Different Market Pricing Options & Tactics: Does Game Theory Work for Pricing Leaders? 🎲
The market is tough and competitors are becoming increasingly creative. What are your market pricing options and tactics? How do your market pricing tactics appear to your competitors? What is the game theory? Does it work for pricing leaders?
That’s a lot of questions, isn’t it? But your answers to all those questions are quite essential. Using different pricing tactics will become essential in your marketing strategy. All of these together determine the course that your business will take. This often tells whether you’ll succeed or not.
Types of Pricing Options
In the realm of business, the flexibility to choose from various pricing options is a valuable asset. Subscription pricing stands out as an approach that can establish a reliable income stream. Under this model, customers are billed at regular intervals, typically monthly or annually, for access to a product or service. Take Netflix, for instance; subscribers pay a fixed monthly fee to access a vast library of movies and TV shows. This predictable revenue can provide financial stability, making it easier to plan and invest in business growth.
Another intriguing pricing option is tiered pricing. It presents customers with multiple packages, each offering a different set of features or levels of service at corresponding price points. This allows customers to pick the package that best aligns with their needs. For instance, SaaS companies like Dropbox provide tiered pricing, with options for individuals, teams, and enterprises, each tailored to specific requirements. It’s an effective way to cater to diverse customer segments while optimising revenue.
Pay-as-you-go pricing takes a different approach, ideal for businesses with variable demand. It’s often found in services like cloud computing, where customers only pay for what they use. Amazon Web Services (AWS) follows this model, charging customers based on the compute and storage resources they consume. It’s a cost-efficient choice for users who require scalability, as they are not locked into fixed plans. By understanding these pricing options, businesses can tailor their strategies to fit their unique circumstances, ultimately enhancing their bottom line.
How to Choose the Right Pricing Option
Selecting the appropriate pricing option is a critical decision that can significantly impact your business’s success. To make an informed choice, you must consider several factors. Start by gaining a deep understanding of your target market. What are their preferences and purchasing habits? For example, if your product caters to small businesses with budget constraints, a subscription model with fixed monthly payments could align well with their needs.
Next, analyse the value your product or service offers. If you provide a software solution that streamlines business processes and offers considerable time savings, a value-based pricing model might be suitable. Value-based pricing charges customers based on the perceived value of your product to their business.
Furthermore, keep a close eye on your competition. What pricing models do they use, and how does your offering compare? This competitive analysis can help you identify pricing gaps and opportunities in the market.
Market research and customer surveys are invaluable tools in the quest to determine the ideal pricing strategy. By collecting feedback and understanding your customers’ willingness to pay, you can fine-tune your pricing options to match their preferences and financial capacity. The key is to strike a balance between your business’s financial goals and the satisfaction of your customer base, ensuring a mutually beneficial arrangement.
Getting ahead of the competition is a much-discussed topic.
In this regard, different market pricing tactics and strategies matter. However, understanding the mindset and behaviours of the competition is a capability that only a handful of pricing leaders and teams have mastered.
Every year, it’s best to re-evaluate existing pricing and revenue management skills, strengths, and potential gaps. There are several market pricing tactics and strategies to choose from. So, we introduce you to some of the most effective ways to devise your own when managing price changes. In this article, we will discuss and learn about different market pricing tactics. What do successful leaders and teams do to improve profitability to remain competitive?
Table of Contents:
Market Pricing Tactics and Options Key Trends
Knowing your competitors and customers, marketing and setting up your brand image, looking after existing consumers but also targeting new markets, and expanding your offers are the common methods and approaches you can adopt to get ahead of the competition. How will you strategise your market pricing tactics? Let’s discuss notable concepts and ideas to guide you in determining different pricing options or tactics in your marketing strategy.
Market Pricing Option Examples
1. Bundled Pricing Option
Bundle pricing is when companies merge complementary products/services and sell them at a single, usually lower price. This strategy is used by fast food restaurants, for example. These bundles have a higher perceived value among customers and provide numerous benefits to the company, including higher overall revenue per customer.
2. Product-Line Pricing Option
Product line pricing entails categorising goods and services in order to create different perceived quality levels for customers. For example, as part of its product line strategy, a company may decide to add new products to a product line based on consumer demand.
3. Psychological Pricing Option
Psychological pricing aims to influence a customer’s spending or buying behaviours to increase or increase the value of sales. The objective is to meet a customer’s psychological desire. For instance, to save money, get the most valuable item, or the largest rebate.
Different Market Pricing Options and Tactics to Manage Price Changes
It is important to consider the reference points that your customers think about when they make a purchase. Try to assess the answers to these questions: What comparisons do they make with your competitors? How sensitive are they to price changes?
Below are the levels of price management which are closely related:
Supply and demand ratio
The basic laws of supply and demand come into play. For instance, changes in supply (lockdowns during the pandemic cause delays in shipment), demand (new market trends), and costs have a great impact on the industry when we talk about prices.
What is your product marketing strategy?
How do customers perceive your products and services when they compare them to other brands? If you have proved that your products deliver more value, then you have more price control and leverage with an ability to charge a higher price than other brands.
What product and service features do your customers perceive as most important?
Are they practically the same as your competitors? How much do you think are your customers willing to pay for extra features or value-added services? Recall how Jelly Belly was able to charge premium prices by selling their candy in luxury chocolate shops and gift stores. We’ve gathered our market research tools to help you further understand your customer’s perception of value.
Market Pricing Options and Tactics
What is your base price and when is it best to employ discounts, promotional offers, and rebates? In truth, you need a strategic product positioning in the marketplace when managing the changes in price pressures.
What are the variables fueling your price direction? This can help you predict and forecast the results while making the best use of price trends in the industry.
If you apply an equal price increase on all of your products and services, it may lead to more customers becoming price-sensitive and picking out only the items that they will keep buying. Whereas cost-based pricing calculates the impact that customers perceive as a justification for the price increase. This may push customers to ask for more price decreases, eventually. And in this case, you may have lost the correlation between price and value.
1. Raise the price without losing volume.
In some cases, prices are often increased by as much as +10% annually for a certain period. Unless you’re a market leader, your items will likely be priced higher than other brands. After some time, customers will typically begin to switch to competitors (customer churn). Here are our most common pricing strategies that apply to relationship-based businesses.
2. Then there’s competitive-based pricing where you match competitors.
The downside of this is over time, you may fall into the trap of simply matching the prices and products of other brands without regard for variation, research, and creativity that pulls you into a typical commoditisation pattern.
High-Quality Low Price Strategy Advantages and Examples
Low pricing, if done right for the purpose of high-quality sales volume has its pros. The result often leads to skyrocketing sales that will likely set the tone for your competitors and the rest of the market. This is especially true if you’ve established your value proposition as a brand – which could attract more customers.
The other advantage of a high-quality low-price strategy is the lower cost of production when it comes to your inventory. You won’t have to keep stocks for a long time which minimises storage costs, especially for resellers and those in the drop shipping business.
Bulk orders also lead to huge discounts from your suppliers, allowing you to offer competitive prices just like how McDonald’s does. Apart from this, a high-quality low price strategy allows you to reach more audiences who likely will become returning or loyal customers.
On the other hand, credibility can frequently become an issue if you rely heavily on discounts to generate sales volume. Why? You’re sending the message that your customers only engage with you when prices are low. Similarly, consistently low prices can implicate that the quality of your products/services is poor. This is where it’s important to differentiate the value you offer from your competitors.
Innovation & Anticipation of Market Pricing Options Tactics
Over the years, Taylor Wells has observed successful price leadership and organisational design in Australia innovating the way they think, view, and anticipate market competition. Controlling the range of human biases that influence price decision-making is a priority for high-performing pricing leaders. They continuously develop and refine competitive strategies.
Diversification of Different Pricing Tactics in Your Marketing Strategy
We have seen a greater emphasis given to Game Theory principles and mathematical modelling to weigh up your market pricing tactics and options. However, traditional Game Theory focuses on modelling a solution for one defined future state. These days, businesses are hiring pricing leaders that can weigh up multiple options across several probable scenarios.
Challenging Traditions with Market Pricing Options and Tactics
We have assessed hundreds of pricing professionals globally (leaders and supporting team members) using our online evaluation tools and online Pricing & Commercial Assessment (PCA™). Our findings indicate that high performers proactively challenge conventional assumptions. This includes aspects of value, price, and the market. They also have the technical and soft skills to back themselves when required.
The key technical skills include dynamic pricing, probabilistic/mathematical modelling, and advanced pricing systems. Key soft skills include strategic influencing, teamwork capability, communication, and strong interpersonal skills.
Improvement of Hiring Practices
More Australian businesses are hiring specialist pricing and revenue management executives from all over the world. Businesses need pricing executives with the skills and technical knowledge to develop sophisticated strategies, models, and systems.
Recently, it’s been a breakaway point from traditional Australian recruitment practices in many leading ASX-listed companies. Global executive searches are on the increase as opposed to the traditional domestic executive search process. More companies are choosing in-depth evaluations of individual pricing capability over CV screening and interviews to build their pricing and revenue, management teams.
Let’s now discuss a pricing determinant called the Game Theory.
Discovering Different Market Pricing Options & Tactics: THE GAME THEORY
As a firm specialising in building pricing and revenue management teams, we like to consider skills and developments being tried in pricing organisations. We believe the growing application of Game Theory is the result of developing complexity in an increasingly irrational business environment.
Game theory helps pricing leaders to determine the market pricing tactics and strategies your competitors are likely to implement with confidence. It helps maximise profit objectives and indicates the way your own choices may influence those strategies.
