Tuesday, March 17, 2015

How To Leverage Pricing To Achieve Long Term Growth

Once again, I discuss a lot in this blog about pricing. But pricing is a key elements in our modern retailing world. 
Consulting firm McKinsey delivered a great article giving some key factors of success of a good pricing strategy. What the article outlines, is also how a good pricing strategy can secure long lasting results.

1. Provide meaningful transparency into pricing data

The pricer position has blossomed in France in most of the retail companies. It is a new job, with clear goals, but which needs to create its own strategy as it is new. As a matter of fact, what is difficult for a pricer is that it needs clear visibility of all the components that will impact both the pricing and the profitability of one product. If the pricer don't have a clear view of what are the operationnal costs for example, it will be tough to achieve profitability goals through pricing.

What makes it worse, is that most of the time the information exists. And actually it exists in bulk:

 But the very proliferation and complexity of data have more often than not overwhelmed rather than helped. As a consequence, advanced pricing analytics are often ignored in favor of pricing decisions based on gut feeling, a one-size-fits-all model, past experience, or outdated analysis. The result is that either companies price too low and leave money on the table, or they price too high and lose customers.

By having a comprehensive analytic tools, you may be able to have differenciate price strategy based on customers' willingness to pay. In this chart below for example, you may see that depending on the elasticity of the discounts, you may get a cluster of customers to propose appropriate pricing.

2. Understand what customers really value

This is what will allow you to propose pricing based on the facial value rather than on your competition's pricing, and/or your costs. It is easier said than done. But based on a clear analysis of what customers value in their shopping experience, it will allow your company to understand better what will create the best added value, and therefore reinforce the value of one product. 

At one company, a team of pricing and sales managers was asked to list the factors it thought determined the prices that customers were paying. It then tested and refined these hypotheses. The analysis revealed 14 significant drivers of pricing sensitivity that the sales reps had not identified, many of them counterintuitive. In one case, for instance, it was the quality of the packaging rather than the quality of the product that was the single most important driver for customers’ willingness to pay a premium.
A pragmatic approach to value pricing is “next-best-alternative pricing.” This method involves researching what alternatives customers have to the company’s product or service. Best-practice companies go further and make the next-best-alternative approach a mandatory team practice. Teams discuss the cases and role-play negotiations. Creating a database of next-best-alternative cases can also help disseminate the new pricing knowledge.

I believe this concept of the "Next best alternative" approach should be the subject of a soon to come blog post.

3. Move from sales reps to ‘value negotiators’

This is something very important. Indeed, as much effort you may put to set up the best pricing strategy, commerce remains full of human factors. Giving the ability to salesforce to negociate the price is the best way to match customers needs. I have discussed a lot in this blog of how important salesforce empowerment is key to CRM. in pricing it is also the case. 

4. Provide on-the-job training to build confidence

5. Change the culture

Those two last ones to me are the same: If you really want pricing strategy to be one of the core elements of your business, and as it is relatively new, you must be able to develop a culture, teach people. This is what we call the change management. And in our nowadays world where trades and positions are changing constantly, it really matters to coach, give education, and give sens to what one pricing strategy is all about.