March 9, 2017
After many years leading strategic pricing initiatives from the inside, I consider myself fortunate to be in a position to now meet with companies every day who are thinking hard about leveraging pricing efforts to drive value for their businesses.
I am amazed by the different perspectives, philosophies, and sophistication that exist across the spectrum of companies I encounter. Regardless of whether these companies are starting on their path or advancing an already sophisticated and capable team, there always seems to be a basic question hovering: “What should I be focused on to drive value with pricing?”
So, this blog is my attempt to paint a simple picture of the B2B Strategic Pricing Agenda.
Here are the 4 main areas to focus your pricing efforts in B2B (in my humble opinion):
|Strategic Initiative Focus||What is it?||Typical Return on Effort|
|Value-based Pricing||Understanding exactly what value you drive, quantifying that value, and staking a claim on it through Marketing, Pricing, and Sales.||+5% to +50%|
|Price Management and Analytics||Supporting effective price administration and analytics in the enterprise. Establishing a central archive of pricing decisions, managing price setting, and publishing accurate information to where it is needed. I’d include the design of pricing policies and effective reporting and analytics in this category of initiatives.||+1% to +2%|
|Pricing Process Effectiveness||The execution side of pricing: Deal process efficiency and effectiveness. Streamlining customer pricing decision and pricing-contract renewal process. Improving decision making with price guidance and better information.||+1% to 3%|
|Segmentation and Price Optimization||Designing a model for peer customer groupings using attributes that predict willingness to pay. Using pricing science and statistics/algorithms to determine better target pricing.||+2% to +5%|
I’ll say it. Value-based pricing is the most important strategic pricing effort your business should be engaged in. Too few companies have a full grasp on exactly what value they drive, making it difficult to quantify said value and stake a claim on it throughout Marketing, Pricing, and Sales. Across the spectrum of initial concept design within product teams, to Sales and Marketing teams pitching to your customers, having a clear understanding of your customer’s problems, how your product or service creates value for them, and how you should capture some of that value is the most important thing you should be working on.
It doesn’t take a massive amount of investment to get there, just time and effort to understand your major customer segments and an interest and investment in understanding what you are worth as you sell to specific customers. Understanding how you drive value and trying to price (and sell!) your services in that context will maximize your revenue opportunity.
Typical Return on Effort: +5-50%
Price Management & Analytics
Price Management is often an area of focus with the customers I meet. These enterprises have built a foundation that highlights the proper investment in good housekeeping when aggregating transaction and contract pricing data and effectively publishing changes in pricing into billing systems and catalogs. The business cases to invest in these capabilities are mostly related to: 1) cost avoidance, 2) preventing compliance penalties or legal expenses, and 3) revenue upside related to insights and price opportunities you can find with better analytics.
Typical Return on Effort: +1-2%
Pricing Process Efficiency (Deal Pricing Process)
I used to work for a great guy with a big New Jersey personality who, deep in our discussions for a customer negotiation, would often say “I’m tired of showing up with a knife at a gunfight!” There’s nothing worse than being outmatched by a procurement team with reams of data. A big piece of the value here is having better information yourself when making decisions.
Investing in a more efficient and effective customer deal process is about 2 things:
- Streamlining the quoting process for sellers: putting together a great quote-to-cash process that makes it quick and easy for a price decision to be made and communicated to customers while enforcing desired policies/escalations—all while capturing data for metrics and KPIs.
- Improving the effectiveness of decision making in the deal process: supporting the Sales team with clear price recommendations and contextual information at the point of decision so they are armed with the information to help them make the best decision.
The business case here is about 1) lower costs through process efficiency, 2) more selling time for Sales (more deals closed), 3) improved revenue by bringing better information to support customer pricing decisions and pricing acceptance, and 4) improved revenue by closing more deals (it has been shown that responsiveness in customer quote requests is directly related to more deals closing).
Typical Return on Effort: +1-3%
Segmentation & Price Optimization
Finally, I want to talk briefly on segmenting your customer base and using sophisticated price optimization techniques to set better pricing guidelines for your Sales team. There are 2 basic things you work on here. The first is to design an optimal segmentation, or grouping of customers. You can do this using groupings that make sense for your business (by “strategy”) and also by using advanced statistics to study various customer attributes and discover those that seem to predict or explain price variation across your customer portfolio.
Once you decide on a practical model for how your world of customers is grouped, you generate target price recommendations based on the pricing for these segmented peer-grouped customers. The intent here is a move from a simple logic-based price setting process to a model that is much more discrete about how your customers are organized. The system then generates pricing guidance for Sales that is much more specific and targeted for each customer that you encounter.
Typical Return on Effort: +2-5%
In my experience, it is rare for any one company to successfully have all these types of initiatives on the go. Depending on your business, you may not have deep needs in all these areas. For many companies, focus can often be related to the types of service and software vendors you partner with. My only point here is that a focus on balance in your pricing efforts is important, and you should aspire to be working on a breadth of efforts to drive the strategic pricing agenda in your business. Good luck!
Stay tuned for future posts from Dave that will dive deeper into each of these topic areas. This is a good foundational introduction into one way of approaching your overall strategic pricing agenda.