By Prasad Kadiyala, 03/23/2018
Undoubtedly, determining the right pricing strategy is one of the most complex functions within any business. A sound pricing strategy helps businesses determine the price point at which it can maximize profits on the sale of products or services. Yet challenges abound, and businesses often overlook several key factors.
In our experience, one of the foremost challenges that stymie companies is an organizational culture that values “tacit knowledge” over a mindset of “test and learn.” This fosters an environment that fails to take into account changing market dynamics, competitive positioning, and advance of new technologies. Exacerbated by a fear of the unknown and high cost of failure, leadership teams are limited in exploring options and unable to add to the knowledge pool in an organization. However, by conducting rapid and low cost experiments with defined goals and timelines, organizations can build a knowledge repository that can be a great asset in defining pricing strategy.
Secondly, strong executive leadership that maintains good relationships with sales and marketing stakeholders while keeping pricing as an independent function is essential. Sales teams are a key part of the pricing process and have their finger on the pulse of customer demands and expectations. However, input from the sales teams often skews the process leading to inaccurate pricing recommendations that favor a particular group of customers. Keeping SKU-level pricing as an independent function creates a process where pricing managers can establish an analytical, data-driven approach that benefits the overall organization. Once delivered, these base prices can act as a yard stick to develop discount thresholds that sales teams can leverage to offer the right value to a customer.
The scale of a business’ operations is another important factor that impacts pricing. A global company operating in various markets must develop, customize and enforce rules for each market. This requires strong analytical capabilities and a holistic approach to pricing strategy that aligns with market needs.
Another factor that poses significant challenges is the sales teams’ failure to adhere to pricing guidelines. This can often be attributed to outdated systems and processes that don’t enforce workflow approvals when pricing thresholds haven’t been followed. Improving such systems and establishing new processes can often be met with resistance from various stakeholders. eClerx Digital works with leading B2B organizations on delivering technological and process transformation programs. It is our experience that an integrated approach that clearly establishes the benefits of such a change, is embraced by the organization and leads to quick wins.
An Analytical Approach to Pricing Strategy
The following factors are helpful when creating a pricing transformation strategy:
1) Advanced Analytics
An advanced analytics approach to pricing that considers both internal and external factors is essential. Internal factors include: customer behavior; product attributes; sales history by channels; discounts and rebates; and customer engagement on digital channels. External factors include macro variables such as inflation, market and industry trends, and competitor behavior. An approach that considers a wide variety of data elements followed by a technically robust analysis can deliver strong insights and recommendations.
2) Process-oriented Approach
A consultative, process-oriented approach that involves key stakeholders across the organization can deliver quick wins. Tap into internal knowledge from your marketing, operations, sales and finance teams when developing a price transformation strategy. The goal is to create and implement a series of workflows within an integrated framework that includes these three key functions
Determining price elasticity and developing base prices at a SKU level
Scenario planning that clearly establishes revenue impact due to price changes
Discount and quote management system that enforces a set of rules and prevents revenue leakage
3) Visibility and Impact
Analytics transformation programs often fail due to a lack of visible impact on key success metrics for an organization. One common theme that differentiates organizations that achieve success through analytics is their ability to establish success metrics at the early stages of a project. Teams should identify the current state of key metrics such as elasticity, demand in terms of units, revenue and ROI. This should be followed by establishing the desired end states for each metric, taking inputs from all the relevant stakeholders in the process. By following this process you ensure executive sponsorship which is vital for the initiative.
4) Rapid Experimentation
Many businesses labor under a ‘one size fits all’ approach to diverse pricing environments that can result in mixed results. For instance, a surefire approach that delivers success in an advanced market such as the UK, may result in significant disappointment in emerging markets in Asia. Adopting a culture of experimentation and learning makes organizations nimble and prepared. Customized strategies backed by data-driven insights from rich data sets should be employed across markets. Additionally, these insights and analyses should be refreshed on a periodic basis. This will enable organizations to respond faster to market and industry dynamics, advanced technologies, as well as changes in customer preferences and competitors’ strategies.
Pricing is a complex function that requires both a strong analytical approach and a process whereby stakeholders can learn quickly through various experiments. Regardless of economic outlooks, whether strong or weak, organizations must remain cautious about tweaking prices too often. Investments in technology combined with strategies focused on creating a richer data set and deploying advanced analytics can have a significant impact on future profits.