Common Pricing Strategies: How to Raise Prices Without Losing Volume 💱
Did you know that pricing could be the most powerful profit lever for your business? Knowing the common pricing strategies could be helpful. The manipulation of prices, may it be upwards or downwards can impact profitability. However, the most important thing to note is that you have to make the right move at the right time. In this article, we will discuss the common pricing strategies that businesses can use in raising prices without losing volume.
Furthermore, the key to beating the competition is knowing the optimum price that you should charge to maximise sales and profits. Also, knowing the common pricing strategies is helpful when raising prices but not losing volume.
Table of Contents:
Common Pricing Strategies: How to Raise Prices Without Losing Volume
The importance of common pricing strategies in raising prices without losing volume
As I am sure you’re already aware (because I know many consultants use this chart), pricing is the number one driver of profitability above volume, cost, and mix. Pricing is just as powerful as the consultants say, both theoretically and empirically.
A chart like this is quite dangerous though. Especially to people who don’t know about the full spectrum of pricing in business. This is because a chart like this suggests pricing for profit is just so simple and easy.
All you need to do is increase your prices by 1-3%. Away you go, you’ve just made a 10 – 30% increase in earnings, just like that!
Looks simple? Well no. The truth is, most of us aren’t world class pricing managers and may not know enough about pricing, including the differences between 4 common pricing strategies or implementing a price rise to safely drive earnings growth. Thus, it’s important that you recognize the 4 common pricing strategies.
In a way, the 4 common pricing strategies pricing teams use are still a mystery to most people (or perhaps a well-kept secret hidden behind overly simplistic bar charts).
Your finance director may well tell you that ‘they know pricing’ because they have very impressively put together complicated financial models. The ones which identify an immediate revenue opportunity to raise product prices by 1 or 2% this quarter.
When you hear this, you’re probably thinking is this right? Can the market bare this kind of broad-brush pricing action right now?
Well, you’re right to be cautious about taking pricing advice like this because a broad-brush price action seldom works out well.
In fact, in our experience, whenever a commercial director or CEO signs off on this type of brash price rise decision, they lose thousands of dollars. Plus the trust of thousands of customers in one fail swoop. (A harsh and memorable blow we don’t want to risk happening again simply because we didn’t have the depth of knowledge about 4 common pricing strategies.)
Most finance managers at this point squirm or cross their arms defensively. It’s not their fault. The price model said it was a good decision. However, their financial model is most probably based on cost plus logic. An assumption that has been proved to be full of flaws time and time again.
We need to uncover the mystery of the four common pricing strategies. By doing so, you will know what appropriate tactic to use among the four common pricing strategies.
In many ways, behind all the financial jargon and financial modelling, pricing is still a bit of black art.
Most managers end up using their gut and intuition. A lot of bubble charts, graphs, and fancy models may well be produced before a price rise is taken to justify a price rise or strategy. Really, all this modelling is overcompensating for the fact they don’t know what the right price is and are guessing.
“The model says this price. It feels about right to me, let’s see how it goes,” the finance manager says.
Some managers may even talk themselves into adding extra on top of their original cost plus financial guesstimates for safe measure. Couldn’t hurt, right?
“We need to make sure we are covering our costs, overheads, expenses and time & materials,” says a very prudent finance manager as he’s spreading costs across thousands of products and services to produce a supposedly fairer average cost position upon which to set an arbitrary margin on top.
Unfortunately, the wrong price or a poorly managed price rise has a direct and negative impact on your profitability.
When you pull prices out of thin air, lots can go wrong.
You’re betting that your customers will happily accept your prices and that they know less about pricing than you do.
What if your customers are more informed about pricing in your industry than you are? What if they have done their pricing homework on you and your competitors’ prices?
That’s right, they’ll be very angry. Annoyed. Frustrated. They’ll feel ripped off. You’ll lose even your most loyal customers to your competitors. Simply because you didn’t know they were offering similar products and services to you but at lower prices.
So in this article, we are going to demystify ‘the dark art of pricing’ and share with you the 4 most common pricing strategies that successful businesses like GE, BP, Caterpillar, John Deere, Woolworths, Coles, Rockwell Automation and CSR use so that you can get a headstart on pricing for profit just like the big end of town.
The 4 common pricing strategies
Pricing strategy is vital to optimising both sales volume and profit. Below are the four common pricing strategies that businesses use. We will discuss each of them further:
- Cost-plus pricing
- Competition-based pricing
- Value-based pricing
- Dynamic pricing
1. Cost-plus pricing
The first of the four common pricing strategies is the cost-plus pricing. It’s probably the simplest of all the four common pricing strategies out there.
A good cost-plus pricing example is when you add up all of your costs, then add a fixed percentage amount on top of a product or services cost.
The cost-plus pricing formula is: Price = Cost + added amount.
Cost-plus pricing: Work out the cost of an item or service in detail. Then put an arbitrary, made up percentage amount on top of the costs of the services to get the margin you want.
A cost-plus pricing strategy is a top-down costing approach to improving profitability. It is very accountancy-driven because cost-plus pricing looks at determining a product’s unit cost first to determine the price. To do this, you got to include direct as well as indirect costs associated with the product or service.
If you’re not sure what fully allocating costs mean, cost allocation is the process of identifying, aggregating, and assigning costs to cost items before you set a percentage amount on top to get your margin. A cost item is any activity or item for which you want to separately measure costs.
Retail and B2B businesses have used cost-plus pricing strategy examples for many years now to make sure they are ‘fairly’ covering their costs and hitting their margin target.
The cost-plus pricing method is still very popular today because it’s relatively simple to add a percentage amount to a product’s or service’s cost to set a price.
Cost-plus is widely used in both B2B and B2C markets. Since ‘pricing’ is still to this day managed largely by finance managers (as opposed to pricing managers). They believe cost-plus pricing strategy is the most financially prudent way to yield a fair and safer return overall fully allocated costs.
But here’s the problem with cost-plus pricing…
Cost-plus pricing assumes you can set prices without impacting volume. But this is not realistic at all.
It’s almost impossible to determine how much a product costs per unit when you don’t factor changing in costs with changes with volume.
Also, it’s pretty difficult to work out a product’s or service’s unit costs because it is not a static thing. It’s a moving target because it’s impacted by volume.
Many finance managers try to get around this problem. Simply by avoiding the impact of volume on cost when they set prices. It is a pretty absurd assumption to make because no matter how hard finance managers try to avoid it, unit costs change with volume changes. Henceforth, volume changes with price changes.
How cost-plus pricing strategy works
The failure to account for the effects of price and volume and volume on price leads finance team to make risky pricing decisions – like poorly structured price rises.
If you increase prices to cover increasing fixed costs, you’ll quickly reduce sales and annoy customers. Reason is, your prices will go up way too high beyond what the market can bear.
Likewise, if you decide to lower prices because sales are higher than expected and you’ve spread costs over more units, you’ll lose margin. This is because your average unit cost would have declined to the point that the percentage amount you added to the product’s cost base may not even be enough to cover your actual costs – let alone hit your margin target.
In other words, a cost pricing strategy leads you to overprice in weak markets and underprice in strong markets. It’s probably the least effective strategies of all of the 4 common pricing strategies out there.
Bad pricing decision
Thinking that you can make up for a bad pricing decision or action by simply lowering your prices is a big mistake too. A mistake that does not correct a bad cost-plus strategy example. This is because you are wrongly assuming people only buy on price, when in fact, price is only part of the story.
Not thinking about the effect of price on volume and volume on costs may appear to be maximising margins (from the cost side of the profit equation) but it’s seriously undermining profitability (from the revenue side of the profit equation).
Not considering your customers and the market when you set prices is a fundamentally broken and flawed pricing model. No matter how common an approach cost plus still is across industries.
Your customers don’t care about your explanations of your costs when they buy from you. What they care about when you discuss your price with them is how you are going to:
- solve their problems
- lower their costs
- or make them more money from the commercial exchange.
When you set prices, managers shouldn’t even be dealing with the problem of pricing to cover costs. A cost-focused approach to pricing reflects an old-fashioned perception of the role of pricing. A perception based on the belief that a finance manager can first determine sales levels, then calculate unit cost and profit objectives, and then set a price. Not realistic at all.
Points to note:
Overall, cost-plus pricing is the most inward-looking approach to pricing for profit of all of the 4 common pricing strategies. Cost-plus pricing strategy examples don’t grow with the market – they destroy value.
Cost-plus pricing was a medico approach at best when markets were simpler and price environments were more stable. Nowadays, markets are by no means simple. There’s a lot of disrupted industries. Pricing for profit has moved a long way in the last twenty years.
