41 min read
Mar 04, 2016
4 Foundational Steps Towards an Effective Pricing Strategy
What price can you put on a sound pricing strategy?
We’ve talked a lot about marketing effectiveness and the use of digital marketing to increase quality leads for businesses, which is a critical first step in growing profitably. However, once the quote is agreed on with the customer and the sale is closed, there is no opportunity to further discuss the benefits of your offering and make sure you are receiving what you deserve for the value you are providing your customers.
This is why it is critical to have a sound pricing strategy as part of your marketing plan to ensure that you are proactively positioning your products/services with respect to current market conditions and growing your business the way you intend to.
There are several benefits to institutionalizing an effective company pricing strategy. By instituting a sound strategy your organization stands to benefit by:
- Understanding the true value that your products and services are providing to your customers and knowing how you may have to adjust to competitive and market trends
- Knowing what direction your group needs to go in order to support overall organizational objectives
- Realizing the full monetary value of your products and services to fuel profitable growth
- Increasing confidence within your team and organization by taking action and realizing benefits relative to a well thought out strategy and plan
As with most improvement initiatives there is typically a framework or methodology that will aid in formulating success – with ‘pricing strategy’ it is no different. Companies may name these activities differently or have a varying number of phases or ‘chevrons’ etc., but the basic elements are the same.
You will ultimately need to do four things:
- Know where you are
- Know where you want to go
- Forge a path to your destination
- Achieve the benefits and communicate the results
Let’s explore each of these seemingly general statements in a little more detail so you get an idea of what each of these entail.
1. Know Where You Are
Before getting started with the popular “defining our strategy” activities that many business people clamor to be involved in, there are a set of foundational activities and capabilities that should be in place so that a baseline can be established. As the function within the organization responsible for pricing, you should be able to provide the details to the leadership team as to the profitability of the various products and services you sell, the profitability of individual customers in the customer portfolio, and general profit and revenue performance as it relates to how you sell into the marketplace (by geography, by industry, by customer type, etc.). If you do not already have this insight, instituting this capability will undoubtedly be one of the strategic priorities on your roadmap which we will discuss later.
The ability to dissect performance in this manner requires data about your customers, products/services, and sales transactions. This data needs to be available in a centralized, standardized, and verified format which typically takes the form of a database, either pre-existing or new, that can be utilized for analysis purposes. In combination with the database, an analysis tool must be used to enable the generation of insights.
There are many options available for both the database and tool including commercial products as well as open-source/free products so don’t let the terms “tool” and “database” scare you from an investment perspective.
It will also be critical to understand what is happening within your industry from a competitive perspective. Answering questions such as “what product/price points are competitors offering today?”, “what new entrants have come into the market?”, “are non-traditional competitors introducing any products or services that may indicate an ensuing industry shock?”, and “what are our customer’s needs and how are they changing?”.
Answers to these questions will position you well to understand the value that customers are expecting from your products/services and will allow you to appropriately prioritize what you should focus on and how you should position and price your products/services in the market.
Once you “know where you are” from a competitive landscape & revenue/profit performance perspective you are ready to move on to the next question. If you can’t yet definitively say “where you are”, you can move on to the next question with the understanding that putting an analytical capability in place is critical to success.
2. Know Where You Want to Go
It never fails that many companies want to jump right in and define strategic priorities ahead of understanding the larger overall organizational objectives. It is paramount that the pricing strategy is completely aligned with corporate objectives for the year and beyond and therefore these objectives need to be clearly understood before moving forward with developing an effective pricing strategy.
Once the overall corporate objectives are understood (these could include areas of focus related to penetrating specific markets or customer segments, growing business within specific customer types, introducing new products into the market, etc.) a pricing vision and mission should be defined and used to guide more detailed activities.
The pricing vision should be aspirational and take on a multi-year perspective–the vision can include defining how the pricing function will support the overall organizational vision as it relates to value realization, product pricing, and profitability management.