The advantage of Game Theory as part of your market pricing tactics model enables price leaders to consider the reactions of competitors, new entrants, and customers during price decision making. For instance – new products, segments, or markets. (e, g., decisions to adapt price dynamically in multiple segments and channels; to marketing to develop new price lists and discount structures based on customer preferences and needs).
What does Game Theory mean for the different pricing options and tactics in your marketing strategy?
These are not just academic and linear/logarithmic Game Theory principles or applications. (i.e., prisoner’s dilemma or Nash equilibrium). Game Theory for pricing strategy options is an advanced approach to hypothesis testing.
This considers the irrationality of the market in different scenarios without bias for one answer. Similarly, it is an innovative form of modelling that rejects answers that are only applicable to a single and fully defined pricing situation and future state.
Game Theory for pricing can be simplified to a model that generates a range of practical answers (rather than just 1 definitive answer) to several well-planned commercial scenarios. In other words, this is more than just modelling. It requires agile learning, scientific investigation, and a deep commercial understanding of the financial impact of different pricing tactics on profitability.
Sticking Point – Different Market Pricing Tactics as a Marketing Strategy
It’s critical to apply Game Theory principles to business data, particularly in market pricing tactics and strategies. However, you must have a clear picture of the competitors’ resources and their decision makers’ objectives.
In some cases, many businesses have large gaps in data. While others have lots of data paired with antiquated systems or price architecture. Therefore, the maturity of your price data architecture and systems are key to meaningful Game Theory application.
Letting data work for Game Theory in complex pricing environments is worthwhile. Data integration processes work well with Game Theory among other requirements.
Why do more businesses apply Game Theory to their price decision-making?
There are a few drivers for change:
- Experience alone is not enough to work out future behaviours when it comes to professional development.
- Pricing environments are more complex than ever before just as we discussed in sales management pricing.
- Market conditions and dynamics are poorly defined and also change daily.
- Companies are losing margins and revenue. In turn, they don’t know where to focus their resources.
- New entrants, competitors, price-savvy consumers, and highly transparent markets are creating uncertainty.
In times of extreme competition, there are many businesses that continue to react to the market. Only a few exceptional leaders take the time to get into the minds of their competitors and see the market through the eyes of the customer.
In summary, you need pricing leaders and teams that apply the Game Theory methodology to your business while implementing different market pricing tactics. You need them to help you perceive the competitive landscape accurately (as opposed to how you think it is).
Conclusion: The Different Market Pricing Options and Tactics
In conclusion, executive leadership teams need to trust their pricing leaders and teams to simplify complexity. In fact, they need them to weigh up risks and opportunities in all likely situations and futures without getting distracted by the noise, pressure, politics, and hype.
If you would like more information on making Game Theory work for pricing managers; we have written FAQs and answer packs to help you prepare for and develop new pricing skills. Likewise, check out our recent posts on pricing approaches and price value.
Common Pricing Strategies: How to Raise Prices Without Losing Volume
Did you know that pricing could be your business’s most powerful profit lever right now? However, the trick to unlocking your pricing power is knowing what common pricing strategies to execute in your business.
With pricing knowledge comes an additional 2 – 4 per cent for your business each year – even for businesses operating within margin-constrained industries. That being said, only businesses that have the right strategy, culture, and execution plan succeed these days. This means you need the right people, to make the right decisions at the right time.
In this article to follow, we will discuss in length the best and most common pricing strategies proven to drive more revenue and margin for leading businesses like Coca-Cola, Mondelez, BP, John Deere, and Caterpillar. We will share the secret to beating the competition using optimal price and revenue management. And what it takes to increase prices without losing volume.
By the end of these articles, you’ll have a good level of knowledge of some of the best common pricing strategies available and be in the position to make an immediate improvement to your business.
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 the 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 recognise 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 to price’ 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 failed 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 proven 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 the common pricing strategies than you do.
What if your customers are more informed about the common pricing strategies 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 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 pricing, one of the common pricing strategies 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 a 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 among the common pricing strategies…
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 a cost-plus pricing strategy works
The failure to account for the effects of price and volume and volume on price leads the 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. The 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 four 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 to use among the common pricing strategies. 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 the unit cost and profit objectives, and then set a price. Not realistic at all.
Points to note for cost-plus pricing (as one of the four common pricing strategies):
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 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 (another approach of the four common pricing strategies)
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 the 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 (the third pricing method among the four common pricing strategies) 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 being one of the common pricing strategies 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 per cent 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 segmentation is 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.
Of all the four common pricing strategies, 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 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 (as the fourth of the 4 common pricing strategies)
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.
Among the four common pricing strategies, 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 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.
Conclusion: Pricing Options
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 the 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 price increase 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 per cent hike.”
and the later, aborted attempt to enraged Netflix customers. The company lost 800,000 subscribers, its stock price dropped 77 per cent 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 are 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 or common pricing strategies (discussed in the first article above). 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 the 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.
Conclusion: Pricing Options
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.
- 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 on the job.
This very situation happened to the 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 the 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.
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 special 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 are becoming very difficult to find, hire and retain.
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.
Conclusion: Pricing Options
Price is the only revenue generator of the business. It is the only marketing variable that generates money for a company. Therefore, having an understanding of the common pricing strategies is helpful for every business.
Competitors can easily change and copy a company’s price. However, prices can attract consumers to different retailers and businesses to different suppliers.
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 a 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 the 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 their 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.
It may also help to know the common pricing strategies as discussed in the first part of this blog.
Common Pricing Strategies: Have You Heard of BDCs (Big Dumb Companies)?
When we talk about common 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 teamwork 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, the 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 common 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 the 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 or common 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 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 or common 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 or common pricing strategies (as discussed earlier in the blog) 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 the customer’s viewpoints on price and value. Also, they thrive from the 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 skilful 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 through 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 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 common 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 individuals and their families.
Early detection and specialist talent evaluation are 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 your 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?
Conclusion: Pricing Options
If you want to move up in your career, make sure your skills, knowledge and presence are 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 the common 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?
Is 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.
Common Pricing Strategies for Travel Agencies: 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.
Common Pricing Strategies for Travel Agencies: 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 travellers 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.
Common Pricing Strategies for Travel Agencies: Flight Centre’s Pricing Strategy
Flight Centre’s pricing strategy is a combination of dynamic and value-based pricing. They use the 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.
Common Pricing Strategies for Travel Agencies: Key indicators of failing pricing strategies
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.
Conclusion: Pricing Options
- 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 💻
Establishing an online pricing policy is now critical for companies implementing multichannel pricing. Online shopping is now an integral part of how we buy groceries, clothes, and everyday supplies. However, due to COVID-19, many retailers and FMCG suppliers have been caught up in improving online operations rather than fixing up price discrepancies between their online/website and their brick-and-mortar stores. As a consequence, managing channel conflict and the margin erosion that is created from an inconsistent multichannel pricing strategy is now a daily pain for retailers and their P&L.
It is very common, for example, to find different prices between many retailers’ online and physical stores. Most retailers are still slashing their prices online while increasing prices in their brick-and-mortar channel. Many retailers are losing substantial margin and foot traffic as customers don’t like this type of behaviour.
The danger with pricing differently across all channels is that you’ll lose margin in either the brick-and-mortar as customers wait for promotions and discounted stock to appear on the website or in the store.
Walmart, conversely, is an exception to most retailers; and have a pretty good multichannel pricing strategy. While all retailers were decreasing their prices online to push stock, for example, Walmart intentionally increased some best-selling product prices online. What’s more, they positioned their best sellers online higher than their equivalent product prices in store.
Walmart’s multichannel pricing strategy here was to get more customers to visit the physical store, and it worked. However, most retailers don’t have a pricing policy for multichannel pricing and don’t plan well enough before they act and experience customer churn.
The pricing team at Walmart, however, had a clear pricing strategy underpinned by a pricing policy and guidelines. All price actions were clearly thought through, documented and reviewed.
So, in this article, we will continue to discuss multichannel pricing and pricing policy. We will start by discussing the problem with different pricing policies in multichannel pricing. We will also talk about finding the right pricing strategy for different pricing policies. In addition, we will share the customers’ value perception and how it affects price sensitivity in different pricing policies. Furthermore, we will provide you with tips on how to approach multichannel pricing in three ways to attract more customers.
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 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.
Common Pricing Strategies: The Challenge of Multichannel Pricing
There are many different pricing policies in multichannel pricing. These variances largely occur because of: decisions on target market, demand forecasts and estimations, cost-to-serve, design of promotional strategy, product strategy, distribution/channel conflict to name but a few pricing policy considerations.
Sometimes the range and options for consideration in a multichannel pricing policy can be overwhelming for pricing teams and value committees managing different channels to market (i.e. online, through the sales team, in-store, tenders etc). However, the first step in the pricing policy process is to explore consumer preferences and to establish the feasibility of product strategy, in order to get a rough idea of the direction of subsequent pricing policies in multichannel pricing.
Usually, companies want to provide equal experience to their customers. But the prices of competitors online are by and large lower than in-store prices. Thus, an inherent pricing discrepancy exists which makes it hard to maintain consistency in pricing across various channels.
Finding the right pricing strategy for common pricing strategies
Multichannel retail businesses are offering customers huge amounts of value, but their pricing doesn’t always do them justice. For example, many retailers are offering their customers a wide range of products and also the convenience that’s typically connected with online shopping. However, their online pricing is often confusing and contradictory to their brick and mortar pricing. Which means that retailers and FMCG are still struggling to come up with the right pricing strategy and the pricing policy required to implement it effectively in the market.
Research indicates, for example, that retailers commonly set different prices on different channels. Are manufacturers and retailers alike ready for the challenge of managing this level of pricing complexity?
