies are struggling to make the transition to Shrinking Population Economics. In his book of that title, Japanese economist Akihiko Matsutani suggests that companies operating in markets with shrinking populations will need to shift focus away from market share and focus on margin. As we all know, pricing is the single most powerful lever that executives have to impact profit. And in a shrinking population it will be easier to grow margins by delivering more value than it will be to grow the top line with undifferentiated offers.

All of us who lead companies, or who play a governance role on corporate boards, should be asking about pricing excellence:  Do our companies have it? Is pricing being used to further our strategies? Are we claiming enough of the value of our innovation to continue to make investments. Pricing excellence is critical to the future health of the economy.

Yesterday, Google announced a rare miss to earnings:  Year-over-year, revenue grew ONLY 25% and profit a mere 7%.  Analysts cited pricing as one of the key reasons for the miss, as the average pay-per-click price decreased by 8% despite growing volume 34% from a year earlier. Does Google have a pricing problem?

If you look beyond analyst reports, the answer is not so simple. The trend in web advertising has shifted in the last year, with individuals clicking on ads from their mobile devices rather than their desktop computers.  Of note, mobile devices inherently drive lower price points than desktop clicks. Despite the lower average price, the growth in volume could not offset the decrease in revenue. This is a MIX challenge, not a pricing issue. 

Google may still command a premium price for both its desktop and mobile pay-per-clicks relative to alternatives. However, due to structural changes in how people use the web, the mix of price points is causing a revenue challenge. The larger question for Google is twofold:

1)      Are they able to maintain or grow their pricing power in each segment?

2)      Are they able to maintain or grow their market share in each segment?

If the answer to these two questions is yes, then it certainly is a mix issue and not a pricing issue. 

If you were in charge of pricing at Google, what actions would you take?

My barber recently left the salon he had worked at for the past 25 years and relocated.  I visited him earlier this week at his new location and he shared his journey and why he chose this particular spot.

I thought there were some interesting lessons to take from his experience and that I’d share them with you.

He checked out three different salons.

The first place he investigated was a good location but according to Antonio “was not well maintained …. there were chairs with rips in them …. my customers would not be happy in that place.”  I happened to walk by that place today and would agree with Antonio. Even if the price was cheaper, I would not like going to that place at all; it was rundown.

Then he described the next stop on his search, “….. a great location, but they charge $40 bucks for a haircut …. I told them that my customers wouldn’t go for that……they’ll pay $4-5 more, but not $40 for a haircut.  The owners said to me that was their price and they were sticking to it ….. they wear bow ties ….. I bet that’s to justify $40 bucks!” We had a good laugh and as a customer I agreed that $40 was a lot more than I was willing to pay.

That lead Antonio to his final destination located closeby in a Fairmont hotel. “Good location and the price is $4 more than what I was charging before …. $4-5 to my customers …. they don’t mind.”  And in my case he is right. I’ve been seeing Antonio for 12 years, I enjoy seeing him; it’s like a little break from the hubbub. We talk about restaurants and travel and our families, at Christmas he sneaks me a glass of wine. You get the idea, it’s personal.

Antonio’s story included wisdom as well as an example of a typical behavior that leads to missed opportunities when it comes to pricing.  I have summarized it into 3 lessons:

1. Antonio instinctively knew what wouldn’t work for his customers.  The first salon was in poor repair and “was not right for his customers” even if the price was cheaper.  He also knew that the high end location that charged 60% more was too much for his customers even though it was a fantastic location.

• Lesson:  A good value proposition consists of many components and price is only one of them.

2. The salon that charged $40 for a haircut stuck to its pricing strategy; they knew their value proposition and did not deviate.

• Lesson:  Segmentation is the name of the game. You need to know who your core customers are and stick with them. If they are Wall Street bankers then go ahead and charge $40, put on a bow tie and feel good about it.

3. He knew he could charge his customers $4-5 more and they “would not mind.”  Based on this insight Antonio missed a golden opportunity. He should have adjusted prices at the old salon 12 months earlier.

• Lesson: We are usually too risk averse when it comes to pricing, thus forgoing significant opportunities.

(Editor’s Note: Paul Hunt’s story originally appeared in the Financial Post, and we have received his permission to use the story on our blog: http://natpo.st/xgRJT9)

One of the biggest challenges for pricing professionals – especially those who work for technology companies – is the lack of control over a coherent pricing strategy.  At PROS, we see quite a few technology companies experiencing accelerated price erosion among their products, primarily due primarily to shorter product lifecycles, an ever-more sophisticated buyer, and overall economic uncertainty and volatility.

The lack of a clear and consistent pricing strategy is often demonstrated by the absence of proper pricing guidance to field sales. Without proper pricing guidance based on a pricing strategy, field sales people tend to request pricing based on customer demands, perceived competitive responses, intuition and emotion.  Without a disciplined price-setting strategy, companies can easily end up accepting too many price approvals via exception. The exception process then becomes an emotional internal struggle that ultimately results in very low pricing in the name of competitive matching. It’s a perfect storm that greatly increases the risk for an acceleration of price erosion due to inconsistent price approvals and confusion between the pricing team and field sales.

