What questions should the CEO ask about pricing?
By Steven Forth
On May 17, I went down to Seattle to give a talk to the Executive Peer Group (XPEG) on the Role of the CEO in Pricing. (You can get the slides here.) The focus was on the role the CEO should play in pricing, and how to lead in this area.
There is a growing body of evidence that companies with CEO engagement on pricing leadership outperform the competition. Research from Simon-Kucher Partners has found that a strong involvement by the CEO in pricing is correlated with 35% higher pricing power. At Wiglaf Pricing, Tim Smith has found that CEOs who focus on business and pricing strategy outperform their competition.
One way to frame this discussion is in terms of Roger Martin's cascading choice framework (sometimes known as Structured Choice Making or Playing to Win choices after the book Roger wrote with Proctor and Gamble CEO A.G. Lafley).
Where pricing is concerned, the CEO leads the Winning Aspirations and Where to Play choices and supports the How to Win and Capabilities choices. What do these choices look like and how are they communicated?
Winning aspirations
Pricing goals need to support the organization's overall goals. We have a good example of this with one of our new clients, Technical Safety BC. The aspiration is to improve safety in British Columbia and the question they have is whether prices have been designed to encourage the behaviours that lead to better safety.
More conventionally, pricing goals will be around commercial objectives. The goals we see most often are
Revenues (many companies want to use pricing to improve the top line)
Gross Margin (pricing is often the best way to address gross profit)
Cashflow (pricing models and the transition to Software as a Service (SaaS) can have a big impact on cashflow)
Unit Economics (SaaS businesses are often evaluated on the Lifetime Value of a Customer (LTV), Customer Acquisition Costs (CAC) and the ratio LTV/CAC)
Market Scale (sometimes the growth of the overall market is the top priority)
Market Share (sometimes one's share of the market is more important than the overall size of the market)
Pricing is a critical aspect of overall positioning and positioning requires clarity. Pricing is a powerful lever but if one tries to use it for too many things it can confuse the situation rather than improve it. It is the CEO's job to make sure that there is strategic alignment.
Where to play
Where to play choices need to be based on how and where you can provided differentiated value. This is why Ibbaka frequently begins pricing work with a value-based market segmentation. In a good segment, potential customers get value in the same way and buy in the same way. Conventional segmentations that are based on company size or industry are basically useless for making where to play choices. One has to go deeper and understand the economic and emotional value of your offer relative to the alternatives.
The CEO needs to stay close to this work. It is critical to success. The segmentation framework (the set of value drivers and buying processes that bring an offer's unique differentiation into focus) is a critical strategic tool that will be used in many places: with the board to frame strategic choices in product investment decisions, marketing and sales.
Closely related to the segmentation is the value metric. The value metric is the unit of consumption by which your customer gets value from your offer. Having a precise understanding of the value metric is central to value-based pricing, and the key to value- based pricing is connecting the value metric to the pricing metric.
Who should own pricing
There are two basic answers to the question 'Who should own pricing?'
Whoever is accountable for the goal that pricing is meant to drive.
Whoever is closest to the key inputs into pricing:
For value-based pricing - whoever has the best understanding of how the offer creates differentiated value for the customer (this is often product management but it can be sales, especially for mature offers)
For cost-plus pricing, whoever has the best insight into costs
For market-following pricing, whoever is closest to the market and can predict how it is likely to move
At the end of the day, the CEO is accountable for pricing goals and needs to be engaged in pricing strategy.
Depending on the goals, pricing methodology, or offer maturity, pricing could be owned by product management, marketing, sales or even operations (when one prices to manage capacity utilization, as airlines and hotels do).
Key questions to ask
The CEO should ask the following questions about pricing, guide the process by which answers are developed, and make sure that all of the critical people in the organization understand the questions, the answers, and where the answers come from.
Are we in alignment on pricing goals? It is the CEO’s job to set the goals.
What is our pricing strategy?
How are prices set?
What is our value metric? (or value metrics)
How does our price track the value we deliver?
Which customers get the most value from our products and services?
How and when do we provide discounts?
What data are we tracking to improve our pricing?