Let’s take the rapid growth of Amazon and Alibaba, for example, who have stormed the market providing customers with excellent value and a price value equation that has outsmarted their competitors and completely disrupted markets and industries alike. Since Amazon and Alibaba appeared, retailers basically around the world have been second-guessing their pricing strategy. And, still, after many years of Amazon, retailers still haven’t come up with a good multichannel strategy or pricing policy.
The upshot is that most retailers just don’t know how to set and manage prices between their brick-and-mortar stores and digital channel. Pricing is still very much tactical and reactive with the majority of retailers varying prices without fully appreciating the impact this will have on brand health.
Common Pricing Strategies: How customers perceive value and how it impacts price sensitivity in different pricing policies
To make sense of the market and get multichannel pricing back on track, retailers want to do the hard work of understanding what your customers value for each channel. Also, how that impacts the amount that they are willing to pay. In fact, according to a study, retailers that establish different prices across all channels experience bottom-line growth of around 2% to 5%. However, the variability in prices must reflect consumption patterns i.e., you should not be varying prices without understanding how your customers buy from you.
- In reality, there’s no one factor of shopping that all customers value most in all situations. Customers take into account the immediate availability of the product, the thrill or pain of shopping in a physical store versus the online store, and of course, a product’s price.
- Oftentimes, customers value different things in different shopping conditions. Advanced pricing tactics should take these customer-oriented considerations into account.
- The primary question that needs to be considered is: On what situations customers become price-sensitive to online/offline price differences? What are the factors that will make them accept or be put off by price differences?
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).
Common pricing 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 pay attention to 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 should 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.
Worked out operational challenges in managing price differences by channel
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.
Conclusion: Pricing Options
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 a 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 by 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: a 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 touchpoints. 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 the quality of hires and ultimately zero margin gains.
Conclusion: Pricing Options
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 with 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
Price Rise Implementation: Are Coles & Woolworths Losing Their Power over Suppliers? 🏪
According to the Australian Financial Review, Nestlé stopped supplying Woolworths for a short time last year after the supermarkets refused to pass on or absorb a six per cent price rise implementation. Many people, as a consequence, had lost access to their favourite brands through Coles and Woolworths for about 2-3 weeks.
What happened in the negotiation room that day between the supermarkets and Nestle is unclear. What we do know is that Nestlé now wants to inform Woolworths’ pricing policy with more favourable terms and conditions of engagement including an arrangement to cover rising costs and price rise flexibility.
Negotiations between these big named suppliers and supermarkets are underway with other suppliers now after COVID-19 to resolve supply issues and refocus attention on customer/market demand dynamic. No definite news on outcomes has been provided about Woolworths’ pricing policy or intended revisions on their price rise implementation policy. But things in FMCG and supermarket retailing are set for a change.
In this article, we will discover the reason why suppliers have taken decisive action to stop supplying Coles and Woolworths with their famous and most-loved brands. We will also provide you with factors that lead suppliers to have price rise implementation. By the end of this article, you’ll learn the reasons why suppliers are now in a good position to defend their value to major supermarkets such as Coles, Woolworths and even Metcash.
The large supermarket retailers are now on the back foot with suppliers regarding price rise implementation
For the first time in the past decade at least, suppliers are starting to fight back against Woolworths’ pricing policy:
“Either you absorb or pass some of the costs we’ve had to bear for the past six years, or else we’ll take our stock off your shelves, and your customers and their beloved pets won’t get the brands they know and love on their dinner tables (and bowls).” – or something along these lines, I imagine.
The recent stand-off between Nestle and the big supermarket chain’s pricing policy and trading terms has been a long time in the making.
Nestlé is not the only one in a standoff with Coles and Woolworths’ pricing policy either: Woolworths is currently locked in price war disputes with a handful of leading suppliers such as Mars Petcare. What’s more, the numbers of suppliers likely to do the same as Nestlé and Mars Petcare is predicted to increase over the short and long term.
It is rumoured that Coles has struck an agreement with Mars Petcare that will see its brands of pet food returned to its shelves – the terms of re-engagement are unknown, but likely to be more favourable for these suppliers including more flexibility taking a price rise implementation.
Last year a handful of power brands disappeared from Coles’ and Woolworths’ shelves. Including Uncle Tobys, Whiskas, Pedigree, My Dog and Dine.
These number of products were fairly small in number so didn’t present a major headache to Coles and Woolworths or their earnings yet. However, customers noticed and complained.
A key question for shareholders, suppliers, and customers now is, will this happen frequently, how long will supply issues continue and what if this is only the start of the supply problem?
Ongoing supply issues and supplier and customer dissatisfaction is something the big supermarkets want to nip in the bud now.
If more supply issues continue with disgruntled suppliers, Coles and Woolworth have a big problem on their hands. Including:
- More brands disappearing from their shelves.
- More customers shopping elsewhere and trialling new entrants to the market.
- Share price value falling.
- Shareholders bailing.
Suppliers are in the position they have nothing to lose…
Suppliers have moved beyond words and threats and have taken decisive action to stop supplying Coles and Woolworths with their most wanted and popular brands.
They want the major supermarket retailers to stop the dysfunctional pricing cycle and pay attention to them and their financial needs – after all, this is supposed to be a partnership, right?
Security of supply is a big deal for major supermarkets. It must be handled with care. Their ability to supply customers with what they want is a major customer value driver. If they get a reputation for failing to supply, customers will go elsewhere, and shareholders will get nervous.
Why has it come to this price rise implementation?
Big and small suppliers have been feeling the tight squeeze from their major retailers for many years now. From Coca-Cola, Nestlé and Mars to small, niche suppliers, or those without major branded products, suppliers pricing policy have been to just cop whatever the big two supermarket retail chains have demanded from them:
- Putting downward pressure on prices over the past number of years as costs were escalating
- Forcing suppliers to cut their prices and push volume with self-funded promos and excessive discounting
- Switching to supplying house-brands
- Offering cheaper and often inferior products
- Requesting power brand go on EDLP
- Ousting suppliers’ brands off the shelf
- Taking a zero-tolerance negotiation position at all price rise implementation discussions
- Stretching out supplier payments to 60 days to free up cash and improve working capital (double the 30-day terms Woolworth expects from its debtors)
In light of a history of tough negotiations and year on year margin decline, global manufacturers such as Nestlé and Mars Petcare are changing their pricing policy with Woolworths. They’re now making some bold moves to stop supplying to Woolworths and Coles for the short term to regain some control of the relationship.
Manufacturers, like consumers, are grappling with price rise implementation, and it seems things may be reaching a boiling point.
On top of this, the impact of COVID droughts and floods across Australia are also driving up prices of fresh food.
Inflation could be rebounding soon enough as well; making it difficult for the Reserve Bank to lower rates to stimulate the economy.
This isn’t to say that Coles and Woolworths haven’t tried to change their pricing policy with suppliers. Recently they have tried to repair relations with suppliers and farmers. Also, bring on board a whole new range of specialised suppliers.
Milk is a good example of Woolworths relationship building. In February last year, Woolworths changed its pricing policy for milk and stopped selling $1 per litre to help farmers. Coles and Aldi are not following suit and continue to sell cheap milk.
However, the way Woolworths has structured the price increase in its pricing policy for farmers is far from altruistic. Essentially passing on all charges to consumers – without paying a cent to help farmers themselves. A pricing policy which gets consumers to fund the full 10 cents per litre price increase (instead of $1) whether they want to or not while Woolworths take the moral high ground for coming up with the idea without offering a cent to farmers.
Suppliers are beginning to call out bad behaviour from the major supermarket chains. In effect, suppliers are fed up with their one-sided supermarket pricing strategies and pricing policies. And also restrictive terms and rules of engagement. They want major supermarket retailers to change their pricing policies.
A price rise implementation program is a particularly sensitive area for major supermarket retailers at the moment. Woolworths is in the middle of a very expensive transformation. They have been trying to reduce costs wherever possible to protect their margins. Then COVID-19 hit and almost flooded them with cash, but this is not sustainable. Prior to this Woolworths was feeling the pressure: Shutting down stores, reducing store size, selling land, cutting headcount across the board.
Ongoing acts of non-compliance from suppliers to the Australian supermarket megaliths could mark a turning point for grocery prices. Rising supplier costs have in effect broken a long and dysfunctional pricing cycle between supermarkets and suppliers. It also may have even ended a relatively peaceful time in the sector.
Our price rise prediction: Suppliers are now in a good position to defend their value to major supermarkets. Therefore, more suppliers are predicted to stand up against Coles, Woolworths, and even Metcash soon; requesting a more flexible approach to price rise implementation and cost changes in the future. A tough time for pricing managers and teams in this sector for sure.
Why do we think of this?
- For a very long time now, Woolworths’ expectations of their suppliers to provide great products at rock bottom rates without delay or disruption has created substantial pressure on suppliers.
- Price exceptions and harsh trading terms are the new norms on all commercial exchanges with Coles and Woolworths. The true value of the offer is often ignored and summarised as pre-requisite of doing business with them.
- Recent disputes with the major supermarkets, however, indicate that they only sit up and listen to their suppliers when they are denied what they want. This or something they value is at risk.
- Most suppliers have done a pretty poor job to the major supermarkets at explaining the value of their offer. Or at least setting boundaries that stop Woolworths from expecting so much from them. This has, in turn, perpetuated a dysfunctional pricing cycle between suppliers and the major supermarkets.
- Nestlé and Mars Petcare will be monitored very closely by all their suppliers. Thus, everyone is keen to learn how they should be managing the major supermarkets’ expectations to improve price realisation in highly competitive and disrupted markets.