It’s probably best to stop using cost-plus pricing now and get a high calibre pricing manager with a different view on pricing. One who asks questions about how a change in price will result in a change in revenue. Whether this change is enough to offset the change in total fixed, variable costs.
A good pricing manager asks different questions to accountants. They focus on calculating the change in volume necessary for any proposed price rise or adjustment. Many accountants don’t know how to do this. In other words, they just can’t get their heads around price profit elasticities, customer value, customer psychology, and marketing. Not their fault. Their passion and skillset are accountancy and spreadsheet modelling – not making money using advanced pricing strategies and practices.
2. Competition-based pricing
Another approach of the four common pricing strategies is the competition-based pricing.
Competition based pricing is when you set your product or services prices by lining up all your competitors’ prices for the same or similar items or services and then benchmark or compare where your prices sit versus your competitors’ prices.
Advantages and disadvantages of a competitive pricing strategy
Again, like cost-plus, there are benefits to competitive pricing. It’s a relatively simple pricing strategy to implement against a monopolistic price taker or maker. Especially if you can get the data on your competitor’s prices. Their prices tend to be publicly available.
Competitive pricing is also a pretty good approach to take if you want to factor pricing under imperfect competition. You’ll find out quickly whether your prices are somewhere in the right zone or not.
The downside of competitive pricing is, you’re assuming your business model, operations and products are pretty much the same as your competitors. You’re assuming that you are selling to the same customer base as your competitors. Also, you’re assuming that your competitors have done their pricing homework and know more about the market than you.
Not the case.
- What if your competitors are going after a completely different market segment to you?
- What if your competitors’ products are not exactly like yours?
- If your major competitor is de-linking from costly operations to reduce their CAPEX and using freed-up cash flow to invest in a penetration pricing strategy to gain market share, what then?
- What if your competitors are following your price movements (kind of like the blind leading the blind scenario)?
Like cost plus, competition-based pricing is a bundle of unfounded assumptions and guesswork.
It has a few good elements (as discussed), but overall it’s one of the 4 common pricing strategies which lack depth.
Remember: Don’t rush to use competition-based pricing too quickly. Most companies are not ready to compete with you like you think they are.
It’s probably best to build out your pricing strategy if you want more earnings growth (using the other strategies from the 4 common pricing strategies) if this is current strategy to date.
3. Value-based pricing
Out of the 4 common pricing strategies out there, value-based pricing is one of the best pricing strategies available.
A value-based pricing strategy should be designed and developed completely around what your customers think is valuable about your products and services (not what you think is valuable).
The difference between cost-based pricing and value-based pricing is that value-based pricing sets the price of a product according to the value it provides to the customer and not based on its manufacturing costs (like cost-plus pricing) – sometimes referred to as customer value-based pricing.
Companies that use value-based pricing include Hilti, John Deere, Caterpillar, 3M and Parker Hannifin.
A value-based approach as one of the common pricing strategies is not just about the price.
It’s about the product, positioning of that product, branding, marketing. There is no “one size fits all” to customer value-based pricing.
Value-based pricing requires knowing your customers inside out. You need to know what your customers want to fulfil their needs and create or articulate value for them. This means finding out how your products or services make your customers’ lives easier before you put a price on a product or service. By far, this is the easiest of the 4 common pricing strategies.
Remember, price is a summation of value. It is not an arbitrary number generated by overly complicated cost allocations and made up mark up percentages. Like cost-plus pricing strategy or margin-based pricing.
You’re probably wondering why if value-based pricing is so good, then why do so many companies resist customer value-based pricing strategies?
The only real drawback of value-based pricing is that no one can do it properly. It is a great concept but there are only a few pricing experts out there who have mastered how to design and implement value-based pricing strategies, algorithms and needs-based segmentation.
The truth is, most consultants, let alone finance managers and pricing managers, haven’t yet figured out how to translate customer value into price points which sum up the total economic value of commercial exchange.
Many managers, even software pricing developers, have still not created a value-based algorithm to set and manage prices. The majority of software algorithms rely on complicated regression models which are mathematically sound but not really value-based.
Even the best price software vendors are still modelling pretty standard price volume data rather than psycho-graphic variables. Nothing radically different from what good pricing managers have been doing. Just more powerful systems to crunch more data.
Don’t go wrong, price optimisation is not value-based pricing.
It’s a process of customising prices, not a strategy.
Of all the four common pricing strategies, value-based pricing requires that the manager truly understands his or her customer base. Including changing preferences and complicated decision-making processes – which seems to enter the realm of psychologists, not mathematicians or financial analysts.
You see, computers are still not capable of interpreting emotion like humans. Ninety-nine percent of decisions made by people, including most pricing decisions are emotional. So why do companies insist on hiring accountants for value-based pricing management roles? This makes absolutely no sense.
Many consultants think they have solved design and implementations issues using customer or needs-based segmentation. Yet, they haven’t really because most customer segmentations are not psychographic segmentation. Rather, they are standard segmentation, sorting customers only by descriptive criteria like size or application field.
Only a small number of companies do a needs-based or value-based segmentation to identify customer groups with distinct needs. This includes specific willingness to pay profiles, risk driver analysis, and psychological/persona profiling.
Needs-based segmentation is important when you implement a value-based pricing strategy. It helps a pricing manager to develop different offers for different groups of customers based on their needs. Offers which balance what customers want with the amount of money they are ready to spend to fix their problem.
The problem with needs-based segmentation, however, is that they are generally designed and implemented by managers. People who are great at numbers but not great at understanding people (including their own teams). Fair enough, they are not born leaders or even trained psychologists.
Value-based pricing (algorithms and segmentation) requires a lot of research and pricing expertise if you want to implement it properly.
It’s not a simple slap a fixed margin and away we go.
The secret to world-class pricing is an equal mix of psychology, economics, mathematics, science, strategy and sales. Many managers water down the value part of pricing with hunches and rules of thumb. They even leave out the parts they don’t feel comfortable with – usually the psychology part.
While leaving value out of the price profit equation is tempting for people that do not possess the right skill set for value-based pricing, value-based pricing (minus the value part) will inevitably underwhelm and disappoint you. You won’t get the earnings to grow you want. You may even lose money by implementing a poor interpretation of value-based pricing in your market.
To develop and implement a value-based pricing strategy successfully, you need to re-think pricing and who you put in your pricing team. Don’t expect a finance manager to naturally pick up customer psychology. Don’t expect a sales manager to naturally pick up mathematical modelling. There’s a reason value-based pricing experts get paid a lot. They have mastered a very difficult topic and get great results.
4. Dynamic pricing
Dynamic pricing is the last of the 4 common pricing strategies and one of the latest additions to the pricing strategy repertoire.
This strategy enables you to sell the same product at different prices to different groups of people.
Dynamic pricing can be implemented in two ways: Time and groups.
Pricing based on groups is when companies use pricing algorithms and statistics to calculate different prices for the same product to different customer groups.
Pricing based on time refers to when a price goes up or down based on time or during a price cycle. Think airline ticket prices.
Dynamic incremental pricing example
Imagine you were the revenue manager of a major Australian airline. You saw that one of the planes on the system leaving tomorrow morning was only half full.
What pricing action would you take to increase the profitability of that flight?
- Keep the airline seat ticket prices at the same price?
- Slowly reduce prices?
- Sharply decrease the price so that last-minute buyers would buy on the spot?
First of all, if you were managing this flight, you’ve held onto these seats for too long and have interpreted the price cycle incorrectly to implement dynamic incremental pricing.
Second, you’ve left yourself with limited time and a limited amount of good options. You now have to make a bold price action to cut prices substantially to fill the jet. You’re pretty much banking on last-minute buyers buying on the spot. A stressful and risky pricing decision because low prices are still no guarantee of filling the jet. People don’t just buy airline tickets because they are cheap. This would be nonsensical. They need a valid motivation and reason to buy a flight.
Third, if you hold on and leave prices high, the margin per seat or unit sold will be higher but the overall flight will be loss-making. The airline would be displeased. You’d probably be out of a job.
Dynamic pricing, one of the common pricing strategies, comes into play in this type of situation.
The drawback of dynamic pricing
The big problem with dynamic pricing (fourth of the common pricing strategies), is that it can get tactical very quickly. Especially when you don’t have the right strategy or expertise to implement dynamic incremental pricing.
Like value-based pricing, dynamic pricing is very difficult to implement. It takes a huge amount of time, expertise and resources to customise prices.
Dynamic pricing assisted by data and algorithms can be a black box if you don’t know how to manage it. So you bought a high power price optimisation system to implement dynamic pricing across different micro-segments? That doesn’t mean the system is going to do your work for you or do pricing well.
It takes a pricing system for a long time to learn how a market operates. Just when it has learned the ropes, the market often changes again. The system has to re-learn all over again.
