Pricing Leadership

Many companies recognize the importance of having multiple business strategies in place for how they will approach the market. Do they want market share, or do they want to be the prestige brand? Are they trying to launch new products and/or sunset others? Each business strategy requires the tactical plans in place to execute, and therein lies the need for mixing up your pricing strategies.

Why is it that many companies recognize the need for multiple business strategies, but then execute through one or two “tried and true” pricing strategies. Each different market approach can be achieved through different pricing strategies, but with vastly different results.  If your brand is positioned as the “prestige” brand in the market, don’t expect the same pricing policies that keep that image in place to work for market penetration.  The same can be said for the typical commodity markets – applying value based pricing to those products in those markets simply will not produce similar results to value based pricing for specialty products. Yet company after company will re-apply “proven” pricing strategies in new markets for new products, without fully analyzing all alternatives. And why is that? It’s not because they don’t want to; typically, it’s related to a company’s inability to project and forecast multiple strategies and manage them once they are in place.

This is where a robust pricing execution tool, such as PROS’ Price Optimizer, shines. The ability to properly forecast price changes using a library (meaning more than two or three) of B2B price strategies is almost invaluable. In addition, companies need to realize that since business is dynamic, so too must be your pricing libraries. A true price execution tool will allow for price change modeling using proven price strategies, but with the necessary tweaks to meet changing market conditions. And so, a new price strategy may be added to the ever-growing library for use elsewhere. The value of such a price execution tool is the reusability of what works, the elimination of what doesn’t, and the proliferation of success throughout the entire organization.

Many times, we run across projects that are faced with a delay for business reasons… such as “all business units aren’t ready”, “we would rather wait until after/just before the next round of pricing”, or “the data looks suspect for this one country/business unit/product group, let’s wait until that’s fixed” – all are common and quite frequently heard during the course of our pricing implementations.

Why would you want to wait? Let’s take a practical approach to this logic: pricing can create profit lifts to revenue.  If your “acceptable” business units or countries equate to 10M USD or 8M EUR, then by not waiting, you could realize 1.1M USD or 1.65M EUR now. Yes, there’s more value to be had later on, and yes, you will go after that value in time.  But DO NOT put on hold the value that’s right at your fingertips, just for an incremental 10, 20, or 30%. Heck, even if the “delayed” portion of the project represents a significant majority of your overall business value, why would you not take what you can get now.

As more and more companies are looking at pricing, they are asking themselves, “what can we do to jump start the process?” Ultimately, it’s understanding how you price.

On each of our implementations, PROS conducts a “Day in the Life” of potential users; we call this “riding in the truck” as a reminder – because we actually rode in the sales truck of one of our customers! This is the only true way to fully understand how, empathize with, appreciate the pains, and absorb the pricing practices of those users. If pricing is such a strategic lever that can make a significant difference in your profitability, shouldn’t you be willing to invest the time to understand all the corners of your organization’s pricing practices in order to squeeze out as much ROI as possible?

The question is: how do I conduct these Day in the Life sessions? I can start by telling you what not to do… don’t just ask questions! Put yourself in your employees’ shoes… if they are called into a room, and must answer a bunch of questions about how they do their job, what do you think they are imagining? No matter how you prep them, how you preface your message, or how you triage any malcontent, they will be nervous. Unfortunately, that feeling will result in them answering the questions they way they “think” you want them to answer. Anyone can put concepts on paper, which is what their answers will no doubt provide; you are trying to get at the dark and ugly truth about price and profit leakage. Therefore, take the “interview” to the next level… go ride in the truck.

But don’t just observe in the “white lab coat, clipboard, and one-way mirror” sort of way… observe AND interact. Ask “why did you [insert activity here]” until you fully understand – don’t assume anything. Then go beyond observation and interaction: solicit their feedback for how they would improve their processes. What else do they need? What could they do without? What typically causes them to sit around and wait for three days while your competitors steal your business? Get them to believe they will have an impact on the outcome, the new process that they will be asked to follow… BECAUSE THEY DO! Once you have this buy-in and belief in your employees that you want them to do better and are willing to give your time and efforts to help them, the truth comes out.  It’s only then you can work with your cross-functional team to improve your pricing processes in a way beneficial to all… because you know how your organization really prices.

Companies across the globe are realizing the value of pricing and doing whatever they can to reap the benefits from an increased focus on pricing. However, it is truly the leading companies out there that recognize the simple fact that pricing is not just a business function, performed by those that need to be involved. Pricing is a complex business process that must have the correct support and guardrails around it. You wouldn’t implement new SOPs without training, support, and feedback… why should pricing be any different?