Conclusion: Pricing Options
Now more than ever, major supermarket chains, need as much traffic through their doors as possible. Also, couple this with happy customers buying more from them to gain a greater share of wallet. However, passing on the cost to customers may jeopardise efforts to gain market share. Many suppliers are or have a plan to go direct. This will hurt supermarkets and take a large share of the market away from them. They need to partner with their suppliers.
Pricing Tactics: Win Deals & Influence With B2B Pricing Management
What are your pricing tactics? How do you win deals and influence people with effective B2B pricing management?
Do you think your business and teams are leaving too much money on the table during negotiations? Have you tried to change pricing tactics in the past, but with limited success? How did that feel? Are you now having second thoughts about whether or not you should implement a new pricing tactics system in the business? Would your sales, key account manager and commercial teams back the change?
If you are thinking along these lines, then a recent study by Taylor Wells shows you are not alone. There are several factors reshaping how leaders and teams in B2B companies win high-value deals. All of them have implications on how your teams manage pricing tactics, revenue, margin and profitability.
- Buying cycles are becoming increasingly complex and drawn out in B2B business environments;
- Multiple stakeholders (on both the supplier and buyer side) are getting involved in pricing (such as key account manager and procurement) and buying decisions;
- Fast-changing business environments are showing up a lot of mismatches, team dysfunctions, skills and talent gaps;
- Heightened concerns about risk and regulatory pressure are demanding greater pricing tactics transparency and logic;
- FX volatility continues to push up the cost of goods and squeeze margins;
- Increasing competition is dragging down market prices and forcing whole markets into a commoditization trap.
In this article, we will discuss the latest pricing trends occurring in Australian-based B2B Industrial businesses. We will show you why and how B2B businesses are leaving too much money on the table during tenders, negotiations and new business. We will explain what dysfunctional B2B pricing tactics look and sound like and how to make it better. Our main contention is that the ‘pain of sticking to suboptimal pricing tactics’ far outweighs the ‘pain of changing to a value-based pricing system (even if it does not feel like it).
In search of answers to real business problems
The ‘good times’ are over. Winning high margin deals with a handshake and a smile from a key account manager are things of the past. Customer loyalty, quick decision-making and clear sign off procedures are fast becoming fond memories. The race/pressure to manage pricing to increase profitability are well and truly on. Businesses that have changed and adapted their pricing to fit these unprecedented times are now in the driver’s seat for the next two years. Businesses that remain the same (or think that their pricing is good enough) are likely to face a harsh reality of earnings decline, headcount reduction and disgruntled shareholders.
Given the strong pressure on leaders and teams to work together to win deals and drive profitability, Taylor Wells wanted to study the dynamics of internal price management in B2B businesses in Australia. We wanted to see what, why and how leaders and teams in B2B businesses manage pricing dysfunction.
Much of the data used came from a survey of over 800 executives in over 100 B2B businesses. A wide variety of internal stakeholders took part in the study. Each involved in pricing up a deal in some way (i.e., from head office, sales, pricing/commercial, marketing, customer services, operations). The survey focused on the actions companies took to win deals. Also, including the relationship between internal pricing and sales practices and behaviours, commercial outcomes and decision making processes.
Our hypothesis was two-tailed: i.e., that teams operating with clear pricing inputs, support and structures and output responsibilities were more likely to win deals and maximise revenue, margin and profit than teams operating with cost plus mark up, discretionary pricing and excessive discounting practices.
The survey consisted of 60 Likert questions on pricing and 10 open-ended questions across three main areas – value, people and structures. Each Likert item had a comment option for executives to provide more detailed stakeholder feedback.
Quantitative responses were analysed using multivariate data and price analysis. Qualitative data were coded and categorised to evaluate key findings and highlight any margin opportunities.
After analysing the data from our study, an intriguing pattern of results started to emerge. These included some unexpected behaviours and pricing decisions to get a deal over the line.
#1: We found certain pricing behaviours tended to cluster together (in the 5 levels above). Level 1 represents the weakest pricing management capability and level 5 represents the best-in-class pricing management.
#2: We found that there were large and significant differences in opinion within the same group of decision-making stakeholders in the same organisation. Key decision-makers in the same organisations were pretty much disagreeing on nearly all aspects of pricing up a deal i.e., value, pricing strategy, tenders, trade agreements, skills, pricing structures, systems, tactics, new business enquiries, quoting.
#3: We found that stakeholders in the same organisation were largely unable to form a group consensus on either the current pricing situation or the desired future state: i.e., what they were doing now, who was doing what, how they were doing it; and what they needed to do to manage pricing more effectively in the future.
#4: We found that key stakeholders in one function were awarding their pricing management top scores (best in class); while stakeholders in the same team and function were giving the same item 0 or 1 (pricing chaos).
5#: We found that the majority of businesses studied (80%) did very little to change their go-to-market and pricing practices. Even though they were losing high-value deals and leaking margin.
#6: We found that the decision to do nothing about dysfunctional pricing was costing some businesses between $2M-$7M in incremental EBIT.
Empower teams to win deals & break unhelpful habits with pricing tactics
So, why are so many B2B businesses struggling to win high-value sales? Well, looking at key findings from this study, there is substantial evidence to show that engaging sales and commercial teams with pricing strategy formulation prior to rolling out a new pricing system is an important causal driver to winning a deal. Sales and commercial teams thrive when they have the right strategy, pricing support and infrastructure.
By this point, you may be thinking why aren’t more B2B businesses getting better at managing price if the opportunity cost of not doing so is so high? In short, most businesses do not have a pricing strategy. Let alone the right infrastructure and operations in place to empower their sales and commercial teams. But, more importantly, the reason why businesses do not have these things in place is that internal key stakeholders struggle to agree on how they price a deal, let alone how they should price to drive profitability.
There is clear and substantial evidence to show that many B2B businesses feel more comfortable agreeing to do nothing than agreeing to challenge the status quo. Risk aversion is at the heart of indecision. No one wants to be accountable for changing pricing in case it fails. As a result, group decision-making and consensus tends to favour tactical pricing over building a commercial pricing capability; and pretty soon mismanagement and dysfunction prevail.
Dysfunctional pricing tactics & teams expose businesses to risk
In order for B2B businesses to adapt and grow, they should take pricing tactics seriously and key stakeholders as a group need to agree to change dysfunctional pricing habits and behaviours. If and when a business cannot come to a clear decision on pricing and/or settle for the path of least resistance, a whole host of commercial and human capital issues continue to play out and amplify:
- Sales teams continue to compete on price, offering more (and larger) discounts and lowering prices. Because they are uncertain about how to respond to demands for ‘sharper’ prices during tenders, contract renewals and new business.
- More and more customers refuse to pay for and/or say they do not care about the incremental value provided.
- Executives continue to struggle to pinpoint and articulate what the business is uniquely good at.
- Sales and marketing teams end up revising and adapting the company’s value proposition yet another time. Because no one can quite connect and quantify the businesses’ total economic value to the customers’ commercial outcomes.
- Issuing blanket price rises indiscriminately across an entire customer base and product portfolio. Consequently, leading to an influx of credit notes, complaints and demands for further discounts.
- Sceptical customers finally make the call to switch to the competition. Because they feel they’re being ripped off and/or hear that other customers are getting a better deal than they are.
What to look out for when your business is changing rapidly
Taking the first step to improving pricing is always the hardest part of the journey. This is only natural. Leaders and teams in pretty much all B2B/P2P businesses are feeling the pressure to perform. Big, complex buying processes and numerous margin pressures are creating further pricing complexity and risk. Gone are the days of just adding a 50% mark on sell with little to no objections from customers. Margins squeeze from every direction. Price transparency is a hot topic. Procurement teams primed and ready to slash costs wherever they can. Winning deals is not going to get easier, but even more difficult in the next few years.
Effective pricing tactics and management is not a project; it is a sustainable process that can be implemented in a low risk and sustainable way. If you’re in a fast-moving business environment, you’ll see a lot of mismatches, team dysfunctions and skills and talent gaps. Honest conversations with some team members may be required to find a place where their skills are a better fit. How you recruit and set up your teams will be crucial to growing and adapting the business in the business. Recruiting people with the right skills and attitude to solve complex commercial and human capital challenges will help you identify more opportunities and risk areas. Giving managers and team members more accountability for team performance will be central to building high-performance teams. Also, multiplying positive pricing behaviours in a low risk and practical way across the business.
Moving the business to a new pricing system does not have to be fraught with risk. It can be implemented using a phased approach using a lean and agile methodology.
However, if you are still not sure whether or not to transition the business to a new pricing system and/or there are questions or doubts in your mind, then, step back and ask yourself and your team the following questions:
- As a business, do we under-value ourselves?
- Do we have the right balance of leadership, pricing competency and engagement in the business to get us to where we need to be?
- Do we lack trust in the current list price and overcompensate by offering excessive customer discounts?
- As a group, are we overly cautious and risk-averse or is it time to take action?
Pricing strategies and tactics: How to Boost Profitability in Less than 12 Months
The pace of margin erosion is accelerating B2B industrial businesses are experiencing accelerated pricing pressure and margin erosion. Leaders and teams are navigating through a range of challenges daily in order to keep up, adapt and survive. Key sources of margin erosion include: volatile FX and commodity prices; new market entrants; professional buying teams; and growing skills and talent gaps in pricing, commercial and customer value management. Companies that have failed to get control of their pricing strategies and tactics have experienced volume losses, earnings downgrades, head count reduction, and higher staff turnover. So, what’s the difference between pricing strategy and pricing tactics?
