May 7, 2014
If I was being harsh (or just honest, depending on your perspective) I might ask, where are you on the Pricing Intelligence Continuum? Are you still living in the Dark Ages of ‘Gut Feel’ pricing?
Does your organisation believe that the only way to ‘price’ your products is to ask the Sales Team or Product Management Team (depending on whose ‘Gut’ dominates your organisation’s cultural constitution) what their experience tells them?
I have heard many times, as we discuss the potential impact and benefits of a Pricing Solution, that the Sales Team knows “how to price best and they understand the customer better than anyone else in the organisation.” For the good (the best) Sales people, this is possibly true and even then, I still believe that all Sales people, including the Best ones, can benefit from a move along the Price Setting Continuum. Moreover, how can you guarantee consistent pricing excellence across the whole Sales team? The essence of the problem is that it is simply very difficult to share individual experience and leverage knowledge stored in the Sales Rep’s ‘Gut’.
So, how can you help yourself to move out of the Dark Ages?
Consider the Price Setting Continuum as a set of building blocks and not a list of either/or alternatives. It reflects an approach that builds on the merits of the previous step:
– ‘Gut Feel’ Pricing enhanced by a set of structured Pricing Rules, Analytics and Market Data
– Rules Based Pricing enhanced by Data driven, Pricing Science based algorithms
This does not ignore the benefits of experience and knowledge of the Sales Team, it looks to capture that knowledge and build on it for the benefit of the whole team. This does however mean more structure is required around your pricing and it requires a discipline from the Sales team to feed the relevant tool. Feeding the Tool rather than their own ‘Guts’ benefits everyone and needs to be encouraged.
The Price Setting Continuum covers, of course, not just the process of setting a list or reference price, but every other price decision that you need to make including: minimum pricing, workflow approval levels and perhaps most importantly the Target Price.
So, how do you get started on this journey?
The first step is to recognise that there is a continuum and it is possible to take small steps along this path. The End Game is deploying a data driven Segmentation Model and leveraging the use of a Power and Risk based optimisation model to set target prices and deliver those to the Sales Team.
It is worth noting at this point (we want you to feel motivated to start the journey) that the End Game is NOT a fully data dependent model. There is always the need for Managerial Insights and the cumulative inputs gathered from Sales. The benefits of collecting, collating and leveraging Sales experience never goes away.
The second step is to establish more structure in your pricing through the automation of inherent business concepts that provide the formal or informal rule set for your business. Think about not only the Rules, but Analytical Insights, Market Data or Macro Economic Trends that could and should influence your Price Setting process. Can you start to use some basic algorithms and statistics to guide you selling – e.g. percentile based guidance based on a Product Price Distribution. The inclusion of any, or all, of these elements in your process is going to provide more structure and discipline around your pricing decisions.
This is going to take some sort of Tool support to capture data inputs and then calculate and deliver intelligent pricing guidance.
So, why would you want to keep moving along the continuum? After all, each step does require more effort. Well, the benefits of Segmentation and Segment driven target pricing have been well documented. Segmentation models support the ultimate in your ability to reflect the difference in the way each of your customers values your product, service, delivery or support.
The third step, from Rules Based pricing to Science supported pricing, leverages data driven segmentation and generates an optimised Target price. For this, you need a model that takes into consideration both your ability to raise prices (Power) and also what is at stake (Risk) if you get it wrong. Ignoring the Risk is a fundamental flaw of many standard pricing optimisation models available on the market.
– The POWER reflects your ability to raise prices in a given segment, while taking into account both quantitative data analysis as well as managerial insight captured through qualitative inputs.
– The RISK reflects the downside of raising prices by looking at inputs such as sales volume, number of customers and revenue at risk.
Combining these two aspects for each opportunity paints a clear picture for Sales of where they can be bold and raise prices, and where they should tread more carefully.
This is the ultimate Goal and the real reason to start on the journey along the Price Setting Continuum. The true Power of Pricing lies in your ability to combine organizational knowledge and experience with the sophistication and intelligence of science based target optimization.
Last week, we introduced Vendavo Power & Risk, a breakthrough solution for targeted price optimization. With Vendavo Power & Risk you can finally empower Sales with the winning price and grow business revenue. To learn more about our new offering click here.