True, leading-edge companies already have this figured out as they are investing in pricing for the long-haul. They are looking at the support mechanisms, training programs, and business policies that must be enacted in order to have a successful pricing initiative. This is not simple and it takes various business units agreeing to change for the mutual benefit of the company. After all, if it were simple, the company would have already figured it out and pricing would not have the immense returns that we have seen time and time again.

Think about what you and your company are currently doing to realize ROI in 6 months and even 12 months? There are not many initiatives out there that have the potential impact like pricing. Therefore, this will not be simple.  But if the desire and determination is there, taking an average 4% profit margin to 5.5% in 6 months and sustaining that gain is not far-fetched. In fact, it is probably understating the true gains.

One of the biggest differences I have noticed in the European community as compared to the US is how different two “neighbors” might be.  For example, take Germany and France. They are geographically next door to each other; but they are miles apart in most aspects – and their approach to pricing is no different. If one company operates in both countries, it is expected that each country will have their own approach to pricing. On the flip side, in the US, while California and New York are miles apart (and there are many additional differences in addition to geography), if one company operates in both California and New York, it is much more likely there will be one approach to pricing (if not one, a least similar enough approaches that may be managed centrally). Thus, a “global pricing approach” is not a simple, straightforward strategy in Europe as is tends to be in the US.

That being said, how a company goes about implementing a global pricing strategy must also allow for and expect the complexities that currently exist in managing the business centrally. If for instance the current business environment is very much decentralized, having a central pricing strategy is not reasonable in the short term. Ignore the change management aspects for the moment, the simple logistics of understanding the diverse and disparate pricing methods and go-to-market strategies that currently exist are immense. The long-term plan should account for this and not expect one, global approach to be implemented in the near term.

However, this does not mean that companies, especially those that are very decentralized in their management, cannot achieve great value by taking a global approach to pricing. It just means that their time horizon must be appropriately set. For example, one customer here in Europe has a long-term vision that includes roll-out of a global pricing process to roughly 40% of its worldwide business (represented by countries and regions of countries) by 2015 if not beyond. Pause and read that again… “global process” for 40% of its business. ”How is this truly global?” you might ask. It’s simple: they are not planning to stop at 40% but they are pragmatic in their approach to ultimately reach 100% of their business. Regardless, as this customer has already begun the global process country by country, it is achieving great value already.

Also, setting up a global pricing process should not imply centralization of power. In fact, it can amplify the current independence and power of the remote business units. Another customer here in Europe is rolling out its global process and by doing so, is providing guardrails that its remote businesses must operate within. But at the same time, it is providing much more information to the remote business units; so much that the decisions those remote business units make are now better supported and therefore, they should be able to operate more independently within those guardrails.

In summary, companies, especially those that operate across cultural borders, should view a global pricing process as a journey. There is extreme value to be made along this journey, but it will take time. Prioritize your “low-hanging fruit” to maximize your return, but commit to the long-haul.

Recently, we have seen many companies attempt to implement with little oversight to the overall, “global” picture.  Now, before I continue, notice I did not specify what they were implementing.  It could be as simple as a new approval process or as complex as a new ERP system.  Also, one could easily replace “global” with any other contextual word that refers to “more than one”, but I digress…

Regardless, in these tight times it seems more and more acceptable to identify process improvements and start down the path of a “global” improvement without stopping to think how one gets from A to Z without stopping at B, C, D, etc.  You may be wondering, “how does this apply to the title or a ‘thousand-island paradise’ of data?”  Simple – many companies have data sources that are currently working perfectly, as-designed, as-expected (insert your own adverb here to describe facetious perfection) but have little in common with each other.  Projects, especially pricing projects, that are incredibly dependent upon data, must have a global approach in mind. Companies must have a plan to take a “thousand disparate data sources” and harmonize them.

All that’s needed is a process in mind and a plan in place, not the actual data harmonization.  Incredible value can be realized through a small implementation, and as Lao Tzu famously quoted, “the journey of a thousand miles begins beneath one’s feet.”  No value will ever be achieved if you wait for perfect data (honestly, I’ve never even seen perfect data). Expect to start small, achieve great results (regardless of how small the results are they are “great!” – socialize the wins!), and use those results to incentivize other areas of your business to join the project bandwagon. Take those “thousand islands of data paradise” and show each, one at a time, how they can improve for the overall health of your business. The results are there to be had!