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Accelerate Top- and Bottom-Line Growth with an Effective Pricing Strategy
Pricing is a powerful lever to accelerate top- and bottom-line growth. A well thought out pricing improvement strategy drives revenue growth that drops directly to the bottom line, and the impact on business results can be felt almost immediately. But there are many examples of pricing improvement programs that do not deliver on their promise or even negatively affect the business. For a pricing improvement strategy to be effective a lot of pieces must come together. From our experience across numerous engagements, we have learned three important lessons that anyone who is on a pricing improvement journey should make sure they follow.
Lesson 1: Data Only Gets You So Far
Pricing is data driven by nature. More advanced data and analytics tools have made it easier to execute analysis, or opened new avenues of analysis altogether, to help identify opportunities for pricing improvement. These analyses are undoubtedly valuable. Outlier analysis, micro-segmentation, and price elasticity modeling, just to name a few, can show where pricing differences exist. But data only tells part of the story and it often misses the all-important answer to the question, “Why?” Additionally, due to data limitations or previous pricing practices, the analysis misses key pricing improvement opportunities altogether. Having input from the market to understand customers’ purchase decisions, perceptions of value, and competitive positioning, among other factors, is just as critical as the data analysis. For example, an outlier analysis (below) might direct you to focus on customers in the area in green. We get significantly better prices from these customers. But, why and how can we replicate that? The data alone won’t tell you. You also might miss an opportunity with the customers in the area in orange. Their pricing doesn’t appear out of the ordinary but market exploration with customers in this segment could show high value perception and limited competitive alternatives, strong signals that their pricing should be higher.
Lesson 2: Not All Initiatives are Equal
Over the course of an engagement many different ideas for pricing improvement will emerge. But not all initiatives are equal. Some will have greater financial impact than others, while others will be more difficult to execute. Above all, the most critical aspect to consider is the business risk associated with the initiative. This risk includes multiple elements, not only immediate sales risk, for example, defection of customers to competitors because of price changes, but also long-term strategic risk, such as misalignment with overall value proposition—a company that has positioned themselves as “easy to do business with” might want to avoid implementing a new complicated pricing structure. Each initiative needs to be assessed along all three of these dimensions: financial impact, difficulty of execution, and, most importantly, risk, to determine which initiatives should be implemented. Initiatives can look attractive because they offer significant positive financial impact and are relatively easy to execute but may represent significant risk to the business. These risks need to be carefully weighed against the potential rewards.
Lesson 3: Be Smart with Implementation
Nothing causes more anxiety for sales executives and their team than a pricing improvement program. The prospect of going to customers with price increases or changes in pricing structure is not something any of them look forward to. An excellent pricing improvement strategy can quickly be undone by poor implementation. Those that are successful are smart with implementation and follow several best practices. These best practices include arming their sales team with a strong justification and story to accompany price changes, for higher risk initiatives performing pilots or small-scale roll outs to confirm results, and lastly aligning incentives across the organization so that all key stakeholders win when the pricing improvement strategy objectives are achieved.
Leveraging these three important lessons can enable a pricing improvement strategy to meet or even exceed its objectives in accelerating top- and bottom-line growth.