Pricing is by far the fastest and most actionable way to boost your bottom line. But to make a pricing strategy work, you’ll need to understand your customers intimately through data, build an organisation that makes insight-driven decisions and be ready to take action. Here are the three steps we follow as pricing experts to help strengthen a company’s pricing capabilities.
Is your business missing out on millions? As a rule of thumb, profits. If you lack the strategy and underlying capabilities to jump on these pricing opportunities, you could be leaving a significant amount of money on the table.
Pricing strategy is far more than just charging more. It could mean making sure the prices you charge reflect the full value you deliver for customers and what they’re willing to pay. Or it could mean knowing when and where to target offers and discounts in a way that maximises the revenue or margin benefit. Smart pricing could also encourage customers to switch to premium products and services.
Given that pricing is such a powerful lever to create value, it’s surprising how hit-and-miss and poorly coordinated the strategies and capabilities can often be. Compared to product and sales channel strategies, which are often highly developed, pricing is a missed opportunity.
What are the common fault lines? There’s often no firm hand on the tiller and little in the way of guiding strategy. In turn, prices are set through a crude cost-plus approach rather than reflecting the value to customers. Even worse, key decisions are based on hunch or a knee-jerk response to competitor moves, rather than reliable, quality.
An effective review can provide the springboard for bringing your pricing capabilities up to scratch by identifying the gaps and formulating a plan to address them. Best of all, reviewing your pricing capabilities doesn’t need to be as complex or demanding as it might sound. Our secret is to use these three systematic and structured steps:
What is your current pricing maturity level? How does this compare to industry best practices and your organisation’s ambitions? Do you apply an analytical approach to identify the gaps?
To gauge the maturity of pricing strategy, we start with a series of fundamental based on your industry and markets. Are you a price leader or a follower? Are your prices driven by cost, value or competition? What are your customers’ perceptions and expectations of value? How are your customers segmented and how are the differences addressed?
You can then assess the surrounding capabilities. Who owns and controls pricing decisions? Are there defined pricing and revenue management roles within your business? What are the tools used to optimise prices? Are the quality and governance of your data supply and analysis fit-for-purpose?
Knowing the answers helps do two things. First, it helps to identify the capabilities gaps and where revenue is being lost. Second, it can bring into focus the end-state you want to get to and how to achieve these across your organisation. What kind of pricing strategy would deliver the greatest benefits? Where should the pricing organisation sit – within sales and marketing or standalone, for example? How should price setting be governed and actual realisation be enforced? How can performance be best measured?
What are the potential benefits from these changes to price setting? And what’s the best way to achieve them?
As with any shift in strategy, it’s important to identify and prioritise the levers that can make the most difference. As part of the capabilities review, it’s important to create a clear, compelling and verifiable business case and an estimate for return on investment (RoI), drawing on analytical insights and market research. The analytics should reflect the specifics of your industry and demonstrate how you can implement tactical repositioning and optimise your price policy in practice. To be effective, you should validate the numbers with your finance teams and make sure they resonate with your board.
It’s also a good idea to present successful examples of where these kinds of changes have worked elsewhere. This will help raise awareness and get buy-in within your organisation.
To build up momentum, focus on generating value through the immediate implementation of quick wins. Base your choices on overall portfolio performance and trends. Draw on insights into possible value leakage in areas such as pricing discrepancies across different segments, hidden costs eroding margins (‘pricing waterfalls’) or cases where poorly targeted discounts in one segment drive down revenues in another (‘pricing cannibalisation’).
But the changes don’t stop there. Make sure you have the tools on hand to continuously monitor the benefits once you’ve put in place your priority moves – and use some of the gains to help fund future transformation initiatives.
How can you develop and execute your roadmap in the fastest, most efficient and most sustainable way?
Once you’ve carried out your maturity assessment and validated the case for change, you can begin to upgrade your pricing processes and capabilities.
Your roadmap shouldn’t be just a wish list of improvements. To be actionable and sustainable, each step needs to be clearly prioritised and the RoI tracked as part of a rigorous approach to project. You can then design and roll out each phase of implementation, while retaining your ability to adapt to market changes.
One key risk to manage is the interdependencies between the business functions involved. And, when seeking to optimise RoI, it’s important to distinguish financial quick wins from long-term operational improvements, which may take extra investment and organisational alignment to achieve.
Remember: the drivers for review and the underlying market dynamics will keep shifting. So you should review and upgrade your capabilities at least yearly. Sometimes you may need to review more often than that – perhaps if you see pushback on price changes from customers or your sales force, or if a new entrant enters and disrupts your market.
Crucially, none of this needs to take a long time. Once you’re clear about the value potential from sharpening up your pricing strategy, as well as the gaps and leakages standing in the way, you can start formulating and implementing your roadmap for change.
Inevitably, you might meet resistance from within your organisation . That’s why it’s so important to clarify who owns and controls pricing, as well as communicating and demonstrating the potential gains, all while making sure that the actual prices realised are carefully monitored and governed.
Our expertise and data-driven approach to capabilities review can help you to unlock pricing opportunities and untapped returns . It would be great to know how you’re managing pricing within your business and how you’re looking to realise the potential. To share your thoughts or to find out how we can help with your review and roadmap, get in touch.
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