This article is written in collaboration with Axholmen Management Consulting.
Pricing has a big impact on every business and it’s easy enough to understand why. While most other approach to optimise value in the business targets some item in the income statement, cash-flow statement or balance-sheet and gets diluted along the way by also incurring additional costs, pricing optimisation simply drop all the way down to the bottomline immediately like magic. Nevertheless, pricing strategy is probably the most underused and seemingly the most difficult area to continuously optimise over time for many companies, particularly in B2B but also B2C. It is easy to get stuck in a cost+ pricing rut, not fully capturing the value of continually optimising profits through pricing based on value created for customers.
Why is this? One reason is lack of ownership in that no single function is solely responsible for pricing strategy inside most companies. (Granted, some companies have pricing support-functions providing tactical support but rarely with executive decision power.) As comparison the R&D function owns the future product, toiling away at improving product performance and dreaming up new innovations to improve the customer value proposition. The marketing function owns the messaging, tirelessly working on improving the brand funnel from awareness to preference and so on. But pricing is often the equivalent of the orphan child of the business, ending up in a tug of war between the "yes-saying-sales-folks", the "no-saying-finance-folks".
Another reason is complexity. In particularly for B2B companies but also in B2C, pricing often involves a lot of manual steps and complexity due to e.g. bundling of offers, price negotiations and discounting, old systems with limited and/or bad data which makes it hard to understand whether the effective prices are optimal or not. In industries and companies where pricing is automated with fast feedback loops from customers, limited number of manual steps and human intervention, and pricing effectively can be automated with AI, pricing is more straight forward at least in theory. But most companies are far from that position.
Furthermore, pricing is a ”red-queen” game in that you have to keep running faster and faster to stay competitive. Things change constantly. Your product competitiveness changes. Customer demands and willingness to pay changes. Your competitors makes new moves. If you don’t continually keep pushing the limits you will eventually start slipping. Many companies shine the light on pricing for a while, and then move on and hope the problem is solved. It rarely is.
So how can you improve pricing? Here is a 3x3 formula towards pricing excellence and to unlock hidden values in your business:
3 pricing value-levers, to uncover hidden value due to non-optimal pricing
3 principles, to guide your efforts to improve pricing
3 steps, to start on the path towards pricing excellence
3 pricing value-levers
Lets start with the pricing value levers. So you have the gut-feeling there is money being left on the table? The question is where do you go look for it? There are three categories you should investigate:
Tactical pricing levers Tactical pricing levers optimise price point per transaction. These include understanding customer/market price elasticity per product and customer, use optimal price indexing of multiyear contracts, understand price differences across markets, optimise and monetise terms & conditions, etc. Tactical pricing levers mean using every bit of data you have on customers and competitors to put a price that continuously lands you the deals that optimise profits. Nothing more, nothing less.
Strategic pricing levers Strategic pricing levers maximise share of wallet and profitability of a customer or market by adjusting the revenue model including e.g. shifting price model from license to SaaS, optimising commercial bundling, etc. Strategic pricing levers ensures that you optimise profitability of a customer, product and market over time rather than deal-by-deal basis and provides the cashflow profile you want.
Commercial excellence levers Commercial excellence levers minimise the revenue and profit leakage from list price to cash-flow e.g. optimising discounts, ensure proper price governance, enforce revenue assurance in reducing leakage from contracted to actual payments, ensure proper contract management, perform SW audits etc. Commercial excellence levers ensures that the revenue earned ultimately shows up as cashflow.
3 principles of pricing strategy
Once you’ve identified value that can be unlocked by optimising pricing, how do you then capture it? Let three principles guide you:
Fix the foundation first Pricing is obviously no panacea. You need to fix your offering and you need to have your strategy straight before you can optimise pricing. You cannot price your product/service to more than what the customer ultimately is willing to pay based on the value you create for them. Ensure that you have your strategy well articulated, know for which products/markets do you want to harvest, which do you want to grow etc. I.e. how do you want to optimise pricing to fit your strategic agenda?
Use data, a lot of data, and continuously live test to get more Start with every bit of data you have. Then get some more. Perform live tests. Experiment. Analyse the resulting data. Put it into decision making use. Automate it. Rule base it. Use AI if appropriate. The opportunity with more data and better analytics is vast and pricing is probably one of the first areas you should go dig for gold. Do more forward looking conjoint studies. Do more A/B testing. Do more tests in different markets. Not just one time but, continuously. More data and automation means less of slow human, cumbersome, decision making needed. Save that human touch for the truly complex pricing calls you will have to make.
Keep it as simple as possible in the pricing process, but no simpler Don’t get bogged down in complexity and look for the 80/20 benefits. Yes, it may be complex and dependent on e.g. product bundling strategies, organisational dependencies, etc. It may be daunting to do market experiments. Go for the easy money first, then move on to the second most obvious. Get going and realise value. Then later think about how to systematise it and what you need to do about those hairy governance, organisational, system and IT issues that typically surround pricing.
3 steps to pricing excellence
So you know where to look for value, and you have principles to guide you. Now how do you where to get started on the track towards excellence? Here are three steps to get you on the right path:
Perform a pricing diagnostics Analyse opportunities in all the three pricing strategy categories to arrive at a prioritised list of hypotheses on pricing-value-levers and their potential. Do it with a manageable scope e.g. one market, one product category or similar. This will take a couple of weeks.
Perform a pilot to test your hypotheses For the top 3 hypotheses, prepare a market A/B test schema to identify the true potential of the value-levers in a live market setting for that single product/market or similar manageable scope. Then launch and live test your pricing strategy with real customers to get real feedback. This is where you will find the real value. This will take you a few weeks up to a few months depending on the level of complexity in your business.
Roll out across markets, iterate and learn Analyse the results of the market tests, adjust the strategy and apply the learnings of what worked across markets. This may take you another few months. Then start over at 1 for another product category or market and keep rolling. And while you do these steps, only then start building a system around it involving governance, organisational ownership, systems etc. Remember, start with results, don’t start with process.