The age of value based pricing
Over the last 20 years large companies across the USA, Europe and Australia have invested in hiring dedicated pricing professionals to develop more sophisticated value based strategies and tactics. Leading companies like GE, Parker, Caterpillar, and Rockwell have all set up and recruited pricing teams to protect margins and drive profitability.
Each of these businesses has chosen to focus its team on developing pricing strategies and tactics. These are all based on their strategic intentions, evolving operating platform and dynamic revenue models. These businesses realise that pricing and revenue management teams are not pricing administrators. They have steadily invested in building high performing pricing and revenue management teams over the past few years. They continue to select high calibre executives with the knowledge, skills (technical and soft) and mindset to support optimal price decision making in complex B2B business environments.
Examples of successful pricing tactics
Parker and Caterpillar, for instance, have organised their pricing strategies and tactics around a distributor business model, which means that each region manages their own revenue, profit & loss, and balance sheets. Parker has one director of pricing (reporting directly to the global CEO in the US) who in turn has one direct report.
The pricing director manages a network of pricing leaders and teams who all focus on improving the implementation of pricing strategies and tactics across 55 countries. Each regional pricing team supports internal stakeholders to increase net profit; working closely with GMs and sales teams to win deals, tenders and contracts.
General Electric (GE) pricing strategy and team structure
GE, conversely, has a functional pricing team structure. The business drives a global pricing standard using a centralised pricing capability to implement pricing strategies and tactics from their main HQ. They have global pricing leaders aligning pricing strategies and tactics for major customer solutions across 31 countries. The pricing leaders are led by Executive Pricing Leaders from each business unit. And all executive pricing leaders report to a Chief Commercial Officer (Beth Comstock)who in turn reports directly to the CEO of GE (Jeff Immelt).
GE’s centralised pricing function is the driving force behind a global pricing strategy and tactics programme. It ensures their pricing standard is put back into the sales process for improved decision making and margin expansion.
How do pricing and revenue management support the business’ drive lucrative pricing?
Let’s take a look at the Parker Hannifin, Asia Pacific pricing team. Over the past two years, Parker’s Sydney based pricing team has been driving significant incremental margin across the Asia Pacific region. They monitor quoting across their entire branch network. Also, they have developed a sophisticated quoting system. It alerts them to the exact location and number of quotes below floor price and quotes above the average price.
They know the margin percentages for thousands of products and hundreds of customers at any one time. Then they can adjust prices accordingly. Parker’s pricing team is also very engaged with the sales teams and customers. This is because they support product managers, sales, marketing and the supply chain to accelerate plans with a 6, 9, 12 month outlook.
Parker also uses a range of data sources and customer insights to evolve their value based pricing strategics and tactics. This is to alert the business of imminent business-margin risk. They evaluate a range of dimensions such as: FX, inflation, recession, operations, and customer preferences. This helps provide options, insight and recommendations on operational efficiency, product development and customer value. Apart from that, they pivot and change their business plan using lean and agile methodology. They also re-evaluate their teams on a yearly basis to ensure their people, teams, and business strategies are aligned to a Parker global talent standard.
What’s the difference between pricing strategies and tactics?
All of the businesses discussed above are leading innovation and pricing best practices. Most B2B and B2C businesses in Australia do not have a centralised pricing system or a dedicated pricing team. The small proportion of B2B businesses in Australia with a pricing team very often under-utilise them; limiting the pricing function to tactical operations and pricing administration. The greatest factor holding back the adoption of value based pricing strategies and tactics is the prevalence of a common set of beliefs, attitudes and behaviours.
“Value pricing won’t work in a selling organisation.”
“It will disrupt the sales team.”
“Customers will not like it.”
“It will add to already heavy workloads.”
Specialist pricing teams boost revenue & increase profitability
Taylor Wells experience and research shows that building a pricing team does not have to be onerous, disruptive or unsettling for the sales team. Taylor Wells has studied talent and performance in the field of pricing and commercial management. How you set up and recruit specialist pricing teams is a key determinant of how fast you can accelerate earnings growth.
With the right pricing team strategy and implementation, incremental earnings gains can begin to occur in less than 12 weeks. After 6-12 months, the team is often able to find additional earnings as they identify more complex and previously unrealised revenue and margin opportunities.
Conclusion: Pricing Options
Effective pricing tactics and management is a sustainable process that can be implemented in a low risk and sustainable way.
The pressure of managing pricing to increase profitability is on; while winning high-margin deals with a handshake and a smile from a key account manager are things of the past. Not only that but also, customer loyalty, quick decision-making and clear sign off procedures.
Most businesses do not have a pricing strategy, let alone the right infrastructure and operations in place to empower their sales and commercial teams. The reason for this is that internal key stakeholders struggle to agree on pricing a deal, also on pricing to drive profitability.
Implementation Plan: How to Triple the ROI on Your Next Price Rise 🎈
You’ve got a good pricing strategy, and a solid implementation plan. You’ve even assigned pricing tasks and responsibilities to ambitious staff in marketing and finance, but progress is slow; your customers have rejected all prior price increases, and your teams seem to be working at cross-purposes. Not to mention a lot of unforeseen grief and angst to sort out before you issue your next price increase…
Why is this happening when your implementation plan is so clear and well laid out?
Short answer: People.
In this article, we will explain why people are the biggest CEO concern during a price improvement initiative; and what you can do to make your teams hyper-aligned and delivering maximum EBIT impact when it’s time to take a price rise.
What is the hardest thing to crack in your price rise implementation plan?
What many consultants gloss over when they sell you a million-dollar pricing strategy and implementation plan is ‘implementation’ itself.
Why? Because they know implementing their strategy is 10x harder than developing a strategy. More to the point, they know that implementation is not a strategy but a challenge. It’s a human behaviour challenge.
Yes, of course, you’ll need a good pricing strategy to outsmart your competitors and get the traction with customers. However, delivering more complex pricing outcomes faster than your competitors requires you have the right people, tools, and systems in place first.
Your challenge right now is executing your implementation plan, not re-thinking your strategy.
The number one thing that catapults a strategy forward is people.
Hypothesising forms strategy development. Or, knowing something to be true without actually doing anything about it. While pricing implementation depends on finding out if the strategy is true or doing something to prove or disprove whether the strategy is true or false in a particular segment or market.
The gap between hypothesising strategy and testing strategy is often huge. Add to this, the necessity of having the right skills and knowledge in place before you start hypothesising and strategizing. Then, of course, you’ve got to figure out if everyone else is acting in alignment with each other…which makes the gap between strategy and implementation even more enormous.
Take control of your implementation plan
One of the main challenges keeping you from success is cross-functional collaboration.
It’s highly likely that you don’t have precisely the right mix of people in place to strategically act out your pricing implementation plan and this is delaying strategy.
Alternatively, you don’t have the right people in the right place to strategically think out the best pricing implementation plan at the operational, strategic or tactical level.
You’ve probably got teams that are thinking and acting like this:
When really, you want them to be thinking and behaving like this:
You may also have team chemistry issues delaying your implementation plan. The wrong team chemistry means you won’t have the capacity to affect a forward momentum. For example, you might not have enough strategic influencers on board and too many technical, functional staff. This means you’ve got too many people hanging back and not taking action. There might be too much procrastinating and not enough action. There might be a tendency to over analyse problems or produce overly complex financial models and not enough tests, pivots or course corrections.
You may not have enough grit and resilience on the team. A price implementation can be negatively impacted when people cannot cope or deal with change – changing work routines, strategy, adopting new methods and approaches, etc. People that don’t cope with change well disrupt cross-functional collaboration because they can: blame others when things don’t follow the implementation plan. They also might struggle to admit their own mistakes and interrupt workflow and learning at critical points in the implementation.
Team chemistry and cross-functional collaboration are critical elements of a successful price rise implementation.
How to drive your implementation plan four times faster
To keep your implementation plan on the forward trajectory, make sure you complete the following checklist first:
- Define the behaviours that will help your teams implement your pricing strategy.
- Identify which behaviours are delaying your implementation plan or making success less likely.
- Articulate your desired organisational behaviour.
- Identify at least 10 people whose skills and capability can drive the pricing initiate
- Identify at least 10 others with organisational authority and highly networked.
- Determine new pricing work in absolute detail.
- Prioritise work and who should focus on what first.
The Advantages of an Implementation Plan
Communicating both the strategic plan and implementation plan to all employees helps the team feel as if they have a sense of ownership in the long-term direction of the company. Remember that the implementation plan plays a big role in achieving your overall strategic plan. Below are the key benefits of an implementation plan:
Easier to meet the company’s long-term goals
The huge benefit that a company can get from having an implementation plan is that it makes meeting long-term goals easier. When everybody knows totally what you want to achieve and how to do it, it’s not difficult to make it happen.
Helps to increase employee cooperation
A well-communicated implementation plan helps to increase cooperation among workers. For example, reaching out to the team and making sure everyone is aligned on the goals that you’re trying to achieve.
Guarantees buy-in from stakeholders
A thoroughly-researched and well-defined implementation plan can guarantee buy-in from shareholders and key partners that are involved in the project. Also, you can continue to get that buy-in all the time no matter which milestone you’re at.
Sustaining Your Implementation Plan
How do you maintain your implementation plan?
Maintaining your implementation plan requires active participation. It needs more effort than just simply setting it up and letting it run if you want to have a successful implementation plan. Meaning, you have to create a system where your employees can easily participate or join forces and monitor all updates so that you can track and report the progress of the implementation to key shareholders at each milestone.
In addition, at each achievement, bring all employees involved and share all the shareholder decisions with the group. As much as possible, keep the door open for more communication. By doing so, you continue to motivate both shareholder buy-in and an environment where all employees feel like they have active participation in the success of the project. Furthermore, even though there are some changes during a milestone, everybody’s questions can be easily answered. Also, changes to the implementation plan will be efficient without disrupting other tasks of the team.
