Pricing is often seen as tactical, something that can be left to pricing experts with input from marketing and sales. Research has shown that many CEOs spend little time on pricing, until it becomes a crisis that is. (See research by Stephen Liozu and Andreas Hinterhuber on this theme).
CEOs and other business leaders often do not approach us until pricing has become a problem for their organization. In many cases, the pricing problem is a symptom of some deeper issue. Underlying causes of pricing symptoms can include a lack of alignment on goals, no real market segmentation or customer targeting, weak differentiation or a failure to connect price to value. The root cause though, is a failure to take a strategic approach to pricing.
One of the most powerful strategic frameworks is the one developed by Roger Martin over the years, originally known as cascading choices, it is also referred to as structured choice making and even your ‘playing to win choices.’ The latter comes from the fullest presentation of this approach in the book Roger co-authored with A.G. Lafley of Procter & Gamble. Roger also has several good articles exploring different aspects of strategic choice making on the Harvard Business Review, such as Pricing Needs to Reflect Who People Want to Be, Not Just What They Want.
The basic framework cascades down (and back up) though five steps: Winning Aspirations, Where to Play, How to Win, Capabilities, Systems. One needs to work on each of these steps in parallel, as there are dependencies between them, but the higher steps fame decisions made lower down the cascade. For example, if one’s winning aspirations include being the category leader then this will frame ones where to play choices. It will help define what one means by ‘category,’ if it is too broadly defined there will be no category leader, if it is too narrowly defined it devalues the aspiration. One cannot make how to win choices (setting pricing levels, deciding when to compete on price) if one does not know where to play.
How do we put this in the context of pricing choices?
One cannot meaningfully help people with pricing if one does not know their pricing goals. We try to ascertain these during the early stages of our work and include our understanding of goals in the situation summary (a document we create for prospective customers before we make a proposal). As we work through the pricing challenges we continually go back to these and validate them. In some cases we also do an internal survey early on in our process to see if there is alignment on pricing goals at the executive level and across different business functions. If you are interested in doing this on your own, try having different people in your organization use our pricing assessment tool and then compare the results.
Some common pricing goals include …
Gross profit growth
Gross profit margin improvement
Maintaining capacity utilization
Unit economics - Lifetime Customer Value, Net Value to Customer, Customer Acquisition Costs
It is also useful to think about how your own pricing goals align with those of your key customers. Thinking through this can bring your own goals into sharper focus.
Pricing strategy often skips over where to play choices, but in fact this is one of the most important things to get right.
The critical where to play choices are how you segment your market and which segments you choose to target. A meaningful market segment for pricing strategy is one that gets value in the same way and that buys in the same way. In a value-based market segmentation process you dig into how customers get economic and emotional value from your offer relative to the alternatives. This requires primary research, but it is necessary. Your market segmentation is the foundation on which your pricing strategy and the rest of your go-to-market plan will be built.
From a pricing perspective, the critical choices are around pricing model design. A good pricing model connects your value metrics (the unit of consumption by which your customer gets value) to your pricing metric (the unit by which you charged) and is designed for your target segments to achieve your winning aspirations. How to win choices are also where pricing tactics are engaged, from discounting plans to how you will respond to competitor actions (remembering that your responses are conditioned by your where to play choices and winning aspirations.
You will not be successful in pricing without some real skills. A competency model for pricing can help your business identify the key roles in pricing and the associated skills. In our research with our affiliate TeamFit.co, we have found for key roles in the pricing function.
Pricing strategist - works with C-level executives on the intersection of pricing and strategy, often leads the pricing function
Pricing designer - works with product and service designers to align price with strategic goals and value, sometimes outsourced to a company like Ibbaka
Pricing coach - works primarily with sales on pricing, but also with other functions that need to understand pricing concepts, how they have been applied at the company, how value and price are related and how to negotiate pricing
Pricing analyst - the number cruncher, who looks for patterns in the data and works towards optimization
Pricing skills should not be confined to pricing experts. To build a true strategic pricing capability some knowledge is needed in finance, sales, offer development, customer success and of course on the executive team. Going all the way back up to winning aspirations, the executives are also accountable for alignment on pricing goals.
Pricing also touches a number of systems that most companies use. The customer relationship management system (CRM) should both contain pricing information for the sales force and collect information from prospects that can be used to evolve the segmentation, choose targets and evaluate value messaging. Pricing will also be an important part of the configure, price quote (CPQ) system and will link in to the financial software. Understanding the connection between pricing models and revenue recognition can be an especially important area (see Pricing and Revenue Recognition). For larger companies, with many SKUs and lots of transactions, one of the large pricing platforms like PROS and Vendavo may be needed, or a newer alternative like Pricef(x). Managing these platforms requires a whole new set of capabilities so once you are large enough to go down this path a new role Pricing Platform Manager emerges.
Another connection between pricing and systems is around data collection. Ideally, your pricing model will be coupled with a value model and your application will collect the data needed to inform your data model. If you are using an ROI calculator you are already on the way to this.
Pricing touches strategy on many different levels, from getting alignment on winning aspirations all the way down to how systems are used and configuration is done. It is one of those things that integrates a company.