Do not use dynamic pricing blindly or in isolation. When dynamic pricing is implemented, devoid of a clear strategy a mismanaged business can lose lots of money customer trust.
If you’re considering implementing dynamic pricing among the four common pricing strategies in your business, get a high-calibre pricing and revenue management team. They will track dynamic prices and apply checks to ensure prices remain reasonable, in line with broader company and pricing goals.
This lesson highlights the four common pricing strategies that businesses use. It emphasises how important it is to know your customers, your market and the particular variables about your business, like:
- Product perishability
- Supply and demand changes
- Price elasticity and constraints
Better systems and processes have empowered more companies by opening up new and creative ways to implement these 4 common pricing strategies. However, you should not see the calibre of the team managing your pricing and revenue models as an after-thought (or secondary issue).
Forgetting the human element in all four common pricing strategies is a guarantee for failure. In fact, each of these four common pricing strategies is reliant on technology. It also requires fundamental shifts in thinking, mindset, and culture to succeed. Making human input ever more important.
Whatever strategy you choose, remember the four common pricing strategies in this article must never be led from the top. Pricing is very much a ground-up activity requiring a step-by-step change management approach.
What We Can Learn About Price Increase Strategies From Netflix
One of the toughest and most nerve-wracking roles assigned to a pricing manager or leader is putting together a strong price increase strategies approach – that will ensure profit optimisation. This is where a price leader can really earn their salt and why it is really important to learn lessons from failed price increase strategies of the past.
In today’s blog, we will take a look at the generally maligned price increase attempt by Netflix in 2011. Back in 2011, Netflix was a very different beast than today. Customers receiving DVDs through mail and high speed broadband was not as prevalent. Instead of growing exponentially, Netflix pursued the general markets (finance and media) view of the price increase strategies that created a “lost year” for the business.
What happens when common pricing increase strategies go wrong?
The basic plot about what happened is summarised by CNET.COM:
“Netflix managers would tell subscribers on July 12 that they planned to do away with a popular subscription that offered access to DVD rentals as well as unlimited on-demand streaming video for $10 per month. DVDs and streaming would be separated and each would cost subscribers $7.99 a month, or $15.98 for both, about a 60 percent hike.”
and the later, aborted attempt to enraged Netflix customers. The company lost 800,000 subscribers, its stock price dropped 77 percent in four months, and management’s reputation was battered. Hastings went from Fortune magazine’s Businessperson of the Year to the target of Saturday Night Live satire.”
It was a really game-changing time for the business – as the DVD part of the business was clearly in decline and was to be spun off into a separate business.
The missed opportunities:
A belief in the future – before your customers were on board with it
The CEO had a clear belief that online streaming was to be the future. However, many customers at this point were still happy to receive DVDs in the mail. There was a clear gap in strategy and customer awareness of it.
Lack of insight into value actually provided to customers
Some customers paid $8.00 a month because they only liked the “option” to watch a movie or two – they did not consume many movies. Hence, doubling the price was a big change for them. See Forbes article on it here.
A lack of segmentation
Basically all customers faced the same increase despite the actual value varying segments received from the service. Some people were clearly getting a great deal, others not so great.
Netflix referenced the costs they were facing – rather than the value in promoting the price rise to customers. This is a lesson that any business can learn from.
The power of social media
In the modern era, customers can complain and make their feelings felt on social media. It is vital to interact with customers and complaints and address concerns.
The value of a skilled and experienced pricing team is highlighted – and why multi-faceted teams are required.
A bit about us – Taylor Wells helps businesses define and implement their pricing and commercial management functions through our market leading pricing appraisal and skills approach. Click the button below for more details:
Pricing approaches: 7 things to avoid when setting up a new pricing function
It happened to a CEO and his team this year.
This B2B industrial business based in Sydney was beginning to challenge how they thought about value, pricing approaches and selling after another loss making year. Forecasts were bleak. They were consistently missing budget. The board were asking a lot more questions about performance and how to get more shareholder return. The CEO was tired including his team. The situation was bringing up a number of people issues, including management misalignment.
This is how events unfolded.
“It’s going to be another tough year, but not insurmountable,” said the CEO to his executive management team. “We have capable, talented people and we just hired a new pricing manager to help us. If we get focused and work together as we agreed in our planning sessions, we will be able to hit budget and achieve growth targets,” he further said.
The room fell silent as the executives in the room remembered back to the team building week they had 6 months prior.
The team-building week was called by the CEO to think about new ways they could increase their competitive advantage in light of a series of hard knocks and challenges. Their warehousing/storage and distribution models were under attack by disruptor online businesses and cheaper new entrants to the market. Procurement teams felt empowered to buy for themselves and were pulling their contracts apart until they were barely making any profit.
The salesforce was also feeling low and complaining that they were not being supported by the marketing team to win new business. It was common to find excessive discounts, free give-away items and price override in the system. The general belief in the business was that although they had achieved operational excellence, they were delivering a commodity and the prices they were charging were over-inflated.
The executive team agreed in the meeting that the team building week produced some good actions and takeaways.
There were some good options to improve customer experience and people were feeling a bit better about their tough situation. However, the team was still unclear about how exactly they could work together to achieve more profitable sales and implement different pricing strategies. They didn’t have a common goal to work to and they were not sure which actions to prioritise. They were not working to a documented and agreed pricing approaches making framework. Sales staff were raising questions about customer pricing arrangements that highlight that there was no clear pricing approaches strategy.
After the meeting, the Marketing GM, Matt and the Sales GM, Greg walked out of the room together reflecting on the meeting they just had. “I wonder how the new price management is going to work out,” says Matt. “I’ll be honest, Greg, I don’t really understand why we need one or what they are supposed to do,” Matt answered. Greg, the GM of Sales replied, “I think the pricing manager is going to help us price more competitively in the market but I’m not exactly sure how. I know we have a lot of pricing admin to deal with each day. Customer invoice issues, price file errors, manual entries, wrong product codes and credit notes are taking up a lot of our time these days. It would be great if the pricing manager could help us with this.”
“I am still not convinced a pricing manager can support us with anything that we can’t do ourselves?” continued Matt, the GM of Marketing. “I’m also a bit concerned about how our teams are going to react too. Your sales teams are used to managing pricing approaches. How are they going to react if this is taken off them?”
The two GMs continued voicing their true concerns and fears of change (that were not uttered once during the leadership meeting).
As they moved along the corridor, they finally reached the doorway to Matt’s office.
As the GMs were finishing off their conversation, Greg’s mind began drifting off to the million-and-one-tasks that he needed to get done that day. He felt sudden tiredness descend upon him. He was dreading having to hear any more team and customer complaints.
Then, with a sudden jolt, Greg’s attention went back to his conversation with Matt as half in jest and half in truth, Matt says: “Is it even possible to have a cohesive sales team anyway?! I thought this was an oxymoron!”
Greg didn’t say anything for a few seconds but felt frustration built up inside. Finally, he said, “All jokes aside, Matt, if my sales teams were able to get decent leads and help from your marketing team, I think there would be a much better relationship between sales and marketing to get the results we need. I just hope the pricing team will be able to give us the support we need.”
Why is this happening in pricing approaches?
This B2B organisation was struggling to transition the business from a cost-plus to value-based culture because of operational silos and well-intentioned but ultimately dysfunctional team behaviours:
- Operational silo structures were stifling creativity, collaboration and good decision-making and cultivating a blame shifting culture.
- There was not enough understanding of value-based pricing or pricing power of the business to move to a new pricing competency system.
- Teams were unsure of the CEO’s vision for change and no clear-set goals and performance metrics to support teamwork.
- Teams were working against each other because trust had been lost.
- The new pricing manager was unwittingly in direct line of fire of a whole range of emotions and ongoing grievances.
- The pricing manager was hired even though the role had not been clearly defined and the role of pricing had not been clearly communicated across the business.
- The team did not know how to solve their own problems and improve performance and were reluctant to address areas of conflict that were blocking progress.
Destroying the barriers that turn colleagues into rivals was crucial to rebuilding functional relations between the sales, marketing and pricing teams in this organisation.
As people automatically reference undertake online due diligence before engaging suppliers, traditional sales, pricing and marketing operational demarcations will become less effective in converting a customer upon 1st, 2nd or 3rd meeting.
Procurement functions within organisations are becoming more empowered to make important buying decisions on their own across a much wide range of categories of spend.
When products and supply chains become commoditised the difference comes down to culture and engagement both internally and externally with customers. Focused, engaged and effective teams will be your number one competitive advantage and differentiator in a rapidly changing business landscape.