Top Recommended Books on Pricing Strategies and Concepts
Well, there are tons of books on the types of pricing strategy in marketing but only a few can stand the test of time and bring relevancy to a business’ price positioning strategy (whether you’re a digital, B2B or traditional brick-and-mortar retail business).
Keynote pricing books can show you how to communicate and capture value through better pricing which is one of the biggest challenges businesses face when they develop pricing strategies for highly competitive markets.
A great pricing book teaches you about the fundamental principles and frameworks to build a profitable pricing strategy.
There are some good pricing books out there that will help you create a product/market strategy for new and existing products; giving you a unique pricing perspective to tackle pricing obstacles.
So in this article, we’ll discuss some of the best pricing books out there – i.e., those that give you practical solutions to real-world pricing challenges that you face everyday. The books provide you with advice from some of the leading pricing experts on burning pricing topics such as:
- How to set prices for new products without pricing too high or too low
- What are the most effective pricing strategies
- Price list management and optimisation
- and how to drive price changes without losing volume during a critical price rise situation.
At Taylor Wells advisory, we strongly believe that, for any pricing manager and corporation seeking to improve their pricing skills and bottom-line profitability, reading keynote pricing books will certainly help you to take the leap in the best way possible.
Here are some of the top recommended books on pricing concepts and strategies:
There are a lot of books out there that tackle pricing. Truth be told, some more readable compared to others. Below are 8 recommended books about pricing concepts and strategies:
1. Negotiating with Backbone: Eight Sales Strategies to Defend Your Price and Value
by Reed K. Holden
This is a complete guide and a must-have for every pricing professional, customer service professionals, and executives who want to understand value-based pricing. The second edition has more updated powerful new strategies and tactics – providing you with the resources to protect your profits and procure more deals.
The eight strategies (for all kinds of pricing negotiations) defined in the book are the tools that help you know your buyer, build your foundation of value, enable you to avoid discounting, and create “give-get” options and value-added services.
Dr Reed K. Holden is the CEO and also the Founder of Holden Advisors. He’s a world-renown pricing expert that guides clients to develop “bang-on” strategies to drive profitable growth, price leadership, and selling backbone.
While most books are written from theory or conjecture, a really good pricing book is written from the account of evidence, experimentation, and expertise.
2. Confessions of the Pricing Man: How Price Affects Everything
by Hermann Simon
Hermann Simon is probably the world’s first and most established pricing expert.
The book defines pricing as a ‘cocktail’. Also, it discusses all the vital tools for success such as economics, psychology, strategies and incentives.
The author talks about some personal experiences he learned about value, people’s perception, and how people gain from it. As people say about it, “You will never look at pricing the same way again.”
3. Pricing for Profit: How to Develop a Powerful Pricing Strategy for Your Business
by Peter Hill
The most important factor that impacts a business’ profitability is correct pricing. Thus, this book teaches you to stand firm in the face of pressure. Don’t let excessive discounts be the first move in order to compete. Additionally, this book is easy to read and serves as a practical guide and uses real-life examples.
If you utilise the strategies provided in the book, it’s sure to make a big difference in your business goals and provide sustainable growth.
Peter Hill is a partner in Mark Holt & Co Chartered Accountants and Healium LLP. He is an expert in his field. He worked with hundreds of companies where price was the key factor to the success of the businesses.
4. Pricing: The Third Business Skill: Principles of Price Management
by Ernst-Jan Bouter
This book outlines the requirements for pricing strategies and tactics. Also, it gives precise insights on what a pricing organisation should be.
There are comprehensive instructions on setting optimum selling prices and high-quality pricing functions.
The real-life companies’ business models include Google, Apple, BMW and LinkedIn. Therefore, it’s an inspiring book and clears the vagueness of the pricing function.
Ernst-Jan Bouter works for both start-ups and multinationals and is a price management genius. In addition, he specialises in organising companies to attain long-term enhancements in their pricing capability.
5. The Psychology of Price: How to Use Price to Increase Demand, Profit and Customer Satisfaction
by Leigh Caldwell
This is a great book for beginners. It explains the logic about the topic, clearly explaining applied strategies and techniques. Also, it provides help to businesses in understanding consumer behaviour and attain higher sales. In fact, it includes an instruction guide to work out the price point for any product.
Leigh Caldwell creates a strong and clear picture of how price psychology works. The book teaches people how to apply price psychology in everyday life. Therefore, there’s something for everyone in this book.
6. Brilliant Selling: What the Best Salespeople Know, Do and Say
by Tom Bird and Jeremy Cassell
This book is easy to read and invites the reader to be inside the mind of both the seller and buyer.
It’s full of logical tips and advice from the best business professionals. The book can be used as a guide for those who are new to sales and a reference book for more experienced salespeople.
The book begins with a section on “you” and teaches how your own goals, personality, thoughts, and morals affect your ability to sell. It points out the need to always seek feedback and self-assess what works and what could be done to make your negotiations better.
This book is a good start to improving your sales techniques during difficult price discussions with customers.
7. Pricing Strategy: How to Price a Product
by Bill McFarlane
An exceptional (also a very reasonably priced!) book. It provides nine rules and other lessons on how to price a product. You’ll find at least one strategy suited to increase your sales and profits.
It also clearly explains how increasing your prices might be the best thing for your business. Thus, the author really knows how to keep you glued to pricing concepts and strategies.
8. Pricing Strategy: Setting Price Levels, Managing Price Discounts and Establishing Price Structures
by Tim Smith
The author examines the marketing, strategic, financial and economic issues you will need to weigh up in making your pricing decisions. Also, the book illustrates numerous relevant case studies, worked examples and graphics.
Trying to understand the buyer’s perspective is difficult to do. Most pricing books will give you a glimpse of the buyer’s position, but not the total picture – that requires you to test and trial these pricing concepts and strategies in your business. Remember these books are pricing tools, they help you understand what you could do with pricing if you have full knowledge.
Most pricing books talk about how to set prices for your products/services beyond cost plus. Therefore, as a leading pricing expert or manager, you need to take what you learn from pricing books and analyse price optimisation or price improvement projects in relation to profit and show the board why they must invest in pricing or a pricing team.
Conclusion: Pricing Options
Developing a strategy is undoubtedly difficult and an essential piece of work. However, getting the right people to deliver your well-crafted strategy is 10X harder.
You’ll need the right people and operational system to fine-tune your pricing strategy.
Find your key contributors quickly. Work out your skills capability gaps. Hire strategically to fill holes quickly and avoid hiring lots of unnecessary people.
Implementing a price increase or pricing strategy is not a moment in time. It’s thousands of minor mistakes, corrections, and successes across time.
As a CEO or executive, you will need to work hard to pay attention to the “people” aspect of your implementation plan. Alternatively, you’ll find abandonment of your implementation plans altogether.
Don’t lose another dollar by implementing the wrong pricing and team strategy.
How To Increase Prices For Industrial Goods And Reach Your Margin Targets Before Year-End 🧰
With fears of a global recession, B2B industrial businesses are battling hard to protect margin. Teams are grappling with so many challenges at one time, from rising inflation; major labour shortages; ongoing supply constraints to volatile stock markets; fluctuating input costs; and now, rising interest rates are forcing customers to cut spending across the value chain. What they need is an effective price increase strategy to achieve target margins.
How a business implements a price rise – i.e., their ability to offset inflation and pass through cost increases while protecting and/or capturing additional margin using price – is now a leading indicator for Private Equity and shareholders alike on a B2B business’ overall worth, value and survival.
The problem is though, most price increases implemented by B2B industrial businesses fall short of expected margin targets and are consequently unprofitable. Often this is because businesses implement fixed price increases that are too small, and often applied to the wrong products and at the wrong time.
Capturing pricing upside is also challenging for teams operating within silo-ed B2B organisations as many still do not have dedicated pricing teams or formal processes to orchestrate and evaluate price rise decisions.
With so many profit-squeezing challenges to deal with at one time; and no commercial systems to ensure teams capture the full $ value of a price rise; in this article, we will discuss different ways teams can protect and/even drive margins using price increases before the year-end.
We argue that a series of unsuccessful / unprofitable price rise management indicates a lack of investment in a business’s internal commercial capabilities.
We strongly believe that in order for teams to set profitable price increases across a large product portfolio for industrial goods, businesses must first establish a new pricing function and invest in building and embedding commercial capability across the business. Especially in the areas of value-based pricing strategies, structures, processes and methodology.
Common Pricing Strategies: How B2B Industrial Companies Can Develop A Product Price Increase Strategy
The Biggest Price Rise Mistake You Can Make Right Now
The no 1 mistake businesses make with price rises is miscalculating how much the increase should be. Usually, the price increases made are too small and too infrequent to offset inflation or cover costs.
For example, we see many sales and commercial teams implementing 1 or 2 price increases within a very narrow bandwidth – typically ranging from 2 to 15 per cent increases across their product portfolio. Sometimes variable increases are applied in one or 2 categories within this bandwidth.
However, both types of price rises are largely unprofitable. This is because increase percentages are typically set on inaccurate cost estimates that do not factor in daily changes to freight, energy/ operational and raw material costs. What’s more, small price increases are not generating enough revenue to cover costs; and businesses are absorbing costs that they should be passing on to customers.
New Driving Forces To Consider When Making A Price Increase Strategy
B2B businesses are operating within unprecedented economic times: Central banks around the world are operating to targeted inflation rates. Currently, this means the value/power of the dollar is falling; and what businesses used to get for their money is decreasing.
