Scenario planning for pricing (managing through uncertainty)
Steven Forth is a Managing Partner at Ibbaka. See his Skill Profile on Ibbaka Talent.
Scenario planning is well established as the more powerful tool for managing uncertainty. These are uncertain times, and pricing strategy leaders should be developing scenarios and preparing the different actions they will need for different possible futures.
We have share some thoughts on this on OpenView ‘Pricing in a time of uncertainty’ and on our own blog ‘Pricing under uncertainty and the need for usage based pricing.’ Let’s take a deeper look at how one can apply scenario planning to pricing to better manage uncertainty.
Before we dive in, you may want to take this survey on pricing scenarios. We are collecting information on how different industries are expecting the COVID-19 crisis to play out. We will be discussing this at our April 30 seminar on Pricing Scenarios and Pricing Action Scenario Management and will share the results in a report to the community.
Scenario planning originated at RAND Corporation during the Cold War. One well known application was at Shell Oil, where the maritime shipping business used scenario planning to prepare for and then respond rapidly to the energy shock, saving the company a massive amount of money. Here is a good case study of what Shell did in the 1970s (there is a lot to be learned from this work even today). Shell maintains a strong scenario planning group and it is worth following their work as you develop your own scenarios, even if you are not primarily concerned with energy or climate change.
If you want to go a bit deeper into scenario planning, one of the most inspiring stories is the Mont Fleur scenarios for the future of South Africa post apartheid. These scenarios were developed with broad participation from people who had been enemies.
A simple process for developing scenarios is as follows.
Establish a baseline
How have your customers changed their assumptions about their own businesses?
How do changes at your customers impact the value they get from your solutions? Consider
Relative importance of the different types of value drivers (community, emotional and economic)
Magnitude of the economic value drivers (does your solution now create more or less economic value
How do changes at your customers impact the demand for your solutions?
Segment your customer base by the current impact of COVID-19 on their own business and their impact on demand and your differentiation value (the value of your solution compared to the next best competitive alternative).
Define the critical uncertainties
What are the critical uncertainties?
Critical uncertainties are those areas that impact your business (and society) where the outcome is currently unknown. Some things to consider:How long will the COVID-19 crisis continue?
Once the crisis is over (this too shall pass) how will the general economy respond?
How will the different customer segments identified be impacted under each of the different scenarios?
Combine the critical uncertainties into a set of 2 x 2 grids.
(In some cases 3 x 3 grids have been used, but let’s keep this simple)Choose just one grid that seems compelling, in other words, you are only going to look at four critical scenarios. Keeping this to just two critical uncertainties and four scenarios helps focus to conversation and planning.
Tell a story about what the world will look like for you and your customers under each scenario.
Focus in on the community and emotional value drivers first, in times of great uncertainty these can overwhelm the economic value drivers.
How will the different customer segments identified be impacted under each of the different scenarios?
Identify leading indicators for each customer segment
What will tell you which scenario is emerging?
Develop a pricing action portfolio for each segment x scenario mapping, so that you can respond rapidly once you know which scenarios are emerging
What are the critical uncertainties for pricing strategy?
In pricing work, there are two main areas where you need to look for critical uncertainties. We will investigate these in more detail in future posts, but here is a quick introduction.
Market dynamics
Have the dynamics of the market changed? This primarily means looking at changes to price elasticity of demand (the degree to which price changes impact demand) and cross price elasticity (the degree to which a price change can cause a buyer to switch vendors).
Some of your customers will have seen price elasticity of demand collapse. There is almost no demand currently for companies servicing airlines or food services. On the other hand, price elasticity of demand for ventilators has also changed as demand would be the same no matter what the price. It would be unethical to try to take advantage of the latter.
Cross price elasticity can also change in a crisis. Some buyers become more loyal, while other begin to rethink long-term relationships.
This is one place to look for critical uncertainties. You need to ask both what is happening now and what will happen once the COVID-19 crisis is over.
Customer value
Emotional, community and economic value are all changing. During the crisis, emotional and community value drivers can become more important than economic value drivers. This can often remain for years after the crisis has subsided. People have long memories about these things. Economic value can also change, with Cost and Risk related value drivers becoming more important than Revenue, Capital or Optionality value drivers.
Combine market dynamics and customer value to build scenarios
There is a tendency when building scenarios to keep like with like. One might, for example, create four scenarios around changes in value drivers, such as a shift from community to security (or vice versa) or from revenue value drivers to cost and/or security value drivers.
This is fine, and can give many insights and help to segment customers.
It can be even more revealing to combine the different aspects and, for example, to look at scenarios where cross price elasticity changes and value drivers shift.
The above mashup combines two different classes of value driver on the Y-Axis (community and economic) with two different possibilities for cross price elasticity. The product and pricing actions would be different for each of these scenarios.
Apply for our online seminar on scenario planning and pricing action portfolio design
We will be giving an online seminar on how to combine scenario planning with pricing action portfolio design in early May. This will be limited to twelve people, two people per company, and will be very interactive. We will break into small teams and work together to …
Identify critical uncertainties for different industries
Build scenarios to explore
Choose pricing actions for a pricing action portfolio
Run a simulation to see which portfolio is most robust
Attendees will also be given access to a microlearning course on scenario planning and pricing action portfolio design that will give hands on guidance on execution. If you are interested in this online seminar and microlearning course please contact us using the link below.