Teams that feel like they are part of, or being led by something bigger or a greater purpose will work more effectively together to transition the business from cost-plus to a value-based culture. Getting the right people with the right skills and mindset on board will be the number one determinant of how effectively you can transform your pricing and selling capability.
CEOs and leadership teams that are either unaware and or do not act fast enough to address management misalignment, skills gaps and operational team silos will eventually find themselves issues that affect morale, productivity and connection with customers. These factors almost always result in lowered profitability.
The three levels where you can approach pricing: first – industry, second – market and third – transaction level. When it comes to pricing matters, every company or business has a slightly different approach to it. That also includes who has overall responsibility for this very important issue within their organisation. It also helps if the business knows the common pricing strategies. In that manner, you will know the most appropriate strategy to use for your business.
If you have any questions or would like to discuss more the topic and learn the common pricing strategies, please feel free to contact me. Check out our recent blog on pricing software tools.
Strategies of pricing: 10 ways pricing builds a revenue generating machine
In this article, we will discuss the strategies of pricing, focusing on the 10 ways to transform your pricing function into a revenue generating machine.
- DO YOU HAVE A DEDICATED PRICING FUNCTION?
- HOW EFFECTIVE IS YOUR PRICING TEAM TO PROJECT AND GROW MARGINS AND REVENUE?
- IS YOUR PRICING FUNCTION SET UP CORRECTLY?
Research by Taylor Wells across Australian businesses reveals the majority of companies who have invested in pricing management functions over the past 10 years, have yet to realise the full potential and opportunity of the function to improve profitability.
A Pricing Function is a Crucial Strategic Asset to Drive Lucrative Strategies of Pricing
Investing in dedicated pricing and commercial teams to drive strategies of pricing and growth has been undertaken by a number of leading Fortune 500 companies for over a decade now. Companies such as Caterpillar, Dupont and Parker have all appointed a Director of Pricing and supporting team members including channel or division pricing managers and support analysts. Australian businesses have begun to implement strategies of pricing management solutions. However, Taylor Wells advisory firm has identified several areas of risk to the successful integration of a dedicated pricing function.
Top three risks to your strategies of pricing include:
- Initiating senior pricing and commercial appointments, promotions and restructuring on the basis of limited research and understanding of the company’s commercial pressures and pricing situation.
- HR guidelines and process that do not give senior pricing and commercial candidates and employees’ clear roles, responsibilities, demarcations to manage pricing decisions and structured career pathways options to leadership roles.
- A heavy reliance on subjective hiring processes and out-dated recruitment tools and resources that fail to predict future work performance or identify potential.
The Story of a CEO hiring a Pricing Manager to Implement New Strategies of Pricing for a B2B Chemicals Company in Melbourne
Candidates have learned how to play the old hiring and recruitment system. They are smart enough to work out what the company wants during the recruitment process but not smart enough to work well with people or deliver on agreed outcomes when they are in the job.
This very situation happened to a CEO of a Chemicals Company just outside Melbourne who hired a national pricing manager two months ago because he wanted to develop more effective strategies of pricing and revenue management.
As a candidate, the hired strategic pricing manager assured everyone that he was the right person for the job. He was polite, capable, strategic and very skilled. His act was unwavering and very convincing throughout the interview and entire recruitment process.
His CV was amazing. He performed well on all the pre-employment tests and he said all the right things during the interview process. However, two months into the job, he has managed to upset and confuse most people he has encountered at work.
He has terrible communication skills. He’s writing strange emails, sending esoteric articles and upsetting people with his pompous and arrogant working style. He has also disappointed his colleagues and the CEO by failing to show any signs of delivering on even one of the strategies of pricing or financial outcomes he agreed when he took the job on.
The Traditional Recruiting mode is broken & jeopardises strategies of pricing
We believe that the conventional way of recruiting and traditional recruitment methods are broken and fundamentally flawed. Like CV screening, all types of interviews and even aptitude and psychometric tests. We think that talent management processes are largely generic. Failing to identify employment development, succession planning and high potential programs for specialist pricing and commercial talent and roles.
Pricing Talent is in short supply & advanced strategies of pricing are becoming more difficult to implement
Talent shortages in pricing and commercial was a major issue for Australian businesses in 2015 and 2016. The perfect pricing and commercial candidate for your new or existing role is becoming very difficult to find, hire and retain.
A heavy reliance on outdated recruitment resources and tools coupled with years of slack hiring and poor talent management processes has complicated and increased the competition for in-demand pricing and commercial talent.
New and better ways to hire and manage pricing and commercial talent are now essential for Australian businesses to grow and maintain lucrative strategies of pricing under unpredictable market conditions.
CEOs that plan ahead now and work to eliminate the risk of losing high calibre candidates and talented employees to other companies will be well-placed to reap the benefit of a high performing commercial function in 2016 and 2017.
10 ways to transform your pricing & revenue function into a Cash-Generating Machine
Over the last 3 years, Taylor Wells has undertaken extensive research on over 100 Australian companies. Listed below are 10 ways companies can build a commercial function in the right way:
- Build employee engagement and accountability to deliver key project outcomes.
- Use of predictive workforce data and real-time analytics to identify talent for a new job (see pricing manager job description) or promotion.
- Stop using out-dated recruitment tools and resources (i.e. CVs, interviews and psychometrics) with low predictive validity.
- Make the recruitment process an opportunity to include and delight talented executives and to reinforce your brand value and reputation.
- Start the recruitment and or promotion process by having a strong understanding of the company’s real commercial situation.
- Engage and communicate with future employees and employees during the hiring, selection and promotion process.
- Implement talent management processes that include and enable talented executives for a role or promotion. Placing them in the right role or function.
- Provide new recruits and employees with a clear pricing strategy.
- Have clear roles, responsibilities and demarcations to manage pricing decisions & invest in analyst or team support.
- Use specialist on boarding or training that enables new employees to function well in the role in the first few weeks rather than after 6 months to a year.
Price is the only revenue generator of the business. It is the only marketing variable that generates money for a company.
Competitors can easily change and copy a company’s price. However, prices can attract consumers to different retailers and businesses to different suppliers.
See blog on employee development plans.
See our blog on hiring costs for pricing professionals.
Pricing Models: The secret to how great businesses make more money
If you are a small business owner, pricing manager or CEO of a large corporate and you are thinking of ways to make more fast cash, review your pricing model today.
How you generate money (i.e., your revenue stream) is inextricably linked to your pricing model. If you want to make more money and are finding it difficult to find revenue opportunities, maybe it’s time to re-think your pricing model.
The type of pricing models you develop for your business can have a huge impact on the revenues you generate. Develop the wrong pricing model and soon find yourself justifying unsustainable and sporadic cash flow statements to the accountant, CFO, board or shareholders.
In this article, I will go through how airline pricing models work to make more money. Moreover, I will explain how and why there is such a strong connection between a business’ revenue stream and their pricing models.
I will then lay out two common types of pricing models – fixed pricing models and dynamic pricing models. Furthermore, I will show the key differences and usages of the two very popular pricing models.
Throughout the article, I will reveal how leading B2B and B2C businesses make more money. To achieve this, I’ll think about how their pricing models can yield more revenue and margin opportunities.
What is a pricing model?
A pricing model is based on a series of pricing mechanisms and mathematical formulae that calibrate fare prices using logic, rules and constraints. An airlines pricing model, for instance, considers things like: route, time of day, season, demand, supply and other factors because fare pricing and airline revenues are largely dependent on inventory and time of purchase.
How do airline pricing models generate more revenue and margin?
Pretty much every successful airline business hires a large team of pricing and revenue managers and analysts. These teams make small adjusts to airfares throughout the day (tactical pricing) to boost revenue and (hopefully) create better customer experience.
The team loads fares into their pricing model at different times of the day every day. The pricing and revenue management team may also do some level of forecasting to determine the best times of the day or week to optimise prices based on supply and demand.
Depending on the strategic pricing approach and sub-strategies defined in the teams’ playbook, the revenue manager may choose to adjust prices or hold prices as a tactic (or sub-strategy) to compete under highly competitive market conditions (i.e. a competitive bidding strategy or bounce strategy to win market share, etc.).
What pricing models make most money?
Revenue managers like to use algorithmic pricing models to maximise profitability.
For example, the picture above on the Cranky Flier blog shows a simple method that airlines have discovered to make more money out of individual passengers. (Remember this the next time you’re sitting in an economy with knees scrunched up under your chin). This is a seat-to-leg room ratio, calculated using an algorithmic pricing model to make more money for the airline.
Advanced pricing models are fairly flexible models that enable pricing and revenue managers to continually refine additional calculations, therefore, business rules and constraints within each segment and as the team learns more about the market and consumer behaviour.
