Part One
Part Two
Pricing is a powerful lever. A 1% price increase can drive as much as an 11% profit improvement.
Through this foundations workshop, Craig Zawada will examine the keys to leveraging this powerful lever across all the essential levels:
- Market level management
- Customer value perceptions
- Transactions
You’ll learn about the requirements for pricing infrastructure (people, processes, and tech) that allow for effective price coordination across these various levels in order to dynamically coordinate pricing to changing market needs, changing customer perceptions of values, and the unique conditions of each transaction.
Join this training course to learn:
- Why a disciplined, defined price strategy is essential.
- Dynamics to watch out for across the varied levels of price management.
- Where to find key sources of untapped pricing opportunity.
About the Speaker
Craig Zawada joined PROS in 2010 and serves as its Chief Visionary Officer. Zawada is responsible for creating and articulating the vision for how PROS uses big data and the latest technology to help companies drive incremental sales growth and profit improvement. Zawada also works with new and existing customers to define the implementation path for these solutions to help them outperform in their respective industries.
Full Transcript
Hello everyone. I’m going to be covering two sessions during outperform around the fundamentals and foundations of pricing. This first session will be around core principles and this will cover the frameworks and tools for those people that are given that are new to pricing maybe you’re a student or just getting into pricing to cover some of the core concepts of pricing. The second session will go into detail on the evolution of pricing of where it’s going.
And what the future holds and what some things are changing with respect to pricing. So let’s dive into this first session. I’ll cover three things. First, the power pricing.
Second the three levels of price management. And lastly, what I call the price advantage mindset. So before we get into the tools and frameworks. Let’s first start with why a focus on pricing.
What does it mean to a company. And if you look at the impact of small changes levers that you can pull as a manager in a business. Price is the most powerful lever. So this is analysis, we did at McKinsey Company that looked at the average economics of roughly 2,500 companies and ask the question, well, what would happen if you reduce fixed costs by 1% or increase volume by 1% or reduce your variable cost.
What is the impact on operating profit. And you can see while it has an improvement price is the most powerful lever in the overall message here is if you want to find improvements to operating profit. It doesn’t take five or 10 percentage points improvement in price. Even small improvements 1 2% can have a dramatic impact on the profitability of the company.
And that’s the reason why it’s important to do pricing extremely well. You can almost never be too good at pricing because those nickels and dimes just add up dramatically to the bottom line of a company. But what do you do about it. Where do you find those opportunities.
And this is a framework we developed at McKinsey to sort of break down the types of problems and opportunities that exist when it comes to pricing because the first challenge that you have when talking about pricing is there’s different views. The first view is kind of the economist’s view, which says, well pricing is about demand and supply and there’s not much you can manage. It’s about the overall industry. The second view is the marketers view, which is it’s really about your position relative to the competition and choosing that position wisely.
And then the third view is the salesperson view, which is I don’t believe all that stuff. It’s about what do I need to do to get the deal. With respect to pricing terms and conditions at the highest profit possible on a customer and transaction level, you can imagine there’s elements of truth in all of those perspectives on pricing. And it is the basis of this core framework of the three levels of pricing market strategy customer value and transaction.
And that is underpinned by your pricing infrastructure. What tools, processes, and organization. Do you have to drive value at those three levels. So what are the three issues or three levels at the market strategy level.
It’s about industry price levels. Given supply demand cost dynamics and the behavior of players in the market, the customer value level is about what is your position for your product in a segment given the benefits that you provide versus competitive alternatives and the transaction level is what’s the right pocket price. And I’ll get into more of that at a customer transaction level. And then infrastructure is about the tools and processes to support those three levels.
So let’s dive into the three levels in more detail and talk about some of the frameworks and tools available at the market strategy level. This is where the economist’s view comes in. It is about industry cost curve. So if you’re in a commodity business you know what you’ve learned in economics class does apply.
So on the right here, you have yellow printing pads writing pads and you can see that the market price is determined by the marginal cost of the next competitor that would enter that market if demand would increase. So if you see Bravo the yellow that’s the economic profit that they make given their class position relative to the market. And the market price is set at Romeo which is the next highest marginal cost to the right of the demand curve. So if you’re in a commodity business.
These cost curves are valuable, and they influence decisions about whether you increase capacity or decrease capacity. So things that you see happening around passive curtailments and things like that. Those are companies that are managing the cost curve in their industry. The other aspect that the market strategy level is around pricing conduct.
So we know in that even an oligopoly concentrated markets that it’s not all about economics. It’s about how you behave in the marketplace, how visible you are, how you lead and follow prices and game theory associated with that. So there is a pricing conduct element at the market strategy level, which influences these industry level price prices in the market to give you an example of this a number of years ago, I worked with a company there were multi-billion dollar chemical additive in the chemical additive market. There were two players that had 80 plus of the market.
The average two year contracts with 50 major customers worldwide. And the pricing issue for them was boy. Our industry profitability should be much higher than it is. And in their view their competitor was completely irrational.