What’s more, as interest rates go up and demand levels change, customers’ and suppliers’ spending will get tighter across the supply and value chain. Bigger, bolder and faster price rise actions are now required to combat these changing monetary pressures.
Our modelling shows, for example, that the required price increase bandwidth to offset inflation can range from 8 per cent to 45 per cent plus depending on the value of product categories, individual SKUs and the price maturity of the business.
As you can see, the new price rise bandwidths are much higher than the typical 2-3 per cent increases B2B Industrial businesses typically make during their annual price review meetings.
However, as economic drivers continue to destabilise the monetary system, price rise bandwidths must be re-calculated regularly to avoid implementing price rises that are: too big or too small; too late; too infrequent, or poorly communicated.
Increase In Product Price’s Immediate Risk To Profitability
When a price rise does not capture the $ value expected, this has an immediate impact on profitability.
This is because the gross margin for most B2B industrial businesses is slim and contracting; typically an average of 20 per cent margin. What’s more, cost-of-goods sold typically absorb over 40 + per cent of gross margin while inflation accounts for another 20 per cent – give or take.
This means that for a price increase to break even, a business would need to implement a minimum increase of 10 per cent; at a pass-through rate of 100%, just to keep gross margins stable.
However, if a B2B Industrial business wanted to drive a modest 1-2 per cent margin gain from a price rise, a business would have to implement a minimum increase of 12 per cent; with no pushback from customers.
Not only is it extremely rare to get a pass-through rate above 70% in a business with a limited commercial capability; but it is also reckless to even consider a fixed percentage increase across all products as every single product has a different cost profile and price sensitivity.
Our consulting and modelling to date show, for example, that B2B industrial businesses must optimise variable price increases across selected customers, channels and products to safely increase average prices.
Alternatively, if leaders do not want to design a specific price increase strategy, they must make strategic changes to their price structure – namely, tiered discounts, tiered and bundled rebates, T&Cs on minimum volume thresholds, and delivery / freight and cost to serve as surcharges or as new price inputs in the price waterfall.
Often price increases are discussed based on their impact on profitability. As indeed, we have done so up until this point. However, the topic of price increases goes so much deeper than spreadsheets and modelling. Poor price rise management indicates a lack of investment in a business’ internal commercial capabilities.
The problem with not investing in vital internal capabilities – like a dedicated pricing team or pricing skills development – is a series of failed implementations and a lack of learning from past mistakes or successes.
It is quite common to see, for example, procurement teams setting spot prices to hedge against risk while commercial teams implement a fixed price increase across all products (and this can be hundreds to thousands of products at a time) based on a simplistic markup. Often, neither team is aware of what the other team is doing, but the result means even more exposure to inflation risk.
Our research shows that when teams struggle to collaborate or continually end up working at cross purposes (as in the above example), pricing is often discretionary and decentralised, and the business does not have a dedicated pricing team to oversee the price realisation process.
In fact, our pricing diagnostic research shows that siloed pricing organisations are very widespread. With c.40% of B2B Leaders in Australia treating pricing as a tactical lever. And over 70% of businesses implement price rises without a pricing manager function.
To execute a successful price rise, then, both pricing and commercial teams need to build commercial capability in fundamental pricing principles, price setting, value-based pricing, price value metrics, price management teams, and price execution and tracking.
The Slow Road To Recovery With A Price Increase Strategy
Price rises often fail in businesses that are siloed because teams just end up doing their own thing. When this happens important elements of a price rise process go missing or are rushed.
- Sales teams continue to set prices based on gross margin targets rather than customer value; giving away any procurement savings in one fell swoop.
- Customer pricing is left to expire in the system – often not updated for years with hundreds of thousands of redundant customer pricing records.
- Price overrides increase as teams freely change prices daily in the system.
- Freight and energy costs are not covered by either customer prices or surcharges.
- Price setting is based on cost even though sourcing, cost of goods sold and input costs change daily.
- Purchasing is rushed
- Customers are not charged for changing their order
- Operational inefficiencies increase due to time pressure
- Invoicing errors increase due to transfer pricing and systems issues
- Overruns in manufacturing hours increase and are not covered by commercial terms
- Warranty costs and operational costs increase and are absorbed by the business (downtime / project scope creep)
- Orders are not tracked and invoices are often not even issued to customers
- Contracts lack clarity on deal mechanics (rebates), key performance metrics (DIFOT), or deliverables
When teams operate in siloed businesses, they quickly become weighed down by broken systems and cultural norms.
And without even realising it; they continue to rely on outdated pricing approaches — disconnected from input costs or customers’ willingness to pay — and fall further behind the competition as their margins shrink and the business loses market value.
How To Beat The Price Increase Strategy Challenges And Move Pass Problems
In spite of all the problems listed above, all B2B Industrial companies (even the ones experiencing all of the symptoms above) still have a chance to drive commercial strategy across the business.
Take action now to build capability at scale by focusing on these 7 commercial capabilities:
- Diagnosing margin leakage & value capture opportunities
- Analysing Transactional Data & Customer Datasets
- Developing a strategic price structure
- Updating discounts and rebates
- Testing Price Points, Methods & Approaches
- Tracking Tests & Trials
- Embedding improvements into BAU
In our experience, capabilities 3 & 4 above should cover the following areas: pricing foundations, setting prices (all methods), price realisation and dashboard visualisations, price management and maintenance, go-to-market execution, customer value discovery, and value-based selling.
The Solution — An Optimisation Commercial System
To drive and capture the $ value of a price rise, then, leaders and teams must first acquire new knowledge and learn new skills and approaches. For this to happen effectively, however, there needs to be a complete shift in mindsets in a real-world context. Moreover, both leaders and managers are positively reinforcing new knowledge, learning, practices and habits to drive continuous improvement across the wider business.
Our research shows that an optimised commercial system of diagnostics, learning and development, coaching, workflows, customised plans, roadmaps and tracking is three times more effective (faster and better) at driving commercial strategy and capturing the $ value of price rise improvements than either consultancy led models or training.
A commercial optimisation system starts with the basics and then builds up from there.
Starting with, basic like:
- Should we put up prices?
- Are competitors signalling price increases at the moment?
- Have our suppliers and/or customers increased their prices?
- Teams move towards the strategic commercial destination
- Roadmap & plans are built to get them there
- Team interdependencies are mapped out
- All tasks and projects have project owners
- Everyone knows how they feed into the pricing project and the team
- Teams know how to make more informed pricing decisions
Within days, teams are hitting goals and reaching new frontiers. Moving together to solve problems they previously couldn’t. And reaching new and critical milestones to generate more $ value for the business and their customers:
- They know what the market is doing right now.
- They understand the short and long term cost and price trends.
- They have built economic models to factor monetary trends.
- They know when to increase prices in small increments and when to increase prices in one big go.
- They have automatically factored in CPI, PPI Indexes into their pricing.
- They have built a price structure based on target customer value drivers
- The have several data price models and information sources to help them predict customer price sensitivities and know by SKU when prices are not covering costs or offsetting inflation
- They have set up automatic reminders, workflows with key owners to update customer pricing and commercial terms.
The Process Of An Effective Price Increase Strategy
As you can see from the capabilities requirements checklist above, a price increase strategy is more than just tinkering around with numbers in a spreadsheet. It’s about teams coming together. Continuously learning and pooling knowledge and skills. And working within an optimised commercial system to channel resources to achieve outcomes faster.
- Set up integrated workflows and plans that deliver shared outcomes
- Project plan timings to ensure price rise communication go out on time
- Build and refine models to optimise price rise
- Agree price increase strategy
- Update pricing in the system
- Refine discounts and agreements to avoid leakage
- Communicate price rise to customers
- Track pass through rates and feedback
- Optimise pricing structures
- Embed proven processes and improvements
With a commercial system like this, nothing goes missing. And within weeks, price rises are capturing the full value expected by the business. We also find that companies will get the best results using a blend of delivery methods during the set up and implementation phases of a major commercial project or transformation.
In fact, our research shows that teams are three times faster and more effective at driving commercial strategy when strategy development and implementation occurs alongside targeted workshops, digital learning, expert coaching, and performance support.
Case Study on Common Pricing Increase Strategies
It is imperative, therefore, that all B2B Industrial businesses optimise price to maintain the financial security of the business and make bolder and safer price increase strategy.
For example, if you examine your peers in similar industries, you’ll see that leading businesses are investing in dedicated pricing teams and building commercial capability to ensure their current price increase strategy is optimised to combat inflation and rising costs.
Boral, as a prime example, has instigated a whole sequence of price increases this year across the group’s product portfolio of cement, concrete, gravel, asphalt, and sand. Although there was no disclosure of the amount, they have said that these increases are the biggest they have made in the last 5 years. What’s more, these increases are on top of prior out-of-cycle price rises.
Boral, like many B2B Industrial businesses, have no choice but to make bolder, more frequent and more substantial price rise decisions. In 2021-2022, Boral’s profits were down by 32 per cent partly due to the lashing rain in Australia; but also higher fuel and energy costs; supply issues; and lower demand levels as buyers pulled out of the housing market.
In fact, Boral openly admits that these recent price increases are some of the largest increases by geography and product line that they’ve put through in the market. Fortunately, they have a pricing team to help them make better price rise decisions; and a commercial support system to instigate better price rise decisions across the business.
Conclusion: Pricing Options
We are facing very usual and troublesome economic times which demand strategic price management and price increase strategy.
Strategically increasing average selling price is crucial to beating inflation. A tactical approach to either price rise management or strategic price structure changes is fraught with risk and undermines any prior profit expectations you believed you’d get from leveraging price.
