Pricing: No other lever has more impact on profitability. But quite often, pricing strategies are historically grown, based on gut feeling, or too traditional. After working out the perfect strategy, implementation comes next to be successful. Nine must-haves to achieve this goal.
Based on our experience, no other lever has more impact on a company’s profitability than pricing. Across all industries, it is increasingly embraced as a capability to stimulate growth and drive profitability. Far too often, pricing is historically grown, based on gut feeling, or based on outdated models like cost-plus pricing. Using these kind of strategies makes it (nearly) impossible to achieve optimal prices that fully exploit companies’ customers’ willingness to pay. Value pricing, where you base your products’ prices on the value consumers receive when using it, helps you to tap into that potential. The result: Price optimization through a logical and structured pricing approach based on customer value typically yields between two to five percentage points of return on sales. But although this is a promising business case, we see many organizations struggle to make the transition towards implementation and realization.
So, the questions is, how should companies go from strategy to implementation? How should you structurally embed your new pricing approach in your organization? In our experience, strategy development is clean, but implementation is dirty and often fails to meet its full potential since crucial ingredients for success are lacking. Based on our experience with successful pricing project implementations, we have identified nine key success factors to implement your price strategy successfully.
1. Make price strategy a top management priority
It is crucial to have board-level awareness on the importance of price and a good pricing strategy, as well as sufficient support for optimization. Firstly, you need management buy-in to regularly emphasize the importance of pricing towards the entire organization. Secondly, the management needs to set direction and define clarity on positioning and price levels. Moreover, top management needs to be involved in the price strategy to create a profit oriented culture where price wars are nevertheless avoided. The way to create this is to set an example and clearly communicate the pricing strategy to the market through press releases and interviews.
2. Set an ambitious pricing roadmap with a phased roll-out
A successful price strategy implementation needs measureable goals that lead to a clear goal. In order to achieve this, take a differentiated view on pricing and identify which pricing topics impact the bottom line. A frequently used method is the price waterfall, which clarifies the steps to take for profit optimization. Do not try to take on all topics at once, but rather prioritize. Critically evaluate each step on improvement potential and define a phased approach. Do not forget to adjust the roadmap after each phase and reprioritize.
3. Select an experienced pricing manager to drive change
Executing a pricing strategy will require intensive coordination between internal departments. Therefore, a seasoned program manager is needed to oversee implementation of the roadmap. This program manager should have (a) an analytical mind-set, (b) be able to translate the numbers to commercial solutions, (c) have experience with leading large programs, and (d) have the skills to manage all stakeholders within the organization.
4. Embed the new price structure in concrete tooling and systems
While pricing typically is based on gut feeling, most price optimization projects result in a structure or a process to support decision making. This could include peer comparison to compare performance within the sales organization or price driver analysis to evaluate the balance of power in a specific situation. Methods or checklists often fade away after a certain period, while tools are a powerful way to translate a strategy to a practical process that can be used for daily business. User friendliness and simplicity are key words to enable a successful translation of a new pricing strategy into tooling.
5. Define clear governance and responsibilities
Responsibility for pricing is often divided between different functions and departments. This leads to limited ownership and suboptimal pricing decisions. Pricing responsibilities range from sales, marketing and product management to finance functions, depending on the industry. Over the last decade we have increasingly seen dedicated pricing teams coming up. In more centralized organizations, these teams are directly responsible for pricing. In more decentralized organizations, we typically see more of an advisory function that creates insights and supports decision making. You should assign clear tasks and responsibilities, balancing between central guidance and local responsibilities over the different functions.
6. Train your salesforce and prepare your customer communication
Pricing projects are often tougher to sell internally than externally. Involving sales at an early stage, training them and clearly showing the benefits of the new structure is crucial. Your sales force needs to believe in the pricing structure and be able to explain it to customers. Often, a pricing project separates the ‘price sellers’ from the ‘value sellers’. That’s a mistake: Sales training will be necessary to have a convincing story for each customer. Thorough preparation, practice and role-plays are key to ensure the confidence needed at the customer table.
7. Define KPI’s, monitor results, and steer accordingly
Even though it is often overlooked, defining KPI’s and measuring results are key to track implementation progress. You will not be able to measure everything from day one. Set-up a simple and lean Excel-based monitoring dashboard to create first insights. Afterwards, add remaining KPI’s and finally embed and automate the monitoring dashboard into your BI or ERP system.
8. Communicate early results to a broad audience
Price optimization is complex, so be prepared that implementation will not happen overnight and input from sales will probably be required. To gain and sustain sufficient buy-in for the new price structure, it is critical to signal (positive) results to a broad audience within the organization. This will ensure that the price strategy is carried and supported by the entire organization. Make people part of the success by sharing achievements of milestones and by celebrating success.
9. Start small and drive continuous improvement
Implementing a new price strategy can have a significant impact within the organization and requires changing existing processes and a new way of working. Change does not happen in one day; start small, learn and then roll-out. We typically start with small pilots, and scale-up gradually. This enables you to continuously refine and improve your solution, based on lessons learned from implementation.
What it takes to succeed
Price implementation projects are complex and not always clear-cut. Therefore, you should approach a price implementation project as a marathon, not a sprint. To have significant impact on the results, preparation is key for a successful implementation. Applying these nine must-haves to your specific case will be the right start to successfully implement your pricing strategy and will enable you to reap the profits of your price strategy.