So they were pricing high on one bid and then super low on the next. And so the question was, well, what’s the behavior in the market and what’s happening here. Because in this virtual duopoly market, you would expect better pricing conduct. And when we did the analysis, what we found is that the competitor was actually acting quite consistently.
So while the company was viewing one deal as high in the other deal low if you looked at the pattern of bidding that was happening if the client or this company took a piece of business from the competitor. The next piece of business that competitor lowered the price significantly. But if they didn’t take a competitor’s business, then it was fairly high prices on the next deals that were happening. So what looked to be irrationality and there was, in fact, a pattern that was happening.
So in order to improve the pricing conduct what the company did is they looked at their bidding as more of a chess game of OK. If we price low on this deal. What is it going to cost us on deals in the future. And they use that to better inform their bidding.
So this is an example where at the market strategy level thinking about pricing conduct and how do you improve industry price levels is an important tool to think about what’s moved to the customer value level and what are the tools and frameworks. There I’ll talk about value maps customer price research and economic value to the customer. And again, this is the level of pricing, which is about your position relative to competitive alternatives. So the first tool that’s useful to understand is the durvalumab.
So the durvalumab is a simple framework, which on the y-axis, you have perceived price and on the x-axis customer perceived benefits. And if you draw a line from the lower left to the top right, we call that the value equivalence line. And at this level shares are stable, not necessarily equal but they’re stable in the market. And so if you think about it, if you’re at this on the bottom, the school back here if you’re this on the bottom, the get low price for low perceived benefits.
And if you’re at the top. It’s a high price relative to the perceived benefits. So the durvalumab. This is a stable market.
Market shares are not changing because someone is not offering higher benefits relative to the price that they’re offering. So what happens in a market where shares are not stable or someone is gaining or losing share. What that means at the customer value level is that someone has moved off of the value equivalence line the video. So in this case competitor E is offering lower benefits relative to the price.
So they’re likely going to lose share to competitor D. Alternatively competitor is a share gainer so they’re offering greater perceived benefits relative to the price that they’re offering. So they’re going to gain shares in the market given the example of this. I worked in a software company that had four editions of their products.
So they had an Enterprise Edition at the top of the premium edition below that, a basic addition and a starter edition. And what was happening is the basic addition was growing faster than other products in their line in their business. And what that meant is they were in a share gain or position. They were offering greater benefits relative to the price.
And the question that they had is, well, how do we improve the profitability. How do we grow more of the premium and enterprise additions. And to understand that they use price research to look at what would happen if I lower the price or if I raise the price and the move that they landed on as they basically got rid of the basic addition, because what they found is there was cross price elasticity. So what would happen is the basic customers would not go down to the starter pack.
They would actually trade up to the premium addition overwhelmingly which was much more profitable to them than lowering the price to make the shares more stable. And so it was a great move for them. They made much more profit because they understood the durvalumab and how customers would move given the choices that they had. And this is where pricing research around New products or packages is very valuable in determining what is the likely customer behavior.
Another example, at the customer value level and framework is I call it the economic value to the customer or even see framework. And the point here is to understand what’s the economic value of your product relative to competitive alternatives. So thinking of this in a waterfall chart, you have the reference value, which is the cost of an alternative. What is your positive differentiation value based on the economics.
So what additional economic value you provide to the customer. And what is the negative differentiation value. Maybe it’s higher. You have higher cost in some areas and that helps determine what’s the right position relative to competitors and to give an example of this, where the eec framework was very valuable is the class a commercial truck.
So think an 18 Wheeler. This company was bringing a new truck to the market. They had lots of innovation. They had lower aerodynamic drag increase driver comfort ease of maintenance and the pricing issue was, well, how do we charge a premium and get paid for these additional benefits and what they did is they use the EDC framework to understand what’s the economics to a buyer of a class A truck.
So for example, if you look at the typical fleet operating costs of a truck. It’s not just the initial purchase price you have wages and benefits of fuel depreciation supplies maintenance et cetera. And what this company did is all the other truck manufacturers we’re talking about fuel economy and ease of maintenance. But what they went through the detailed calculation of what this meant to the customer.
So a big one was aerodynamic drag. And what they did is they tested their trucks in Nevada did rolling tests they had scientists test the aerodynamic drag and they were able to calculate how would that translate into fuel cost savings for a customer. Now they went one step further than that. So big customers actually had data on their average speeds and what was the distribution of speed for their drivers.
This is using satellite technology to track their drivers. So they had all that data available. What they did is aero amick drag it is a function of your drag increases exponentially as speed increases. So if you’re a customer and you had high speed on average, you would get greater savings than, say you if you were an intercity operator.
So they were able to make it very specific to a customer to say these trucks are going to save you X amount of in fuel costs. As an example, due to the lower aerodynamic drag. So they didn’t talk about it in general terms they made it very specific to individual customers. And that was just one element.
They actually benchmarked the maintenance cost. Their trucks were more comfortable. So they tested what was the improvement in driver satisfaction and the lower propensity to shift to other companies. Given the benefits of their truck.