How advanced pricing models make money for large corporates
Fares in airline pricing models are dynamic because they are set by the market and focus on the consumer. The number of passengers booked on a flight varies at any one time. This will trigger alternative valued-based pricing logic and value fences embed within the pricing model that will in turn optimise revenue and margin against set volume requirements by flight, schedule and customer segment.
Many airlines announce sales at the beginning of the week which often creates some kind of reaction in the market or price response. Some airlines, for instance, may try and match certain fare prices the following day because this is their competitive strategy while others may choose to hold their fare prices after calculating competitive responses using advanced Game theory modelling and or scenario planning sessions.
Airlines tend to have technologies and price software to automate their pricing model to speed up routine pricing tasks for better pricing outcomes. Airlines, for instance, develop pricing models for pricing systems that are commonly made up of pricing algorithms (or mathematical formulae) which at a very basic level are calculated using regressions and price volume elasticities for the business and their key competitors.
The output from these pricing models shows key price volume differentials which the team interpret as leading indicators of growth and profitability.
How “Smart pricing” strategies drive price optimisation
Airlines tend to automate its pricing model using “smart pricing” or algorithmic pricing. Algorithmic pricing coupled with technology and price software reduces the time it takes to review prices across multiple customer segments.
Think for a moment about the complexity of a flight network and the huge array of fares, discounts and specials (or price files) in their SAP system. A pretty daunting and time-consuming task, right?
It would be difficult for revenue managers and their teams to manually go through every price point for every flight and adjust prices for optimal revenues. Therefore, most airlines choose to buy pricing software to automate price reviews for predictable flight schedules.
Automation has also been found to reduce human error and save time. Price software does not provide solutions for unpredictable pricing situations. This has to be programmed into the system as an additional rule and constraint.
The complexity of algorithmic pricing models is dependent on the continual development of carefully selected business rules and constraints or conditions that have been pre-programmed into a pricing model.
Algorithmic pricing models can simultaneously boost revenue and maximise profitability. They help teams to make more informed decisions.
Algorithmic pricing models produce real-time data analytics and visualisations to help teams understand market dynamics in a glance using price, volume graphs, histograms, price waterfalls and charts.
Revenue managers like to use algorithmic pricing models to boost revenue and maximise profitability.
The design of advanced pricing models is flexible. It enables pricing and revenue managers to generate more revenue for the business while protecting volume.
|Pricing model options|
|1. Fixed pricing models(largely used by B2B businesses)||2. Dynamic pricing models(commonly used by B2C businesses)|
|List price||§ Fixed prices for individual products, services or other value propositions||Negotiation(bargaining)||§ Price negotiated between two or more partners depending on negotiation power and/or negotiation skills|
|Product feature dependent||§ Price depends on the number or quality of value proposition features||Yield management||§ The price will depend on inventory and time of purchase (normally used for perishable resources such as hotel rooms or airline seats)|
|Customer segment dependent||§ Price depends on the type and characteristic of a Customer segment||Real-time-market||§ Price is established dynamically based on supply and demand|
|Volume dependent||§ Price as a function of the quantity purchased||Auctions||§ Price determined by the outcome of competitive bidding strategy|
|*Based on Pricing Mechanisms table written in Business Model Generation – Alex Osterwalder & Yves Pigneur|
Understanding more about how your competitors and consumers behave is the secret to generating more revenue while protecting volume.
It’s time to re-think your pricing model if you want to make more money but having difficulties finding revenue opportunities. Remember, the type of pricing models you develop for your business can have a huge impact on the revenues you generate.
Common Pricing Strategies: Have You Heard of BDCs (Big Dumb Companies)?
When we talk about pricing strategies at Taylor Wells, we are really talking about more than just whether you should slightly alter prices on your long tail. Whilst that is really important (after you have put in place numerous sensible easy wins) – we also make clear how important it is to address communication issues and politics in a company. From our experience, these issues are usually the biggest hindrance to success for many pricing functions. Like they cannot get buy-in or support no matter how skilled they are or how good their proposition is. When we look at really successful pricing transformations, they usually are part of a wider reaching company transformation also.
We read an interesting and provocative article recently that touches on numerous corporate political and team work failings that we believe can really hold back a company’s progression to a profit-making machine. Some business thinkers have referred to a BDC (Big Dumb Company) as one that makes numerous mistakes that hinder growth. From our perspective, implementation of successful pricing strategies.
We look at a number of examples of these failings to highlight how common they can be (and the impact they can have on a pricing function). We reference a blog post on the topic by Ron Alvesteffer and quote from it below:
Common Pricing Strategies: How BDCs can hinder commercial success?
The eight key failings include the following:
- Prioritizing numbers before people
- An intolerance for failure
- Lack of vision
- Trying to do everything – no focus
- Lack of people development
- They measure the wrong things
- Don’t communicate successes or failure
I’m sure almost anyone with a sense of recognition can read the list above. However, we believe it is very powerful to think what these weaknesses say about failure to implement pricing strategies.
Successful pricing transformations happen when the entire corporate (with senior leadership buy-in) supports the function. When an organisation is siloed and different departments do not work together, discuss issues openly and operate with political rather than commercial objectives any pricing team will under deliver.
The second key lesson we take from the list above is the focus on talent – and development of talent. However, when an organisation is excessively political, star performers may become disillusioned or feel they are wasting their time. In this context, rewards may stem from something that is not delivering commercial success. See our blog on value based business strategy and how talent is key.
If you would like to know more or provide feedback on the concepts above and learn the common pricing strategies – or want to brush up on your pricing skills and knowledge.
Different pricing strategies: Win pricing jobs in B2B industrial companies
To move your career to the next level, you need to be a great business person and not just a pricing manager. This might sound strange, argue with your assumptions about your role in pricing or feel a little outside your comfort zone. However, if you want to accelerate your career, you need to make sure your skills, knowledge and presence is relevant to the business and your customers. Businesses need pricing professionals that can help them solve complex commercial challenges, not just people who are technically brilliant at pricing services and products. Focus on solving complex business challenges. Help and care for other people and see how your own interests and career ambitions fall into place.
In this article, we will discuss the behavioural characteristics of great pricing leaders. Our main contention is that great pricing leaders have learned how to channel their unique capability on the things that matter most. These include understanding changing markets, customers’ pains and wants, staying ahead of the competition, different pricing strategies and ultimately helping the business drive sustainable revenue, margin, profitability and growth.
Have a talent and passion for numbers and manipulating data
From over 300 interviews with pricing and commercial analysts, managers and directors across B2B industrial companies in Australia, 100 company pricing diagnostics, 600 talent evaluations of pricing and commercial professionals at every level and every industry and different pricing strategies, a clear picture of a great pricing leader starts to emerge.
It might sound obvious but the first sign of ‘pricing competency’ or a key characteristic of a ‘great pricing leader’ is a strong core pricing competency. When we say ‘pricing competency’, we are measuring a range of technical and soft skills like financial and commercial problem solving, data analysis, arithmetic, communication, teamwork, business math, data analysis and interpretation, reading charts, tables and graphs, presenting ideas and results.
We find that great pricing leaders or potential leaders do not start their career necessarily knowing everything there is to know about pricing like different pricing strategies. Domain expertise and knowledge is something you build over time. They do, however, all start their career with a strong core analytical and problem-solving competency and communication skills. In order to thrive in most financial and commercial environments.
Trust your entrepreneurial instinct
A second important characteristic is entrepreneurship or intrapreneurship. Channelling a unique capability or skill set to drive profitability by helping and understanding the needs of others.
Ask yourself for a moment, what led you to where you are today? What behaviours, attitude and personal psychology or mindset do you have which serve you well? Now, think about how you should cultivate these strengths to help other people. Great pricing leaders make it their priority to help internal and external customers understand how better pricing management can build more opportunities, different pricing strategies, growth and profitability. They also spend a great deal of time empowering these same people to take control of the pricing situation and or make better buying decisions.
Pricing leaders have a unique advantage to get to senior leadership positions. They have a propensity to detect opportunity and risk like an entrepreneur or astute business leader and then make lots of money from it. Great pricing leaders like Dick Braun (Parker Hannifan), Bob Vezeau (WestRock), Greg Preuer (Cooper Lighting) have all made it to leadership positions in B2B industrial companies. For the reason that they remain focused on the bigger picture, different pricing strategies and quickly detect opportunity and risk. If pricing leaders are being consistently told what to take care of (opportunity) or what to look out for (risks) then something is wrong.
What specifically makes a pricing leader an astute business person, rather than just a pricing manager that hands out prices and can focus on different pricing strategies? When we reviewed our research on global pricing talent, we saw great pricing leaders had a compelling mix of at least three of the following traits and characteristics:
They care about and focus on customers.
Pricing leaders like customers and deals. They enjoy getting involved in making deals and will challenge customer’s viewpoints on price and value. Also, they thrive from constructive debate and are always the educator, guiding customers tactfully to better buying decisions. They can control important discussions on value by digging into the financial detail and mechanisms of a deal. In addition, are skillful at shifting the customer’s mind away from price to value by showing them how they can make their life easier and business more profitable.
Highly commercial and results focused.
It is likely that they have moved into pricing and commercial because they prefer selling deals rather than buying deals or reporting on deals. They are highly competitive and want to beat the competition by providing options or recommendations that make lots of money. On top of that, they are driven to win a large amount of business from the market place. Also, they are trusted and relied upon by sales. Advising the team whether they should stick to the best price or particular deals or go below or above it or offer best and final right now.
They have a natural propensity to range.
Pricing leaders have to do a lot of things and deal with and count so many variables. They not only do analysis and recommend a good price. Also, they work with the management team to make practical and low risk recommendations to drive profitability. They build up, collect, develop and refine their thinking on a number of variables (customer value, business metrics, market conditions, competitors and internal stakeholder management) based on reliable sources of information (data, analytics, business intelligence, algorithms, templates and dashboards) to form the best strategy possible to close or win business.
Trusted advisor to a number of groups.
Great pricing leaders are energised by helping others. Like winning deals, ranging though a number of complex problems and scenarios, and being recognised for their efforts and talents. Their number one contribution to a sales team is bringing sound understanding and simple explanation of numbers. Driving profitability, identifying opportunities and risk and aligning commercial teams to key business metrics and growth plans are their contributions to management teams are. Their number one contribution to customers is challenging the way they perceive price and value. They tend to always start with the numbers but validate findings in a very collaborative way. In addition, will avoid risky decisions by working methodically through complex problems and or deals using Lean and Agile methodology. They tend to have a plenty of ideas on nearly all topics. Also, likely considering several factors to make sure they are giving the people the best advice possible.
What is preventing you from getting the right pricing role in different pricing strategies?
At this point, you may be thinking why aren’t more businesses hiring pricing managers if they are able to do all this?
There is absolutely no doubt that more B2B businesses need more great pricing leaders. Many great leaders of the future go undetected because of a lack of knowledge and skills to detect pricing talent and leadership potential. Many new recruits into B2B pricing teams have done little to know pricing – leadership level excluded. They are mostly internal hires. They were moved from sales, procurement, finance, customer services teams. Some may have been moved into the pricing team because of their talent and competency in these core pricing competencies. Many, however, are moved into pricing teams. For reasons like because they have to (the boss told them to) or want to (fancy a change). Not because they are the right person for the job.
What can be done to support and drive your career
The role of pricing is still largely undefined in many B2B companies. Many B2B businesses are not setting up pricing and their pricing teams in the best way possible. There is a need for more clarity and training around what it takes to be and or identify great pricing analysts, managers and directors. Job descriptions and talent evaluations are largely generic and unrealistic. Finding talent in many businesses is more the ‘luck of the draw’ than a systematic, robust and fair process.
There are people in pricing jobs that shouldn’t be there and vice versa. Some great people with the right mix of core competencies and potential are overlooked for pricing roles because they were tested using the wrong competency framework. Assumptions or a lack of knowledge about pricing can lead to hit and miss recruitment (i.e. both the right and wrong people are brought into the business). This is a mistake and exposes the team and business to risk. Wrong hiring decisions affect work satisfaction and the lives of the individuals and their families.
Early detection and specialist talent evaluation is required to help candidates, teams and businesses make more informed decisions. There is a growing need for better recruitment and hiring for all pricing roles (analyst to director) to avoid bad hires, identify pricing talent early and prevent under-performing teams.
Companies like Parker Hannifan, Rockwell, Shell, GE, Cooper Lighting and Eastman Chemicals have all invested in pricing and people right from the recruitment through to leadership positions.
If you are thinking about changing career, interviewing for a pricing role right now or wondering whether a career in pricing is something you should persevere with or start, then think about great pricing leaders and what they have done to succeed.
Ask yourself these questions too:
Do you keep an eye on the bigger picture and make it a constant reminder to not get lost or preoccupied with tactical analysis and pricing administration? Also, do you wait for the ideal job or opportunity to be brought to you? Do you have a network of people that can guide and support you? Furthermore, do people respond positively to you because you are credible, reliable and focused on solving their problems?
If you want to move up on your career, make sure your skills, knowledge and presence is relevant to the business and your customers. Companies need pricing professionals that can help them solve business problems.
To summarize, great pricing leaders care about and focus on customers. Another characteristic is, they are highly commercial and results-focused. Also, they have a natural propensity to the range and are a trusted advisor to a number of groups.
Common Pricing Strategies for Travel Agencies 🧳: Adapting Pricing to Digital World
- How have pricing strategies for travel agencies responded to alternative online travel agencies and pricing offers?
- What is Flight Centre’s new marketing strategy that consumers are now buying their holidays and flights online rather than in-store?
- Are the Australian public really willing to pay for Flight Centre’s flights and holidays when they can go online and get the same deal around about the same price or cheaper?
Gone are the days when nearly every Australian went into their local travel agent to buy all their flights and holidays. People just don’t buy holidays and flights like they used to. The average Australian automatically goes online to book their flights and holidays. Most people prefer to do it in the comfort of their own homes.
Research on Australia’s top travel agent
According to Roy Morgan, 9.3% of Australians (aged 14 and above) that took a minimum of one holiday in a one-year period booked their flights from Booking.com. Flight Centre followed with 9% of the bookings. The newcomer, Airbnb, came in third with 4.5% of the bookings.
In 2016, Bookings.com took the top spot from Flight Centre, who, in 2004, was by far the most popular agent (9.4%), ahead of Booking.com (5.8%) and Wotif.com (5.2%).
From 2014 to 2019, the average industry growth for booking flights online was 21.7% – with end-user penetration at 28.7% in 2019. This growth rate is expected to continue rapidly, hitting 31.0% by 2023.
In terms of the dollar value of online booking and travel, the average revenue per user (ARPU) amounts to US$1,239.31. Revenue is expected to show an annual growth rate (CAGR 2019-2023) of 4.7%, resulting in a market volume of US$10,719m by 2023.
A Look into Digital Pricing
In this article, we will look at how pricing strategies for travel agencies have changed in response to aggressive online pricing and digital travel alternatives. We’ll also discuss recent pricing and business challenges faced by Thomas Cook – the UK equivalent of Flight Centre. Will Flight Centre face the same fate?
We’ll close by taking a look at how Flight Centre marketing has changed amidst a rapidly changing Australian marketplace. We’ll offer some tips and checklist too on how travel agencies can improve their pricing strategies in an increasingly digital and challenging market.
In the first quarter of 2019, things looked shaky for Thomas Cook travel agency. They attempted to sell the majority of their stocks to China’s Fosun in an attempt to ensure its majority stakeholders remained solvent. But, this was not enough. The banks soon demanded an additional $250 million to pay their prior debts.
After months of negotiations, the deal collapsed with Forsun. Thomas Cook travel agency went into liquidation in September of this year. Thousands of Thomas Cook customers were left stranded abroad.
Thomas Cook was over. The everyday British public who had trusted Thomas Cook for over 150 years were left stranded overseas without even a return ticket to get them back home.
Many reasons were given for Thomas Cooks’ collapse citing: Brexit, weather conditions and political unrest in holiday countries. But really, the sudden collapse was the consequence of being “an analogue business model in a digital world”. Much of Thomas Cook’s value was in its brand, reputation, and the loyalty of its customer base. However, even this was not enough.
It didn’t ‘go digital’ when it had the chance. Passengers today rely on a wide range of digital platforms available to book their flight travels. Most customers feel that they don’t need personal assistance in booking their holidays. No amount of push promotions and discounts could maintain Thomas Cook operations for even just 1 more day.
A sneak peek into Flight Centre marketing plans for 2020
Does this mass migration to online travel ticketing spell disaster for travel agencies like Flights Centre?
Brick-and-mortar travel agents like Flight Centre have been heavily impacted by the rise of online-only operators. The whole travel industry has been shaken. The majority of traditional travel agents have found it very difficult to adapt quickly enough to the digital age. Many don’t have a robust marketing plan. A growing number are finding their pricing and promotions quickly losing their influence with their customers. No matter how hard they pull the promotional lever.
Taylor Wells advisory strongly believe that Flight Centre can give their customers what they need and transform and adapt their business and pricing to the digital era. Despite being a ‘traditional’ travel agent for most of its history, we see great signs of them transitioning their Flight Centre marketing strategy to digital. In turn, delivering innovative pricing strategies for travel agencies.
Listed below are some of the ways Flight Centre marketing is addressing and monetising their offer:
- New offers: Flight Centre Travel Group are continually revising their packages, pricing, ticketing and marketing to adapt to changing trends. The ultimate goal is to increase turnover both in-store and online. Their objective is to improve the margin for retail consultants and increase customer acquisition. This would mean staying relevant to their customers and communicating the need for change across the organisation. Including their subsidiaries around the world.
- Branding: With its new logo designs, the old slogan “Lowest Airfare Guarantee” was removed from the Flight Centre advertisement, believing that travelers are no longer price-driven but on face value willing to pay for: loyalty and trust. The constant challenge for the company is to persuade people to buy from Flight Centre using data-driven insights. To accomplish this, the pricing team needs to fully understand customer wants, needs and data.
- New pricing strategy: Moving to a value-based strategy is now essential for Flight Centre to stay ahead or even exist in the next 5 years. Read Flight Centre’s pricing strategy below for more detail.
- Social media: All Flight Centre’s departments aligned themselves to their new Flight Centre marketing plan. They are looking to cover all social media platforms and mediums. This ranges from search engines, social media blogs to the traditional print and broadcast venues.
- New technology: Flight Centre is very keen to explore and invest in new tech innovations at the moment. Their MO is to attract more customers and keep them engaged. They have looked at innovations like voice-activation within their digital agency. Also, they are introducing virtual reality to their customer booths. They want to improve customer experience using VR accessories.
Flight Centre’s Pricing Strategy
Flight Centre’s pricing strategy is a combination of dynamic and value-based pricing. They use pricing algorithm python to monitor the fluctuations in the world airfare prices and scheduling. They also use INFARE airfare data to increase the efficiency and accuracy of pricing decisions. By doing so, they can avoid the likelihood of overcharging or undercharging for their flights and holidays.
Flight Centre uses ‘Airfare data program’. This system is one of the most comprehensive sources of airfare prices in the world. The database tracks the fluctuations of the world airfare prices in real-time together with its partner software: Retailers Price Position Suite for Air Cube. This pricing software adjusts prices within set parameters agreed by the Flight Centre pricing team and executive team.
New Pricing Team
The business has recently installed a new pricing team to drive pricing strategies and systems. Hence, the newly-installed pricing team at Flight Centre use the Airfare system to price airfares against several price indexes. Consequently, giving them a lead in a highly competitive retail travel space.
Thanks to the outputs of Infare. Flight Centre’s new pricing manager has now the ability to find and capture new pricing and revenue opportunities. He can also get a bird’s eye view of their published fares alongside their reference competitors and other airlines’ fares.
A good indication that Flight Centre is adopting a more value-based pricing strategy derived from their new offer configurations and promotions deals. They have spent a good deal of time and investment surveying and understanding what their customers really value about their business. They have then used this feedback to create travel packages like interest-free holidays and Flight Centre price-drop protection.
Their ‘Price-drop protection’ initiative, for instance, is a great way to maintain their trusted status with their customers. Their customers’ feedback indicated that Flight Centre customers hated feeling ripped off. In response, Flight Centre put together ‘Price-drop protection’. It essentially states that if their customer finds out that the price of the ticket they’ve bought from them suddenly drops, they’ll have to repay them the difference once their plane has departed.
Key indicators of failing pricing strategies for travel agencies:
If you are a travel agency feeling the pressure of change and your business is losing revenue, it may be an indication that it’s time to revisit your pricing strategy.
Listed below are some cues that your pricing may not be where it should be:
- The company is an intermediary agency. The service can be digitised. In addition, the company relies heavily on brick-and-mortar offices to do business (i.e., high CAPEX requirement).
- Your customers prefer to use a digital platform instead of personal service. In other words, they’d rather do the booking in the comfort of their own homes rather than face the hassle of going into the travel office.
- You are losing direct access to your customers because of a digital platform. As a result, technology has doomed the physical aspect of a business. The computer screen has become their main connection to flights and holidays.
- You sell more commoditised products (i.e., common flights and destinations) than personalised, niche tours for target segments.
- You’re too late to join the digital platform revolution. Consequently, your references competitors have the lead position online.
- You don’t have enough resources to transform your business or adapt your pricing for online. To clarify, it takes considerable resources and time to completely transform into the digital realm. The need for IT hardware, expertise and software is enough to eat a big hole in your revenues.
- Strategy: With every strategic shift you make, there’ll be some risks associated. In reality, customers do not know what they really want until it’s right there. Innovation means getting close to customers and reading what they want before they even realise it. Can Flight Centre do this in time or has the boat already sailed?
- Customers: Customers are the life-blood of Flight Centre. Showing their customers that they care and understand their needs (and can anticipate their wants) would make them feel comfortable. Perhaps, more loyal too.
- Value: To be more responsive, Flight Centre will need to adjust their pricing to the market. Will Flight Centre commit to being a customer-led strategy for the mid to long term? Or, will they buckle under the pressure of transformation? Will a value-based strategy translate into significant profit dollars for the business? Remember, this is by no means an easy solution to pull off.
- Digital: This is essential while Flight Centre still have the resources to invest in a world-class pricing team. As a result, they need the expertise to drive their online retail pricing strategy. It would be a shame to see an Australian institution like Flight Centre suffer the same fate as Thomas Cook.
- Flight Centre marketing’s and business leaders’ aim is to fully understand customer wants, needs and data. Therefore, plan a value-based strategy to address those concerns.
- Pricing strategies for travel agencies are becoming more customer-focused than ever before. Flight Centre is focusing on understanding how their customers perceive their prices and what they really value. They have invested in an automated dynamic pricing system. In effect, they are listening closely to customer feedback to devise a more updated versioning strategy and price promotions.
- The travel business is in flux at the moment. Nothing is certain. However, good work has been done to date. Ensuring Flight Centre marketing is in sync with its franchise offices and customer base.
Common Pricing Strategies: The problem With Different Pricing Policies in Multichannel Pricing 💻
The different pricing policies in multichannel pricing can be a challenge for the pricing teams to implement in different channels to market (i.e. online, through the sales team, in-store, tenders etc).
For years, customers have been shopping online to see how prices compare with a retailer’s competitors. Still, the concept of comparing store prices in different channels is relatively new.
Research indicates that retail customers may now be more willing to accept different prices on different channels. Are manufacturers and retailers alike ready for the challenge of managing this level of pricing complexity?
For instance, the proliferation of Amazon and Alibaba has put pricing between the brick-and-mortar and digital retailers in varying price sets for a similar product.
It’s safe to say that at the precise moment you last shopped in a physical store for your latest washing machine or set of steak knives, the same item was being offered for a different price on the mobile app of that same retailer.
It has come into greater attention since The Wall Street Journal reported last year that Walmart has begun to price higher for products online than in stores. In effect, the aim is getting more consumers to go to in-store establishments.
Finding the right pricing strategy for different pricing policies
For many retailers, prices increasingly vary between online and physical stores. Retailers tend to offer lower prices in the digital space. However, there are exceptions as the Walmart example shows.
Understanding what customers value in each channel and how that affects what they are willing to pay is the main challenge for pricing teams today.
Getting it right can have its benefits. Based on research, retailers that effectively price differently across all channels, see bottom-line growth of 2% to 5%.
Under what circumstances are customers sensitive to online/offline price differences? Are they open to price differences, and which pricing situations drive them away?
We’ll argue that though the price differences between traditional and digital retailers are significant, customers still consider value as the primary reason to buy the products. Therefore, it is necessary to know what strategies the brick-and-mortar stores can use to bring in more customers.
We believe that customers can tolerate the higher prices in the stores as long as they accept the product value. However, if the different pricing policies between the traditional and digital retailers are substantial, the customers will choose the latter.
How customers have perceived value — and how that affects price sensitivity in different pricing policies
- In reality, there’s no one factor of shopping that all customers value most in all situations. Customers will consider the convenience of immediate availability, the thrill (or pain) of shopping in a store versus online, and a product’s price.
- They often value different things in different shopping situations. Sophisticated pricing strategies need to take these customer-centric considerations into account.
- The primary question that needs to be considered is this: under what circumstances are customers sensitive to online/offline price differences?
- Are they open to price differences? Or, are they put off by them?
In all categories, people are fine with prices being higher in the store for the same item. That is, if they see that the value of the high-priced item (compared to low-priced online item) is reasonable. They also like the item to be in physical proximity, and exclusively available to them. To some extent, consumers must understand the higher overhead costs retailers pay for stock items in physical stores. For instance, you pay more for valuable item + storage + distribution, etc.
