September 7, 2016
Complexity in business can be an overpowering ball and chain, making companies inefficient, lacking in agility, hard to manage, and challenging to scale. When not managed well, complexity costs money and clients.
When designing a pricing strategy and selecting a pricing tool, it is too easy to fall into the trap of making things overly complex. Pricing has evolved into a discipline that combines analytics and science with insight from human interactions. And it’s still evolving. There may be many reasons for introducing a complex pricing strategy, but generally complexity does not equate to sophistication.
“Simplicity is the ultimate sophistication” – Leonardo da Vinci
I am a big fan of keeping things simple. It is more about reducing the excess clutter and noise, so you can do less and get more from it. To focus on what really matters, bring the most results, and let go of the rest. Removing complexity from pricing processes and tools should be no different. Processes and tools that drive simplicity will be welcomed by the pricing department, sales, marketing, and especially customers.
“Simple can be harder than complex: You have to work hard to get your thinking clean to make it simple. But it’s worth it in the end because once you get there, you can move mountains.” – Steve Jobs
Here are a few examples of how to remove complexity from your pricing strategy.
“It’s not a waterfall; it’s a Niagara.”
The above is a favorite quote of mine from one of our customers who had over 100 price waterfall elements. While having granularity can help with insight into historical performance, reducing the number of waterfall elements can make it more actionable. If the waterfall element doesn’t make up a significant proportion and it cannot be easily influenced, then it might be a good idea to question if it should be an element at all. This is a good starting point in reducing complexity in a pricing project.
Pareto and the Paradox of Choice
When designing an analytical pricing platform, it is easy to go over the top and implement a conglomeration of metrics, KPIs, dashboards, and reports. Although these may be understood at the time of design, many will go unused. Remember the Pareto principle that 80% of the users will only use 20% of the functionality. Providing too much information can lead to a deer-in-the-headlights situation and the paradox of choice. Focus on the insights that will enable action to drive profit and reduce margin leakage.
Implementing a price structure that effectively segments your market and maximizes your profitable sales is among the most difficult aspects of pricing strategy. It can be a moving target as market dynamics shift or the business grows.
Instead of setting segmentation strategies in stone and building a process and tool around these, use data-based segmentation to identify and group together transactions that are characterized by a similar willingness to pay. Then, define key business dimensions and build your segmentation tree. From there, test and monitor the accuracy of your segmentation model and continuously update and refresh the model to reflect the specifics of your business. This is an effective way to automate and simplify your segmentation strategy.
Standardize Across Business Units and Geographies
The standardization of business processes intends to improve performance and give management more control over operational performance. Advantages from standardization—beyond direct cost and quality improvements—include:
- Establishing an important prerequisite for the standardization of IT systems, in particular pricing tools.
- Improved reliability and comparison of the performance between different units and geographies.
- Reduced expenditure in development of innovative new practices and tools.
In many projects I hear the term “global project” with the anticipation that business units and geographies have standardized processes and tools. This is rarely the case, however. When global standardization is achieved it can help immensely in reducing complexity in the pricing transformation journey.
Remember: Simplicity in a complex world is what drives success; the art of pricing is what drives profit!