So they had economic calculations across many of these elements in order to prove the economic value to the customer. They were able to find $40 million of additional price through this effort of being specific on economic value to the customer. So this is a very valuable framework in order to get paid for the additional benefits that you provide versus competitive alternatives. So we talked about the market strategy level of pricing and the customer value level.
Let’s move to the transaction level of pricing. Three important frameworks here are the price waterfall price bands and micro segmentation and guidance and again, this is the transaction level, what is the price on an individual customer transaction. What does it take to get the deal at the highest price possible. Now the first problem.
When you have when you talk about pricing at the transaction level is what’s the right price. So you have a list price. Well hardly anyone pays list price. And then some companies will say, well, let’s look at the invoice price after promotions or order size discounts.
Well for most companies that doesn’t stop there. There are things after the invoice like cash discount promotional bonuses product line rebates which reduce the invoice price down to the pocket price. So in this example Ted Kraft gave a pocket price discount of 39.1 after all of these waterfall elements.
So when we talk about where do you look for 1% improvement in price at the transaction level, there’s usually lots of opportunity to understand all of the discounts terms and conditions, which influence what’s left at your pot in your pocket at the end of the day. In this framework, you can even take it further by looking at costs to serve to look at the pocket margin what’s the margin left in your pocket at the end of the day. And to give you the example of this. This was for office products bank versus bank B.
They both had roughly the same amount of sales. And if you looked at their margin percentage they were in the 75th percentile. So they’re relatively high relative to other companies of this size. However, when you adjusted their profitability percentile bank was in the 86 percentile.
So they’re the top profitability within this segment. And bank B was in the 25th percentile. Well what were the drivers of distance. Well bank had they paid in 10 days.
They had a low delivery costs. They had no rebate. Bank B had they paid longer. They had many more branches they actually deliver not just to the branch to the desk in the branch.
And they were given a rebate. So this is an example of where understanding the price waterfall influences the pocket price or pocket margin that’s left in the pocket. And this is an area that’s usually rich to understand what are the influences and impacts to the bottom line with respect to pricing. The other framework is price bands scatter plots, which look at the distribution of pocket price or pocket margin across customers.
So if you take virtually any B2B company that is in a negotiate an environment where you’re giving discounts terms and conditions. There’s variability in the market. You’ll find a virtual scatter plot of scattered blast of transactions in the market. So this is an example from a rental company for a monthly rental.
What’s the distribution of prices in the market. And again, if you’re looking for one or two percentage points improvement in price. This is usually right for opportunity. And so how do you do that.
Well the overall goal is to move the curve and increase profits. So if you look at that scatter plot in a different way in this bar chart, you can see that you have some transactions that are low or negative profitability and you have some transactions on that are quite high. And your goal is to shift this curve to the right. And if you can do that smartly you can often find two or three percentage points improvement in price.
Well how do most companies do this. Typically they take three actions. One is they cut off the losers or make them profitable. So in the previous example, they would go to bank B and say that.
OK We’re not delivering to your desk or if we do, you’re going to have to pay for it. And by the way, that’s exactly what they did. On the other hand, they’re going to go to the most profitable customers bank a. How do we increase.
How do we find more bank A’s that are out there. How do we reduce the churn maybe get a greater share of wallet. Because if I can grow my volume there. I’m going to shift this curve to the right.
So those are the typical actions that you take the hardest is to raise the average through better customer insight. So these are situations where you have a customer that’s in the middle. They’re paying. OK margins OK prices.
But they could be a little bit more given the microsegment that they’re in. And this, by the way, is usually the biggest source of opportunity. And we’ve looked at this at pros empirically and typically, that’s 60% to 90% of the transaction opportunity is improving this middle band of customers. And the only way you do that is through better customer insight.
And this is where AI and technology is very important in order to efficiently find those opportunities. So how do you do that micro segmentation leads to better pricing. So if you look at this transaction plot the question is, well, how do you change it. Well, I can look at large, medium, and small customers and banned them that way.
But then I can look at it further than that. What’s the microsegment. What region are they and is a competitive market. What’s the end use.
What’s the product that I’m selling here. And when you look at and understand what’s driving this price band it can lead you to provide tools to the sales force in order to increase those middle bucket customers that could be paying a little bit more. So for example, this is a medium customer in region six. It’s not competitive.
It’s in the industrial segment. Well if you’re in this bottom here, you know that mathematically other like customers are paying a little bit more. So you’re going to deliver that guidance to the sales force to say, hey, this is a situation where this customer should be paying a little bit more. And again, this often gets lost in the averages.
This might be an average profitability customer. But given the micro segmentation they should be paying a little bit more. And that’s the art and science of finding these transaction opportunities in a smart way. So this is an example of where you can give guidance.
So can know whether this deal is red, yellow, or green given the micro segmentation that’s provided. So in this case, I’m going to give a target price based upon that micro segmentation and using those science and algorithms to give guidance to the sales force. The last thing I’ll talk about at the transaction level is increasingly, it’s not about the profitability or price. Now it’s what is the lifetime profit.