Next, the pricing mission is written in alignment with the vision. The pricing mission is typically more grounded and less vague than the vision and relates to the top-priority objectives for the next one to two years. Both the vision and mission should give leaders in your area confidence in what the group is trying to achieve in both the short and long-term timeframes.
After setting the mission, strategic priorities are developed for the ensuing fiscal year to support the mission. Strategic priorities are typically written as three to seven areas of focus that are related to the mission. These are the specific areas that who would like your organization to focus on over the fiscal year.
The last level of detail includes the enabling initiatives. These are the actual initiatives or projects which align with each of the strategic priorities for the year. This may seem like a lot of layers of complexity as compared to just writing several lines of a “pricing strategy” and moving forward – however, taking the time with your team to thoughtfully construct the vision, mission, strategic priorities, and enabling initiatives will give you a level of clarity among your team as well as the broader organization that will pay substantial dividends in aligning your leaders, motivating your broader team, gaining executive leadership and board buy-in, as well as help in securing funding, for what you want to achieve.
3. Forge a Path to Your Destination
Once the team is clear on the direction you want them to go, and executive leaders are aligned with the overall direction, it is time to get into the details of how you will fulfill the strategic priorities through the enabling initiatives.
This will involve putting together a roadmap consisting of plans for each of the enabling initiatives. It will also involve conducting further or updated market research (if not already conducted internally by a market research function within the organization) in order to understand what is currently happening in your industry with respect to competition (positioning/pricing) as well as industry trends and potential industry shocks.
Details for each enabling initiative should be outlined and at a minimum include: the objective (client need, business objective), scope (inclusions and exclusions), the definition of success and performance metrics, potential risks and mitigating actions, team structure (leader, core team, business champions, extended team), additional required support (internal or external resources), and a timeline of activities and the associated deliverables. These plans will provide the teams with enough footing to kick off the projects, gain momentum, and achieve some essential quick wins.
One of the biggest challenges in this ‘Forging a Path’ phase is developing, gaining, and maintaining momentum for the initiatives throughout the organization. Quick wins are an easy way to solidify support and secure funding for more complex initiatives that the organization may not have the appetite for prior to seeing any tangible results.
4. Achieve the Benefits and Communicate the Results
Some may think that now that the plans have been thoroughly laid out and the rest is relatively easy. That could not be further from the truth.
Executing against plans, no matter how thorough they are, is sometimes much more difficult than initially anticipated for several reasons. Resistance to change is often a significant obstacle in realizing individual enabling initiatives. Generally speaking, people are typically more comfortable continuing doing what they have been doing and therefore if an initiative calls on people to change behavior there will be inherent resistance.
This is why it is critical to pave the way for the initiatives through pre-socialization with other functions within the business (finance, sales, operations, etc.) so they understand the anticipated changes before they are asked to change. Pre-socialization is also an opportunity to convey the value of the initiatives and associated changes to the overall organization in order to gain buy-in.
As results are achieved it is extremely critical to communicate the progress that teams have made. Updating the organization as to the value the initiatives are providing not only showcases the value of the initiatives themselves but for the pricing function as a whole. This is also a good time to recognize contributions from the pricing team and reward team members for their extra effort to fuel ambition and forward momentum.
In closing, a sound pricing strategy can be priceless if the time and effort are spent to effectively construct it. Typically, this process should be revisited annually before the end of the fiscal year so that as you begin the new year, your team is aligned and hitting the ground running working on the highest priority initiatives.
Many companies wait until the last minute to put their plans together, or frequently don’t even bother planning at all and consequently are reactive throughout most of the following year. The more proactive you are in planning pricing activities that support strategic and corporate objectives, the more value you will be able to extract from the marketplace, the more valuable the pricing function will become to the organization itself, and the more your team will appreciate you as a leader for taking the reins and prioritizing the most important, challenging, and valuable projects for them to work on.
Need help figuring out how pricing fits into your marketing strategy? Contact us for a free consultation: