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)

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

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.

All the best planning and hard work that go into a major corporate pricing project or initiative can be wasted if you don’t manage the change process for your users—especially your sales force.  At PROS, we’ve talked to a number of frustrated companies that have been stymied in their pricing efforts because their sales force didn’t have the confidence in their numbers or their systems.

That’s why PROS sponsored a recent online Professional Pricing Society (PPS) webinar from one of the top pricing professionals in the country, Kristin Daniels, of Cardinal Health.  Kristin shares her experience and lessons learned for successful pricing project adoption in this presentation.   If you’re a PPS member you can check it out here.

Kristin and I have also coauthored a new white paper called, “Change Management in Pricing Projects” that gives you an overview of four key steps every pricing project needs to secure user adoption.  It’s designed to help you get your users to not only adopt but to embrace your pricing project goals and processes. 

One of the most important things to keep in mind is that different audiences in your company need to have pricing messages and examples tailored to issues or problems that are meaningful to them.  That includes your finance department as well as marketing types and sales people. 

Your sales people, in particular, want specific examples of how new pricing methods and technologies are going to make their life easier and more productive.  When introducing new pricing software, for example, Kristin has some great suggestions.

Go for a quick win with fast answers from using the pricing software and then have the ability to dig into more complex analysis.  Break up the sales team into small teams, ideally of 3-4 people.  Give each team a unique problem to solve in the software and 15 minutes to solve it.  Then have a representative from each team come to the front of the room and demonstrate in 5 minutes or less how they found their answer in the software.  Then repeat with at least one more 30 minute round.  This is particularly effective with sales representatives because it forces teamwork, drives competition, ensures participation, and enables three different problems to be shown to the entire group within each 30 minute round.

This paper is filled with these kinds of practical tips you can use in implementing your own pricing project.  I suggest you take a few minutes and download it free.

Last Friday, Bloomberg.com posted an article quoting Warren Buffett on the importance of Pricing Power when evaluating a company’s position.

I totally agree that pricing power is an incredibly valuable thing.  There are a small minority of companies that have this broad-based power as Mr. Buffett talks about.

However, the majority of companies have much more power than they might expect… in The Price Advantage, we put forth the idea that many more companies can make pricing a source of competitive advantage for their business.   For example, most companies have a rich history of pricing transaction data in their systems, but do not use this information to price the next deal that comes by – instead, relying on simple rules, or gut feel. 

Companies can create pricing power.  Leading companies equip their pricing decision makers with sophisticated tools to find the opportunities, and surround those tools with leading edge pricing processes and organizations.  It takes hard work, and good management, but the rewards are quick and substantial.

The Oracle of Omaha made some interesting comments recently when speaking to the Financial Crisis Inquiry Commission.  According to Mr. Buffett, “If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business and if you have to have a prayer session before raising the price by 10 percent, then you’ve got a terrible business.”¹

Warren Buffett’s key thesis is when you measure the quality of a company – you only need to look at their ability to raise prices and the corresponding market response.  Those companies that have built great branding or niche markets are great companies – with one impressive characteristic – the ability to raise price at will.

Are you selling only niche products with little/no competition?  Is your brand so strong, you can increase prices by 10% across the board without as much as a whimper from your customers?  If you are a B2B Manufacturer, Distributor or Service Provider then the answer is highly unlikely.  That’s because your products, customers and markets aren’t that simple, in fact, they are quite complex. 

Mr. Buffett’s comments probably hold true for some of your products.  There are certain products in your portfolio that your customer base is highly loyal too.  Other products are pure commodities.  Your markets are also complex.  You dominate the market in certain regions, while other geographies represent a challenge logistically and competitively.  In the end, your customers’ willingness-to-pay can change drastically by product, geography, industry and branding – for more information, see The Critical Variable in Pricing: Understanding Willingness-to-Pay in Business-to-Business Marketing.

Can you raise prices by 10% across the board without a prayer session?  Can you use science and fact-based analysis to make the best pricing decisions possible?  Absolutely – and that’s what good businesses do.

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¹Buffett Says Pricing Power More Important Than Good Management, A Frye and Dakin Campbell, Bloomberg, Feb 17th, 2011.

Manufacturing.net and PROS’ Doug Fuehne, VP, Professional Services of PROS Pricing Software Solutions talk about how manufacturers can improve their pricing strategies and come out ahead as the economy turns around.

To get right to it, the five pricing strategies Fuehne suggests will help you come out ahead in the economic recovery:

1. Identify underperformers.
2. Proactively forecast future performance.
3. Increase organizational agility.
4. Focus on customer satisfaction to keep the customers you DO have.
5. Provide sales force with optimized prices and other highly relevant information in a timely manner.

Click here to read the full article

I am not very good at poker. My friends say I have more “tells” than they can count. A tell in poker, is a facial expression or body position that gives away what kind of hand you have – a bad one, a good one and sometimes a really good one. The best poker players in the world don’t have a tell, but read others like an open book. Take a look at the embedded videos and watch Daniel Negreanu show off his amazing skills at reading his competitors and accurately guessing their hands – it’s downright freakish.

http://www.youtube.com/watch?v=Tbp_i8dOUvU&feature=related

http://www.youtube.com/watch?v=FhQjwdeViGk&feature=related

There is one aspect of poker I do understand well – calculating the probability of a winning hand. Without a doubt, the best poker players in the world can easily calculate the odds of winning a hand. They don’t have perfect information, but they know, right out of the gate, what their approximate chances of winning are. In Texas Hold ‘em, some cards are eventually exposed to give more information about your chances of winning and then betting continues. With each exposure, good players recalculate their odds and play accordingly. Mathematics and statistics play such a vital role in poker, you can’t even come close to competing at the highest level without it.

B2B negotiations aren’t that different from poker. The best sales people are like Daniel Negreanu in the video – they are able to read the customer. They negotiate better pricing, giving the company more profits and themselves fatter commission checks. 

But even the best negotiators don’t know the probabilities. The top sales people use their vast experience to determine pricing danger zones and winning strategies. What if you could give them, and other sales people with far less experience, a window into the probability that they will actually win the deal?  This is the heart of B2B pricing science – giving real-time analytics to sales people and negotiators to expose the pricing that wins while maximizing margin dollars. In poker, there are many different hands – straights, flushes, pairs, full-houses, etc. Depending on what you could put together, your strategy changes. In B2B, different types of customers, products and transactional environments change as well. Pricing science can tell you the “sweet spot” for every different scenario you can think of – often changing drastically (e.g. A large customer renewing a contract versus a small customer with a one-time rush order). 

Did you notice the “probability of win” in the video? That’s really powerful information. Pricing science does exactly that – it helps calculate the probability of winning a deal or contract acceptance. Our goal is to have B2B companies negotiate closer to the price that achieves the best probability of winning as well as getting the most margin dollars. This is where poker and pricing differ. Poker is about winning. Pricing is about winning and maximizing profits.

Are your sales people armed with the right analytics to help them win? Are your competitor’s sales people armed?