So another element to this is understanding what drives profit over time. So it could be the terms it could be the ability to drive cost improvements or customer buying behavior. So you want to understand the profitability. Now but also, what is the potential profitability over a period of time.
And to degree that you can have visibility and predict that can increase your ability to price better at the transaction level. And an example of this is in the printer industry. So if you’re selling printers you want to know what’s your chance of getting the ink cartridges over time. And if you can predict that it’s going to inform your negotiation on the initial deal because you’ll have a better idea of what that profitability is over time.
So lifetime value is another concept at the transaction level where tools and technologies can help you do that. So let’s move to the pricing infrastructure level. What are the tools and frameworks at this level. Well this is about your organization, your processes people incentive structures and technology.
So that the organization in question. There’s often two views about what a pricing organization should be. Should it be centralized or decentralized. So in a centralized model that would be price improvement is driven by a center of excellence.
So you develop common tools and frameworks to drive within the business units within the local markets. A decentralized model is to say that. Well everything is local market. The local market understands the competition and the market situation there.
And there is some benefit to that. So to give you example, when you have a branch business in the food service you have 70, 80 branches across the market. While the local market is very different. And so he would say, well, you need to understand that local market.
But I would say as most companies are moving towards a centralized model where you at least at the central level you’re developing the common language tools and frameworks that are deployed at the local level. So in the case of the food service you have a center of excellence which develops the tools, the technologies. The ability to find price improvement. But then it’s deployed in a decentralized basis in order to get that opportunity.
The problem is if everything’s decentralized then there’s no efficiency. And I’ve seen this a number of times, we have decentralized pricing and everyone’s doing different things. They’re using different tools. Some are more administrative functions.
Some are strategic functions and you really lose the opportunity to find and apply common tools and frameworks across the specific regions. I won’t go into all the detail of this can be a lead behind in the materials. But if you’re interested in the pricing discipline the often there’s a question of, well, what does pricing do and often there’s administration around contracts there there’s transaction pricing some pricing groups have a deal desk that get involved in influencing the price performance management is a key aspect. What are the common KPIs to understand what’s happening in the business building capabilities in sales.
This is often a key important area of how do you improve the ability of sales to price better through tools through training. And then lastly pricing strategy where do you want to move prices. How do you want to test higher prices in the local market and see what happens. How do you evaluate that.
How do you deploy that strategy across different markets. So these are key elements of a pricing group and often relates to the processes involved in the pricing organization on people I’d say there’s three things to look for in people on a pricing group. There is high IQ pq an Lq so IQ I’m not going to get into that want people that are intelligent. Pq is important.
What’s the pricing quotient. So the pricing quotient is you want to be able to understand what are the sources of value and pricing you want to know what the right dashboards are helpful in evaluating pricing you want to understand pricing optimization and the organization how you’re going to move the organization over time. The good news is there’s lots of books and conferences, the ability for people to build their pq it’s not that difficult. The tools and techniques hopefully this session is helpful in that the harder one is Lq and this is the leadership quotient in my experience and pricing.
This is even more important than pq it’s how do you drive improvement in price in an organization and often this takes inspiration influence initiative and really driving impact in the company. So if you’re looking to get into pricing or if you’re looking to hire people in pricing I would say focus on Lq more than pq you can learn pq but you want people that are leaders that can drive inspiration to improve pricing within the company high performance rewards this is something that I think of driving change within a company. It’s important to give people guidance to have technology to measure people incorporating this into the reward systems is incredibly important as well.
It’s kind of the third leg of the stool in order to drive change in an organization. And there are many aspects of this, there could be financial elements to reward those individuals that drive price improvement could be non-financial. So how do you bring transparency to how people are doing and give a little bit of competition going performance reviews that look at pricing not just margin or volume performance. And then the performance metrics and the important part of performance metrics is it’s not a traditional way of volume and margin that what I talked about earlier.
And the micro segmentation you account for differences in the market. So often you’ll get into the issue where you’re talking to a salesperson and say, well, your margin is lower than average. And they may say, well, it’s because I’m selling to bigger customers or I’m in this region that’s more competitive all of those segmentation attributes that I talked about earlier, you want your performance metrics to account for that. So to have an apples to apples comparison.
And one of the things that we have pros as we call it APT average price to target. So we don’t look at just your price. But what’s your price relative to the target because the target takes into account that apples to apples comparison. And that’s a fair measure and a more inspirational measure to say, hey, I’m already accounting for these differences and segmentation when I’m evaluating your performance in terms of analytics.
There’s lots of analytics available within tools. Now when I joined in pricing this was something that wasn’t available where you can quickly identify the price waterfall, you can identify customers or transactions that are red or green. And what you should do about it. So there’s lots of tools that can help you measure and understand what’s happening.
And historically, this took months to get this data. The good news is the systems, the technology from pros allows this to be much easier to go and find those opportunities. So it’s important to be familiar with the frameworks and tools that are available. This last section is about the price advantage mindset and this is something that we talked about upfront in the book.
The price advantage. We published a few years ago, the idea of the price advantage is that if you think as a company. Most companies will look for what’s their advantage. Is it a cost advantage.
Is it a technological advantage. There are a number of things. And the idea of the price advantage is the price advantage is available to virtually any company and it’s a mindset about how you view pricing the investment that you make in pricing and the idea of the price advantage is that good practices are things like plugging the holes or increasing control fixing the lowest margin customers or monitoring pricing and margins. Those are all good practices and apply a lot of the tools that I’ve talked about in this presentation.
But that isn’t enough good practices are kind of like good management. I just need to make sure I don’t make mistakes. The idea the price advantage is that the price advantage enables you to get paid for the value that you bring to customers and actually allow you to reinvest that excess economic profit to other areas of the business. Be your technological advantage or your cost advantage.
And so it’s always good to try to be as best as possible. And to really move to world class in pricing and that opportunity is available to virtually any company. So the price advantage mindset is yes. I need to do everything on the left here, I need to get the fundamentals in place.
But I need to go much further than that. I should look for sources of pricing innovation. I should take the capability of pricing to world class. And I’ve worked with companies that have hundreds of people in their pricing groups that have invested in pricing over many, many years.
And they have this mindset that there’s still more to do there is the opportunity to bring more data external data to get a read of the markets and customer behavior to apply technology to get more refined artificial intelligence to improve the practices and get the best that they could be in pricing. And so that’s really the price advantage mindset is it’s not about something that I have to do to manage the business. It’s the same. It’s something that allows me to gain a competitive advantage and to invest into other areas of the business.
So I’ve talked about in this foundations of pricing discussion around the three levels of pricing. The economist marketer and sales person view that is the market strategy view the customer value view and the transaction view of pricing. And there are different approaches frameworks and tools available at all three of those levels. And a lot of the pricing issues span across them and they involve multiple levels on these three levels of pricing.
But it’s a useful framework to break down the issues the opportunities and tools and framework. And of course, all of that requires a pricing infrastructure, which allows you to repeat those best practices over time. So the world of pricing is exciting. It is an opportunity to create a price advantage for your business and invest in those other areas.
And the good news is that there are lots of tools and techniques and frameworks that have been developed to help reach that price advantage and ultimately move to world class pricing. If you want more information we talk about these frameworks and tools in much more detail in the book. The price advantage, which was an effort to consolidate the learnings and experiences of working with many companies around the opportunities and frameworks around the three levels of pricing. So it goes into much more detail.
So if you’re new to pricing want more detail on some of those tools and frameworks and how they apply, then I would recommend the book as further reading. So thank you very much. And look forward to the next session.
Hello, and welcome to this second session on foundations in pricing. Here I’m going to talk about the evolving discipline in pricing. So in the first session. I covered some of the fundamental frameworks and tools that every pricing practitioner should be familiar with.
And this session, I’ll talk about how the pricing discipline has changed. What are the implications about where pricing practitioners need to focus in the future. So the first thing I want to talk about is a little bit of history of pricing. And I’m not going to talk about history from an just nostalgia sake.
But there are important elements of how the pricing discipline has evolved with implications about where companies need to focus now and some of the practices they’ve been they need to change in this new customer environment. So let’s first talk about some of the history of pricing. So if I think back to the evolution of pricing I go back to the fall of 1992. And there was a seminal article in the Harvard Business Review written by Rob roselle and Mike Moran called Managing price gaining profit.
And at one point, it was in the top 25 of HBR reprints and it was really an important article because there are a number of big ideas that came out of this article. The first is big idea was that price is the most powerful profit lover. And I talked about this in the first session on how just small changes in price have a huge impact on the bottom line positively or negatively. And this woke up a lot of companies and they kind of scratch their head to say, are we really investing in the discipline of pricing given how sensitive profits are to the bottom line within the company.
So that was a big idea. The second big idea was measuring the right price. That when it comes to finding one or two percentage points improvement in price that most companies have lots of discounts terms and conditions, which have the effect of taking away percentage points of price and what really matters is the pocket price. Now at this time when the article was released, it raised a lot of interest, but still companies did not necessarily build pricing organizations or apply a lot of tools to pricing.
And it really wasn’t until big idea number 3 came out. Knight I would say this happened in the timeframe of the year 2000 to 2010 and when companies started to measure a pocket price and look at what was happening in their business. This chart is indicative of what many companies face, which was a virtual scatter gun blast of transactions and customers within their business. So the reaction was.
Boy OK. Now I understand price has a huge impact on profitability and there’s all kinds of things happening with price and discounts in terms and conditions. But boy we’re our decisions are all over the map. And God there has to be opportunity in a lot of companies viewed this as this is a management problem.
So I have uncontrolled discounts that are out there that I need to put greater control around. So the typical reaction to this was to apply analytics to the problem to reduce authority levels to put in organizational structure. And even in some cases apply Six Sigma this issue. So again, the fundamental reaction for a lot of companies was to approach pricing has a management problem that needs to get fixed.
Now the typical response to this was a chart, we took from a customer prior a number of years ago on their pricing process where lots of handoffs between people in the organization to run analysis. So if you’re negotiating a deal financial analysis would have to be done. It would be passed along. And there would be approval levels and that sought to solve the management problem.
But the reaction to that or the implication of this is you had slow response time you had multiple touch points. And it was customer obfuscation. So the customer really didn’t understand what was going on. And again, companies approach this because they viewed pricing as a management issue.
So it happened prior to 2020 is companies they recognize the value of pricing recognized that significant untapped opportunity exists. There were tools and frameworks to go and capture this opportunity. And however this journey really is an evolution to a world class of a bill pricing organizations. They apply tools and frameworks to that.
However, the point of this presentation is world class as a moving target. There are a lot of things that are changing from a customer standpoint, which is impacting how traditionally, companies have used to manage pricing in a more effective way. And that is the new buyer. And this is really a transition that I’ve seen in the pricing discipline where pricing is now less of a management issue that I need to control and more of a customer issue, which I need to respond to and make sure that my prices are relevant and timely against this new buyer.
So a lot of things are happening recently. The first buyer change. Number one is that the sales experience is the new key to revenue growth. So traditionally, companies if they want to grow their business, they built their brand.
They had great products and services and they made sure that their price to value was right on the durvalumab and the right point. The experience. Now is that the sales experience the how frictionless it is how fast it is increasingly a contributor to revenue growth and actually is much greater than any of those individual elements that traditionally has led to revenue growth. And if you think about it, the Uber is the Amazons.
The other companies that have taken traditional industries that have for many years, they’ve all innervated around that sales experience and have had huge growth in their volume. So there’s lots of evidence of how companies are growing by focusing on the sales experience. Now this has huge implications for pricing existing B2B pricing models make frictionless buying difficult. So if you look at most B2B companies, they have an overreliance on high touch negotiation.
So that is if a customer wants a price there’d be a negotiation and all that process internal process would work. And very little for many companies is self serve. For instant pricing, which is more frictionless and its Comp it’s because this process is complicated and long. So while customers are demanding a great sales experience, most pricing approaches make it difficult to deliver on that.
Good sales experience. And how is this viewed from the buyer lens. This was a recent survey from Gartner. They asked companies do you deliver super experiences.
80% said yes. Only 8% of customers agree with this. And there’s lots of data that customers are not willing to put up with a sales process that is full of friction and pricing is a key component of that buyer change. Number two is convenience is increasingly a competitive differentiator.
This was a survey from UPS on industrial buying dynamics. Just look at things like order of the mobile app and how the generations of buyers are changing and how millennials for example, are much more likely to move business if they can’t buy from a mobile app from an existing supplier. So convenience is increasingly a competitive differentiators. Buyer change number 3 is Sellers do not who do not provide real time personalized pricing face an uphill battle.
So many companies that deliver prices again, are tied to this long, complicated process. And increasingly companies and buyers are expecting to get that relevant price immediately. So they don’t want to go through a negotiation and understand and go back and forth. And be unsure if they’re getting a good price.
They want that real time price delivered immediately. And this was a survey that we did with Hanover research that said 2/3 of buyers would potentially switch if they had a supplier that offered real time market relative and pricing as opposed to going through this long negotiation process. And if you look at traditionally how companies pursue market relevant pricing it takes too long. You have finance, marketing, sales pricing involved in determining the price and the problem with that is while it may solve the management issue of pricing that I talked about it takes too long.
It’s error prone. It’s often wildly inconsistent relies heavily on human judgment and isn’t transparent or trusted by a lot of customers. And a lot of companies and suppliers will put there. And the companies they buy from through a long negotiation process because they don’t trust them.
They don’t want to pay a higher price relative to everyone else. So they put them through this long process because they don’t trust the providers of the products and services that they need. Lastly it’s just not fast enough. And time is definitely a contributor to win rate.
This was an example from a technology company where they knew they had an opportunity in pricing pricing was wildly variable from salesperson a salesperson from selling the same product in the same region it was all over the map. But what really made them invest in pricing technology and artificial intelligence was the time element and the chart that really helped make the decision was the one in the left here where they looked at their win rate. And they found that their win rate dropped by 42% If they had a quote that was less than 12 hours versus greater than 24 hours, and unfortunately, the investments that the company made in pricing was all dealing with trying to manage pricing as opposed to solving this customer issue of getting a market relative in price immediately.
And we talked to a number of the resellers. So they sold through distributors and the distributors said, we wouldn’t even send a quote to this company. If we knew it was time sensitive because they had this long, complicated process by which to get back a price. And so this was really the reason why they tried.
They wanted to improve their pricing approach investing in technology to speed up this quoting process. And there’s lots of data. For example, inside sales 50% of buyers choose the vendor that responds first. So you have to be in the ballpark market relevant, but you have to be very quick and there’s lots of this company when they change their pricing they delivered pricing very quickly.
They were actually able to get a premium. So they had an increased win rate. And they got a slight premium over what they would have done had they gone through this negotiation process because they were conservative with the guidance and putting the price out there. And they found that they were able to increase their win rate at a higher price.
So there’s evidence that buyers are willing to pay as long as you’re in the ballpark of market relevant pricing for this increase. The buyer change number four as I call it judo pricing. So I practice judo when I was younger and you learn in judo it’s not necessarily how big or strong you are. It’s how you use your competitor strength against them.
And try to find in balance in tipping points to use to your advantage. And that’s happening a lot with pricing now where pricing is much more variable than it was 10, 15 years ago, 10, 15 years ago. Most companies they change price once a quarter once a year, they go through a process. But if you look at and this is from camel.
Camel camel dot.com looking at Amazon prices you see over a period of months, prices being tested up and down by players in the marketplace to try to find those imbalance or tipping points. And unfortunately, a lot of pricing processes and organizations aren’t built to react and understand how to play in this environment. And buyers are more used to it.
They know prices are more variable than they were historically and are OK with it. And the question is, if you have a static price are you going to be outmaneuvered by competitors that better understand those tipping points. Buyer change number 5 was actually trust algorithms and this was research, we did in 2000 and 19. And we updated in 2000 and as well.
And the question is to buyers do you trust. If you’re going to buy from someone do you trust that they’re using an algorithm to set the price. And interestingly buyers overwhelmingly thought that it’s fair beneficial trustworthy and actually preferred relative to a person to person negotiation back and forth, which is, in most cases. And obfuscated that I talked about earlier.
And if you think about it, it makes sense say you’re in a taxi and you know there’s no meter running. You have no idea what the price is and it’s a negotiation after the fact. Well you know, you wonder, are you being taken advantage of are you a better negotiator than the person on the other side of the table. So increasingly buyers understand that market relevant pricing is a moving target that algorithms seek to look at your offering versus competitive environments.
What’s the demand and supply environment and determine that price and buyers are increasingly OK with that. And they actually trust that more than a negotiation back and forth. So this is something that’s been quite a shift over the last few years. And we think it’s going to continue.
And there’s an opportunity from a pricing professional standpoint to think of how are you using algorithms to set pricing. Can you explain them to buyers. How they work because it’s an opportunity instead of going through these long management processes around pricing to let technology take the drivers wheel of moving prices up and down accordingly. So what’s the risk to your business.
So I’ve talked about the history of pricing. But how the buyers are changing and what they expect if you don’t respond to this your prices may be too slow. The example, I talked about for in technology and computers you can’t respond quickly enough. They could be static.
They don’t move with the market. They’re not. They’re impersonal. They’re not targeted at a specific customer segment.
They could be siloed they could be different across channels and inconsistent and that reduces the trust of buyers in the marketplace. So increasingly as we look to the evolution of the pricing profession companies and pricing organizations need to respond to this. And understand to make their prices. So they’re quick.
They’re not static. They’re personalized they’re consistent across channels. So it’s a new dimension that’s being added to the pricing profession and really changes some of the elements of where you focus and the things that you do. Which leads me to the next section.
What are the new pricing capabilities required to win. So I’ll go through these briefly then in more detail further on. The first is focus on speed. Second segment your processes for no touch Lo touch and high touch build trust in the I embrace variable pricing and build the right pricing organization.
So let’s go into more detail. The first is to focus on speed. This was again, some research that we did. Buyers will actually pay more for instant pricing information.
They’ll pay 61% 1% more and we have experience with a number of our customers where this is true. Like the example, in technology. I gave earlier, the company was a little bit conservative in putting they put prices that were lower than list price. But they knew as close to market relative pricing and they found buyers were willing to pay a premium for that.
So speed people are willing and buyers are willing to pay for speed. Unfortunately by the way, most pricing organizations don’t have a metric around speed. So how quickly the pricing quotes go out. And so this was something historically, I know my history and the pricing profession, something that wasn’t even on the radar screen.
But it’s something that’s new in the buyers you have to think about what’s your time to quote, how much of your pricing is getting out there in under an hour or instantly. And that leads to the next action, which is to segment your pricing process. How much of your business. Now is high touch negotiation.
How much is partner sales or self-service where who the customer is. But they don’t need to talk to someone you can give them a price or instant pricing, which is anonymous. So increasingly and almost every company we’re talking to they’re trying to shift more of their business to the self serve or instant pricing and less on the high touch negotiation. And I would throw it out there that no more than 15% to 20% of your deals should be high touch negotiation.
We have to run this analysis get a go through approval levels. You should be moving the majority of your business to self serve an instant pricing because that’s why that’s how buyers want to buy now. If it’s a repeat purchase or it’s a smaller type purchase there’s no reason why you need to ask for a special price. So you should be thinking about shifting your business to more of this self serve and instant pricing to do that, you need technology and you need guy and you need to build trust in the AI and the first element of trust is understanding that it works.
And it’s better than human judgment. And I’ll give an example. This was a product that you bought the component. And then you had consumables that happened afterwards.
And as part of pricing you want to know what’s your propensity what’s your probability of getting that consumables business. And historically what would happen is the salespeople would say, Oh, we need to give this low price because we’re going to get the consumables which are higher margin over a period of time. But if you looked empirically that wasn’t always the case. Sometimes you did get it.
Sometimes you didn’t get it. And what the technology. And I was able to do is to understand and have an estimate of what that probability was and that would factor into the guidance that was given to the salespeople to give them guidance around the price. So for example, one customer, you may give a low price, but you have a very high probability of giving that consumables business and another business where you have a low probability.
Well you want to make sure that you capture that margin on the initial sale. And the point of all of this is that technology allows you to do math and facts to get out these probabilities and these estimates much better than human judgment. If you have hundreds of salespeople or thousands of salespeople salespeople they have different experiences, different background, different knowledge of the customer. And technology allows you to harness that information and make better decision when it comes to these pricing levels.
And so it’s much better than human judgment alone human judgment does play into it. But it is a great improvement over that human judgment by harnessing the collective experience of the whole company. So as a pricing professional as you move to more touch pricing as an example, you need to build trust in the AI how it works what’s driving it within the organization to increasingly have the technology inform these decisions, action for is embrace variable pricing. So I talked about the judo pricing most pricing organizations aren’t built for this.
And this is an example on microwave ovens of Sears has one price never changes Amazon changing very frequently intraday best by changing a little bit. So as markets are moving and becoming more dynamic you have to think of your dynamic pricing of are you are you going to move to that type of model. And what are the inputs to this model to help you make these decisions. You know in some cases intraday around pricing because as I mentioned customers are more open to this.
It’s happening more often. And if you don’t do it, you could be outmaneuvered by competitors in the market. And then lastly is to build the right pricing organization, the traditional organization and pricing. And I talked about this earlier was primarily a management function.
You protect margin you manage and execute pricing. You try to build price models that match price to value. And a lot of it is execution and less about strategy as we move forward in the digital commerce area. Pricing enables nimble market movements.
You you help transition to touch you try to move more of your business to the self serve or no touch model. You have to implement repeatable self running dynamic pricing models be comfortable with it build those models improve them over time. And then the last part is continuous ideation and testing of the pricing strategy. An example of the technology company.
I gave earlier is interesting that had one market where they wanted to be more aggressive and see what would happen. And it was a relatively easy change for them. They made the change. They analyzed the results.
And as they recognized the flexibility of the technology they started to think, well, what other tests do we want to run. Do we want to go for what more margin what’s the impact on volume. Do we want. If a competitor is aggressive in an area do we want to try to gain share.
Are they just going to lower price and it’s going to be stable shares going forward. So it’s a different mindset than pricing from purely a management standpoint. I need to control and plug the holes of leakage around continuous ideation and testing of your strategy. And that’s really action fi which is enabled by this more dynamic pricing environment that’s out there.
So winning in the B2B model going forward. What’s the ideal state for pricings role pricings role versus consistency in person, phone web, mobile distribution. You have to have price consistency because customers will lose confidence in you and trust in you if you’re not consistent across the channel your price experience has to be simple and quick configurable. And most importantly relevant to the market.
You have to be relevant. A lot of companies that are going through digital transformation they’re grabbing the list price and putting it out there. That’s not relevant to the market. You need to be comfortable in putting a quick price out there.
That’s relevant to the market. And again, a lot of pricing organizations are not built for this and therefore, you need a digital infrastructure that focuses on the user experience where pricing is part of the user experience. It has to be sophisticated. This doesn’t mean just putting the simple price average price out there and not moving.
It is required sophistication and it has to have scale to it. You have to be able to respond to these changes in the environment. And an example of this one customer of ours, where they sell to the hospitality industry as the market is changed, then become more dynamic a lot of their product categories are shifting where some things like personal protective equipment were more background items. Now there’s some there are supply shortages it’s more of a front and center item.
You have to be able to scale and change your pricing relevant to the market in a much quicker way. And you need a digital infrastructure to do that. So it’s a brave new world. Pricing is absolutely central to an organization’s ability to compete.
Buyers demand more faster, easier, more personalized. This is quite a change from where the pricing discipline has come from in the past. Whereas I mentioned it was primarily more of a management issue. But they’re willing to pay for it.
If you can deliver consistent personalized immediate pricing they’re willing to pay for that. And it’s part of this new sales experience. Things are moving faster the technology is evolving and it’s moving fast as well. And AI is likely part of the future.
I know we have some sessions Michael Wuhan the background of AI how it works. I would suggest getting familiar with it, because it will be part of the future pricing going forward. Just like in many other areas of business. So thank you very much.
I covered the two foundation sessions first one on where the pricing discipline some of the core fundamental frameworks and the second one around how the practices of pricing are evolving and changing and really changing in light of this new customer environment and the movement to digital. And I hope it was helpful. And I look forward to the comments and questions that come up. Thank you.