Amazon Prime members are more tolerant than other consumers of online prices being higher than in-store prices. We think this could be because these customers see the holistic value proposition differently. They get more value with online shopping’s traits of ease of purchase, ease of returns, speed, and not having to travel to a store. What’s more, they are willing to pay extra for these value drivers even though they are going online (i.e. a channel to market that is generally considered by most retailers to be the low price channel to push volume and old stock quickly).
Strategies in different pricing policies to win the multichannel pricing game
To attract more customers, retailers should approach multichannel pricing in three ways:
Pricing teams should focus on implementing price differential strategies
Deciding what prices to use for which channel starts with developing business rules that combine “hard facts” about price elasticity and competitive pricing. For instance, the impact of the price change on demand by segment with “soft facts”.
Also, on consumers’ willingness to accept price differences by channel, approaches to flexibility include time-series methods. Furthermore, it also includes big data analytics to calculate how a product’s price affects demand. They also take into consideration a wide variety of factors including seasonality, cannibalisation, and competitive moves.
Pricing teams need to put omnichannel pricing programs in place, actively monitor them and continuously optimise prices based on what’s working
Through agile pricing practices, teams can sequence test-and-learn programs that help define pricing boundaries. To best start the program, these teams need to start with a small part of the assortment, pilot the new approach and then scale what works.
Store employees should wield the right tools for talking about price differences
This new strategy of pricing requires a more active communication strategy and an effective method to train store employees.
Store employees avoid straight explanation when asked for the price difference in the store versus in the related mobile app. Too often, the responses are:
“It’s probably just a mistake in the system — they should be the same price.”
“They don’t tell us why. I’m just a cashier, maybe the manager knows.”
“Online and in-store are different businesses, so they price differently based on what they need to liquidate.”
While this may be relatively new, we believe that retailers need to train in-store staff in addressing customer questions. In particular, they need proper training related to price variance and the value reflected in the price.
Customers understand the higher costs for stocking an item in a physical store. Also, the value of having immediate access to a product. Salespeople need to be both aware of the price differences and equipped to explain its reasons.
The training should be revised based on what customers are asking. Additionally, it should also be revised based on how effective in-store staff is in providing quality, on-brand answers.
Operational challenges in managing price differences by channel need to be worked out
A truly customer-centric company offers the option for a customer to return a product purchased online to a physical store.
In reality, customers value choice. Office Depot, for example, can provide refunds to customers for products they’ve returned at the price they paid for. No matter which channel was used to purchase it. Providing this service requires that online customer data be made accessible to staff in the store.
For retailers, getting a sale at a lower price, whether online or offline can be of value. There are opportunities for upselling and cross-selling for developing ongoing customer loyalty and for monetising the data that customers share.
Price differences between online and traditional retailers are significant. To gain value, brick-and-mortar retailers should adapt to omnichannel pricing. They should do so to attract more customers and get the right pricing.
Some management people are still uncomfortable with the boldness required to show different sticker prices for the same item in different channels. Yet studies revealed such price differences to be an increasingly common practice these days. Most retailers are posting different prices on the shelf and mobile apps for the same item at the same time.
Putting omnichannel pricing into practice is not easy. It can start only with a mindset shift at the leadership level to embrace a “license to price differently” across channels. Only with committed leadership can omnichannel pricing be a true source of improved performance and growth.
Even with the presence of digital shopping more prevalent, lower prices, consumers still value the traditional stores. The reason being is they can physically see the items. They know the overhead costs of the retailers. Therefore, they can tolerate the higher price.
Pricing teams should actively pursue omnichannel pricing programs, actively monitor them and continue optimising prices on what works. Through trial and error, teams can find the right pricing strategy. It’s best to start slowly, pilot the new approach and then gradually increase the scope to what works.
Common Pricing Marketing Strategies: 4 Obstacles To Quality Pricing Hires
Selecting candidates for price marketing strategy roles is cumbersome, inaccurate and ineffective.
Organisations are struggling to improve their price marketing strategy while candidates are forced to endure drawn out and tedious recruitment processes for limited return. Managers complain it’s difficult to find top quality pricing talent for their teams and businesses.
Candidates complain that applying for price marketing strategy jobs is frustrating. Application volumes for price marketing strategy roles have increased 35% in recent years. However, 60% of these applicants don’t meet your basic qualifications.
New hires are less likely to apply themselves to the role after experiencing a negative recruiting experience. They are also more likely to leave – 38% high turnover. Screening people out for price marketing strategy roles is harder than ever. Online platforms like LinkedIn have provided us with instant access to thousands of potential applicants. Businesses continue to rely on limited recruitment tools and processes to select candidates for pricing roles.
From pricing analysts, managers and GMs of commercial and pricing, how do you know if you’ve overlooked good people with strong potential and capability? Or worse still, progressed unsuitable candidates that could potentially damage team dynamics risking price marketing strategy implementation? Everyone knows there’s a problem with recruitment. Every day, we continue to roll out the same broken recruitment process for our price marketing strategy roles.
Listed below are four significant obstacles preventing you from high-quality price marketing strategy hires. A quick-start guide to motivate you to re-imagine your candidate experience before you take any further action.
#1: Avoid standard recruiting processes
First of all, the standard recruiting process is a highly ineffective approach to candidate selection for price marketing strategy roles (i.e. Step 1: CV screening, Step 2: telephone screening, Step 3: face-to-face interview with managers, Step 4: references, Step 5: salary negotiation, Step 6: offer).
Standard recruiting leaves recruiters to sort through large, unqualified candidates pools. It relies on managers to give up their time to interview unsuitable candidates. It encourages candidates to pick and choose roles and businesses based on salary and perks. Also, it places both parties in a vulnerable and unclear position about the future.
In short, businesses are offering price marketing strategy roles to candidates without really knowing whether or not they can do the job properly. What’s more, candidates are accepting offers for price marketing strategy roles without really understanding the position, their objectives, or the challenges ahead.
#2: Avoid bad price marketing strategy hires
Furthermore, price marketing strategy teams need advanced pricing skills to generate more revenue and margin for their businesses. Research reveals two out of three (64%) price marketing strategy managers hire employees that don’t fit in well with their team. Some reasons include skills deficits, mismatches, lousy attitude and sensitivity to change and ambiguity.
In addition, skills gaps lead to ineptitude, poor implementation, and a diluted price marketing strategy benchmark. Disengagement is contagious. Poor performers lower the bar for other workers on their teams. Their bad habits spread throughout the organisation and often delay progress and interrupt workflow.
Having poor procedures in place or not putting enough time and effort on the front end to make sure you have the best available pool of applicants for your price marketing strategy roles will expose your teams to more bad hires and performance issues.
#3: Avoid highly automated recruiting for price marketing strategy roles
Highly automated processes are driving good price marketing strategy candidates away. In addition, research shows that people are more likely to drop out of highly automated recruiting processes with limited human touch points. Compared to organisations offering relevant, actionable communication throughout the process.
60% of job applicants quit in the middle of filling out a job application due to their length and complexity. Over 80% of candidates find automated online recruitment processes frustrating.
The large fallout rates for organisations using highly automated recruiting indicates most businesses are losing good hires or progressing bad hires due to their recruitment funnel without even realising it.
#4: Avoid expensive recruiting software for price marketing strategy roles
Finally, recruiting software does not fix a flawed recruiting process, it automates them. Many firms buy hiring software and candidate tracking systems, thinking it’s the silver bullet solution to all their problems. However, it is not. We have seen many recruiting processes that have resulted in mismatches, lousy price marketing strategy hires, long drawn out methods, substantial replacement costs, and increased managerial time and effort. What’s more, there’s been no lift in quality of hires and ultimately zero margin gains.
Online platforms and technology have changed how we source and recruit forever. As a result, we’ve now got instant access to thousands of potential applicants, CVs, profiles and social media avatars in a click of a button.
However, screening people out early in the recruiting process for price marketing strategy roles is now harder than ever. Too many talented people are being passed over for price marketing strategy. Likewise, too many unsuitable applications are progressing through our recruitment funnels. Too many people are securing senior price marketing strategy roles for which they are mismatched.
The best companies are avoiding these obstacles by providing recruiters with the predictive insight they need. The best leaders want to empower candidates to make better-informed decisions. Finally, the best applicants are choosing recruitment and talent advisors to help them move to the next phase in your hiring processes faster and more efficiently.
What’s your recruitment process like? Are you getting the candidates you want and need for your teams? Are you ready to re-imagine your candidate selection approach?
If you would like to learn more about how to find and identify the right talent for your pricing function, press link to download our free guide to highly effective Pricing Recruitment Strategies, Systems And Processes for hiring:
- Pricing & Commercial Analysts
- Pricing / Revenue Managers
- Commercial Managers
- Head of Pricing / Revenue Management
Click here to download the whitepaper.
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