Many consultants and business leaders argue that teams struggle to implement price increases because of the complexity of the task at hand or implementation. However, from our experience working with teams implementing price increases, the real problem is the absence of a system to build and embed capability across the organisation – in every department – from sales right through to HR.
All teams including pricing and revenue management teams must build mastery of foundational pricing knowledge in fundamental pricing principles, price setting, value based pricing, price value metrics, price management and price execution and tracking.
Organisations that build and embed commercial capabilities across the business, are more than three times more likely to succeed in driving sustainable and profitable growth during a downturn.
How to Increase Your Prices When You Have No Other Option
In our digital era which transformed how businesses operate, many B2Bs and B2Cs think they can quite easily change their prices, whether that’s an increase or a decrease. But most business leaders tend to underplay the important factors that are involved in setting up a proper pricing system. They forget that it’s more complicated than just changing up the numbers with a flick of the hand.
They often make the mistake of relying on cost-plus pricing that simply passing the increased costs onto B2B and B2C clients will solve the problem once and for all. In fact, without putting much thought into it, there is no assurance that a strategy like this will recoup financial losses due to increased expenses.
But pricing power and decisions are more complex than that. Executives forget that the wrong pricing decisions can send customers switching to other brands and competitors.
In this article, we discuss how you can mitigate negative responses caused by rising prices due to inflation. This can feel daunting especially when there is no other option but to increase prices.
At Taylor Wells, we believe that value-based pricing can ease the arduous task of justifying your prices in relation to your value proposition. We argue that managing your relationship with clients as you raise prices does wonders in increasing your brand awareness and reputation. By the end of this article, you will learn as we guide you to some of the pricing steps that are most applicable to your current environment and situation.
Common Pricing Strategies on How to Increase your Prices
As Covid-19 induced inflation affects 26 million Australians including the corporate world, it’s worsened on a global scale, thanks to the developing Russia-Ukraine war. The latest price hikes in basic commodities, oil, fuel, gas, and coal have reached a 14-year record high as the world scrambles for alternative supplies, vowing to cut Russian trades, and imposing sanctions.
As prices soar, there is no guarantee that clients will continue spending at the same rate. It’s just as difficult to guesstimate if they possess the same spending power as before. Or how much they will reduce or even completely cut down their expenses on specific commodities – unless you belong to a market that has an inelastic demand. But if you don’t, then you need to find out how much they are really willing to pay.
Warn your Customers
The price for products/services that don’t regularly go up and down will stay in the minds of customers. A first-time buyer who is price-conscious may consider your regular price as expensive. While another customer may think that your consistently low prices make your overall product/service quality and value questionable.
Whether they will be converted to returning or loyal customers is uncertain. And sometimes, when clients have formed their own conclusion or first impressions about your brand, it becomes more difficult to try to change their minds.
In a situation like this, what are the best ways to navigate a delicate situation like a price increase? How can you notify clients that you have no other option but to pass on some of the costs even if you have absorbed part of the increased prices?
Explain and Communicate without Apologising
Although there are friendlier and more appropriate ways to let buyers know that you’re raising prices soon and have no other option, it doesn’t mean that customers will be happy about it. Like you, they also have their own problems and that’s why you need to approach this in a realistic manner.
Of course, your clients won’t be thrilled by price increases. But not being able to communicate to them ahead of time and explain why there is a price hike can definitely worsen the situation and agitate B2B and B2C customers alike.
It’s important to put your message in the right context by telling your story. Put your customers at the center of your business vision while keeping in mind how they may feel when you implement any operational, price, or even brand image changes. The more that they’re connecting and engaging with you, the more relatable your story is to them.
- What do people love about your brand?
- How are you solving their problems?
- How do you make them feel about your offered solutions?
Netflix – How to Increase your Prices
Take the example when Netflix raised their prices in 2011 of up to 60%. This was a drastic move that resulted in the streaming service to lose at least 800,000 of its subscribers. And in just as short as four months, Netflix’s stock dropped to a whopping 77%.
Although this was a forward-thinking step for Netflix to disrupt the disc (VCD/DVD) or movie rental market, it could’ve informed its customers better about its price increase.
Fast forward to 6 years later, Netflix subtly raised its prices this time, informing its viewers early on that this move was done to create and deliver better content. And new, original, better content was delivered to its satisfied subscribers to enjoy.
Common Pricing Strategies on How to Increase your Prices: Keeping an Eye on your Value & Competitors
It’s common in the market to use competitor-based pricing where rivals respond to each other’s price changes in an effort to keep customers on their side. This will likely lead to a price war which is almost like a game of tug-of-war between competing brands.
Price leadership can get you out of the cycle of being a follower, copying whatever the market leader does. Especially if you belong to a congested market with many competitors.
But in an oligopoly setting, price wars will occur quite often as only a few companies are leading the industry (for instance, Coles vs. Woolies.) This gives them more control and freedom to leverage their pricing power.
Common Pricing Strategies: Coles vs. Woolworths
It’s quite standard now to see Coles and Woolies engage in a price war. Most recently, they both lowered their prices for about 250 items on their shelves. Coles brings back its “Down, Down” strategy every so often and Woolworths responds accordingly, sometimes as quick as 24 hours.
The downside of a pricing system that’s based on a competitor’s actions is how it focuses more on the customer’s perception of prices, rather than value. Business leaders might overlook this factor and undersell their services. Similarly, it is also a short-term solution to attract new customers.
However, if you can combine value and product differentiation, then you’re likely going to succeed in setting your pricing structure based on competitors.
Where can you decrease your costs without sacrificing quality or value?
There are other ways to make up for the price increase without causing financial losses or cash flow leaks. You could take a second look at your overall expenses and overhead costs to identify which areas you can increase savings and decrease costs.
This could include office spaces, marketing expenses, and utilities. For instance, ever since the Covid-19 pandemic, more and more companies have transitioned to remote work. For most B2B and B2C firms, this helped minimise unnecessary spending as they adjusted and optimised their new setup.
This could also be done with free shipping or delivery terms and 24/7 customer service assistance. Or in the case of equipment and appliance industries, they come with free or discounted maintenance – done in a way that doesn’t undersell you nor puts you in a poor financial situation in the long-term. You must also communicate to your clients that your relationship with them is important to you by offering valuable experiences.
Common Pricing Strategies on How to Increase your Prices: Good, Better, Best Pricing
A good-better-best pricing gives customers the basic service vs. an upgraded and a premium version. This helps customers perceive a sense of control over their spending power to help them decide which one is best for them.
Studies show that this helps them elevate their desire to use upgraded or premium services. Of course, as a brand, you need to justify the value proposition and price range that you offer.
Johnnie Walker whisky, for instance, uses colour-coded labels for different drinkers and at different prices. For starters, the basic label is Red which is also the least expensive. In sequential order, Red comes before Black, Double Black, Gold, Green, Platinum, and lastly, Blue.
The Blue label is the most expensive and premium version, costing $180 per 700 ml. But why does the brand consider it a premium? Interestingly, only 1 from Johnnie Walker’s 10,000 casks makes it to the Blue label.
Pricing professionals use this strategy to influence buyer behaviour and decisions. Although those who are price-sensitive will be more conscious of the comparisons in numbers, highlighting the added features in the upgraded or premium version should steer their focus away from prices.
Common Pricing Strategies on How to Increase your Prices: Customised Pricing Plans
Another way to address price-conscious clients is to offer them a protection package price plan. In this manner, you can still keep them within your customer base. It is also supposed to ensure that they won’t be heavily impacted by future price increases using a slightly higher but fixed pricing package.
Your clients have different needs and preferences. And because of this, you need to vary up your offers, services, and packages. They should be presented in ways that people can choose from. We often see this strategy in the airline, Software-as-a-Service, insurance, streaming, and telecommunications industry.
Honda, for instance, offers different price packages for its customised service packages. This includes road hazards, tires and wheel packages. It also offers a theft protection plan, towing fees, and car breakdown and service coverage.
This customised pricing option gives you more opportunities to include more clients in your target market. It also emphasises how your product portfolio is a solution tailored to their different needs and problems. This allows them to manage their spending ability better.
To do this the right way though, you need to research on:
- the current market conditions
- customer demographics
- the challenges that clients face
You can then use this information to fuel your innovative solutions in:
- optimising your pricing system
- product quality
- marketing efforts
- client relationship management
Over our years of consulting work, most companies realise that their lack of a robust pricing structure becomes a problem when revenue and profits are chipped away. This, in turn, affects their growth strategy and leads them to suffer financial losses.
In dealing with these concerns, we discovered that the right set-up and pricing team in place leads to more earnings and positive outcomes in less than 12 weeks. And after 6 months, a business can capture at least 1.0-2.25% more margin using better price management skills.
After 9-12 months, companies will often generate between 3-7% additional margin annually. That’s according to our extensive research from further working with B2Bs and B2Cs. Whether you are underselling or overpricing your product portfolio, hiring pricing professionals will open up more opportunities for concrete pricing strategies. This will eventually lead towards your long-term sustainable future growth.
Bottomline: Pricing options
Pricing decisions are more complex than just raising and lowering numbers anytime the need arises. Rather, they involve consistent evaluation of current and previous price data along with a functioning organisational design.
If customers aren’t happy about price changes or some of them leave, it’s not the end of the world. It only shows who your real or ideal customers are. In this case, it’s best to focus on how you can keep serving them better than worrying too much about customer churn (those that have switched to other brands).
For a comprehensive view on maximizing growth in your company,
Are you a business in need of help to align your pricing strategy, people and operations to deliver an immediate impact on profit?
If so, please call (+61) 2 9000 1115.
You can also email us at email@example.com if you have any further questions.
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