To help take back control of pricing, technology companies are finding ways of gaining better insight into list-price setting and automated methods to determine price-guidance targets for negotiated deals. Fortunately, pricing software can help create a consistent pricing framework based on objective measures. Companies can then use pricing software tools to establish logical, price-band ladders for a product group. This will slow the rate of price erosion and ultimately give organizations higher revenues, while protecting market share.

Here at PROS, we’ve developed a new white paper titled “Price Erosion Challenges for Technology Companies:  A Better Approach with Pricing Software.” It describes how companies can address the issue of accelerated price erosion through the adoption of software pricing tools.  We invite you to download it free at http://www.prospricing.com/Resources/White-Papers.aspx.

The European Pricing Platform – Connecting Pricing People are an independent industry organisation, based in Belgium, dedicated to promoting pricing excellence across Europe. On Oct. 27, PROS served as a key sponsor of the ePP’s Manufacturing PricingFuel Day, along with Deloitte, at an all-day event in Munich.

There was a real buzz of excitement and anticipation as the delegates and sponsors concentrated in the reception area. Delegates travelled from Norway, Sweden, the UK, Germany and Holland. As one told me “pricing is a dark art shrouded in both mystery and confusion.” It seemed the common denominator from a participant perspective was the quest for knowledge and education. Where do you start? What does pricing excellence look like? Is anyone really doing pricing excellence? The delegate anticipation was tangible, with everyone keen to better understand how to become profit hunters through pricing excellence.

Professor Oliver Roll, who has a vast background in pricing, served as host for the day. He is professor for international marketing and price management at the University of Applied Sciences in Osnabruck, Germany.

The keynote presentation was delivered by Wolfgang Krueger who heads marketing at Merck, a multi-billion dollar chemical corporation. With more than 45 years of service with Merck, Wolfgang presented a fascinating insight as to best pricing practices at his company, including overcoming cultural, technology and process challenges when deploying a pricing excellence strategy. His 45-minute presentation seemed to last only five minutes; however, the session reached a fevered pitch when the host requested questions from the delegates. Wolfgang was literally bombarded with questions from the floor. The questions came fast and furious from delegates, many of whom represented Europe’s leading corporations.  As I observed the spirited interactions, the feeling I had was similar to early days of the Internet revolution – the desire, excitement and business necessity to engender change.

There were several additional customer best-practice presentations notably from Novozymes, a Danish bio-tech corporation. Again the fast and furious post-presentation debate with delegates was the highlight. Clearly there was a massive hunger to understand more and learn what pricing excellence means; what it does; and what it could possibly do for a business.

Like all conferences, the real business of the day was conducted over lunch and post-conference drinks. The presenters from Novozymes were holding court with delegates, who literally queued to catch some time and share some of the pricing Kool-Aid magic. Quite telling was the fact that as the afternoon session was starting, the buffet lunch had remained mainly untouched, with delegates deeply engrossed in their pricing conversations.

In closing what was a momentous day, Professor Roll thanked the delegates, the sponsors and most of all the customers for presenting.  In a final comment Professor Roll stated:

“It was really a great day. One of the best conferences that I have ever attended.

The atmosphere and the quality of the speakers were just extraordinary.”

For what was the first ePP event I have attended, I left, impressed, amused, fascinated and positive. Pricing clearly is gaining momentum as a business issue in Europe. The companies that “get pricing” are reaping the benefits.

As a six-month newcomer to the world of pricing, I’m on a steep learning trajectory.  I’ve been deeply mired in pricing conversations here at PROS, and this past week offered another trek on my personal journey to become more adept in the language of pricing.

Last week’s Professional Pricing Society provided a tremendous opportunity to view the industry with some of its key players and to hear from them about their own insights on the importance of pricing. PPS offers pricing professionals an opportunity to learn together, side-by-side, in an environment where pricing conversations are second to none.  The PPS 22^nd Annual Fall Conference, which was held last week at Caesars Palace in Las Vegas, attracts people from across the world. In fact, one of the more animated conversations I had was with a pricing executive from New Zealand.

I was able to play a voyeuristic role, listening to our customers, partners, prospects and interested parties conduct discussions with the PROS team, who were generous and enthusiastic in their feedback.

I also made it a point to sit with people who weren’t part of our organization and to learn about their businesses. These pricing pros cut across a wide swathe of industries, from bio-tech firms, to technology, chemical, healthcare, electronics and consulting companies, to name just a few. I met PROS partners who were well-represented at PPS, and who also shared their enthusiasm of the work they do, helping their clients and customers to achieve greater profitability.

PROS Senior Vice President of Pricing Excellence Craig Zawada delivered a keynote at the event titled “Pricing – Good to Great.” He was in great company with a number of other high-profile pricing professionals, including Deloitte’s Julie Mehan and Dr. George Tacke, CEO of Simon-Kutcher, to name just a few.

The glaring observation is that everyone at the conference shares a passion for pricing on two fronts – making sure they take care of customers and helping keep their companies profitable.  My personal logic tells me that profitable companies hire new employees, so there’s nothing more important to jumpstarting the global economy than strong, growing companies. I’m glad the cast from PPS and its members see it that way too.

The PPS 7^th Annual European pricing event will be held Nov. 30-Dec. 2 at Barcelona’s Princess Sofia Gran Hotel. If you’re even thinking it’s a good idea, do yourself a favor and go. Or as Nike says, just do it. It’s time well spent learning from industry professionals who love what they do and who willingly help others learn. PROS will be there, so if you go, stop by our booth. You’ll be glad you did.

Finding ways to improve profitability has never been more at the forefront of the minds of CFOs than now, as companies strive to remain viable and competitive in today’s market.  With competitive pressures at an all-time high, increasing stringency in government regulations, and continuing volatility in commodities pricing, companies are faced with finding innovative new ways to grow margins and meet shareholder demands.  Within this context, it’s no wonder the promise of pricing – a mere one percent improvement in price can positively impact revenue by nearly nine percent* – offers an extremely  attractive value proposition to CFOs, as “guardians of profitability” for their companies.

In fact, in the recent Duke University/CFO Magazine Global Business Outlook Survey, pricing made the list of top three concerns that keep CFOs up at night.  What was once considered a “black hole” is now emerging as a key component of corporate growth strategies, as business leaders, like the CFO, embrace the power that pricing can wield when it comes to turning around financial performance and delivering much-sought-after margin improvements.

Yet, a solid pricing strategy alone is not enough to yield the results CFOs are looking for.  With leaner staffs and the need to more quickly respond to changes in the market, companies are quickly discovering that labor-intensive tools, such as surveys and spreadsheets, are not only inadequate but also place their organizations at risk, as their competitors seize this window of opportunity to take even more precious market share.  More and more companies are now turning to advanced pricing software as a more powerful and efficient means of optimizing pricing at the customer and transactional level, identifying and fixing profit anomalies, and ensuring compliance with their pricing strategy – all of which lead to significant increases in profitability and a greater competitive edge.

The pricing software market has been steadily growing, as more and more B2B companies discover they can harness the true power of pricing by successfully implementing pricing software across their enterprise.  Today, with the level of maturity of the tools available and the number of proven successes among leading companies, the pricing software market is now entering the mainstream.  This trend is evidenced by a recent article in CFO Magazine, “The Price is (More) Right,” that highlights the increasing need for CFOs to focus on pricing and leverage advanced tools and capabilities to give their companies the competitive and financial advantage they need.  With the right technology in place and the leadership of the CFO, companies can harness the power of pricing to deliver financial results that will put them head and shoulders above their competitors.

*Source: Baker, Marn, Zawada, McKinsey & Company – The Price Advantage (2^nd Edition 2010). John Wiley & Sons

Imagine:  You are a paper products manufacturer and you can data mine Twitter to help predict uptake through your distributor network in New England.

Imagine: Customized and aggregated reports, updated live and in real-time, over millions of sales transactions per day using a mainstream database.

This is a nice visual from the Gartner article.

I was able to attend a High Tech event with Microsoft in February.  They have just released the content and the CIO panel was interesting.  I think it’s worth the time to watch…

http://www.microsoft.com/showcase/en/us/details/2f4c6463-4d68-4fc5-9627-ce4132cd9c36

Watch the CIO Panel Discussion on “Cloud Computing…the New Normal?” from the 2011 Global High Tech Summit moderated by John Halliwell, General Manager – Northwest District, Microsoft with panel members: Sam Coursen, CIO, Freescale Semiconductor, David Smoley, SVP and CIO, Flextronics International, Kevin Cooney,VP & CIO, Xilinx and Jay Kerley, VP and Deputy CIO, Applied Materials.

I read a great article this morning at CFO.com entitled “The Queen of Soul’s Ode to CFOs.”  In this piece by Bud Kulesza, he outlines the top ways in which CFOs can engender trust and respect from their organizations.  One such way is “to work with the rest of the organization to increase understanding of what the ‘numbers’ mean and how to use them to make better business decisions.”  As I read this point, one instance in particular came to mind where better insights could lead to better decisions -  pricing.

I had the privilege of hosting two CFO roundtables earlier this year at the CFO Corporate Performance Management conference. The topic we discussed was the credibility gap between finance and sales when it comes to pricing: finance thinks sales just gives away deals; sales thinks finance is out of touch with the market when it comes to pricing.

Most of the CFOs agreed that one way to close this divide is by finance providing more granular, fact-based insight into historical customer transaction data that reveals not only true customer profitability, but also true customer willingness-to-pay. With this depth of fact-based insights based on irrefutable buying behavior, finance can credibly contribute to “right pricing” for products, customers, and deals. And sales will be more inclined to respect and trust finance for providing useful, timely, and market-relevant data that helps them win more business profitably. CFOs agreed overwhelmingly that this approach would go a long way to close the trust gap with sales.

If you’re interested in learning more about willingness-to-pay, I encourage you to download a whitepaper on this topic written by Dr. Neil Biehn of PROS.