As SBI’s pricing practice leader, I’m often asked for sources of pricing competitive advantage. First though, establish whether your pricing strategy is a problem. Answer the eleven questions identified on page 144 of the How to Make Your Number in 2018 . This executive-level guide will help you quickly get your arms around whether your pricing strategy is a problem. From there, you’ll have access to the entire Pricing Strategy section on pages 140 – 234 to fill any gaps.
I’ll happily share approaches that have had yielded strong results for companies. My suggestions of course vary by company situation – there’s no “one size fits all” to pricing. There is one question, however, to which my answer is always the same. It’s unyielding, no matter the company, the country, or the industry.
The question? “What is the best practice pricing methodology for my industry?” To this, I always answer with a question of my own:
“What is your business trying to achieve?”
This may sound trivial, but I consider this to be one of the most fundamental questions in successful pricing. A question that is consistently overlooked by B2B businesses. Frequently, companies do not align their pricing strategy to their business objectives. Instead, they default to pricing the same way as their competitors, or as other somewhat comparable products.
“Why is this a problem? Why do I need to consider my business objectives for pricing?”
It’s a fair question. Why should business objectives for pricing be more important than for any other function? To answer it, let’s consider a quick case study.
Imagine a B2B software company is looking to grow revenues. To do this, the company envisions it is going to focus on Market Share – winning as many new accounts as possible – and Revenue per Account – maximizing transaction size. Such a joint approach is not uncommon to hear. Transaction size and volume are frequently shared company objectives. But in terms of pricing, they are completely incompatible. The pricing strategies that naturally flow from these individual objectives pull in completely opposite directions.
Think about it. If I want to increase market share, what are the pricing decisions that would likely flow from that objective?
- Low price point – Set a low price to minimize price objections
- Simple choices – Enough options to facilitate decision making, but no more than that
- Transparent pricing – Establish clear pricing to speed-up decision-making and allow for selling through E-commerce, maximizing reach
What if I was trying to maximize revenue per transaction? What then?
- High average price point – Aim to price close to willingness-to-pay
- Granular choices – Offer multiple options to choose value-added extras and up-sell to higher price points
- Opaque pricing – Do not publish list prices so that pricing can be optimized per customer. Likely using a skilled direct sales force
Yes, this is a simplified example, but the principle it illustrates is very real. Your pricing strategy cannot facilitate both objectives at the same time. You must prioritize.
Looking through this lens exposes why pricing based purely on competitors makes little sense. Considering what your competitors do is certainly an important input – customers will be comparing your offerings and pricing after all. But your competitors don’t necessarily share your priorities. Why would the pricing strategy that works for them automatically be the best for you?
Moreover, consider your competitors’ likely approach to designing their own pricing strategy. They probably didn’t align their pricing strategy to their business objectives either!
It also reveals why “what is the best practice pricing strategy for my industry?” isn’t the right question. Certain industries have certain accepted conventions for pricing. But unless all companies have common objectives, they shouldn’t have exactly the same pricing.
“I want to produce a pricing strategy that is aligned to my business objectives. What should I do?”
Step 1 – Align and prioritize your business objectives and strategies: It’s common for companies to not price based on business objectives. But it is equally as common for leaders to not agree on what those company objectives are! This is not as surprising as it may seem. Even if a corporate strategy exists, it is frequently not proactively communicated beneath the C-level. If it is communicated, it is not always communicated effectively. And if it is communicated effectively, it is often received differently based on focus. For example, a marketing executive may attach more weight to an “expand” objective than a “streamline” objective. Even if they were originally communicated as equally important.
To get alignment, hold a workshop with leaders from all functional teams who should have a stake in pricing. Strategy/business lead, product, marketing, sales, operations, finance should all be included. Have everyone write out what they believe the corporate objectives are. Collect the feedback, prioritize them as a group, and agree on which objectives pricing strategy should focus.
Remember to be broad in your thinking here. We used market share and transaction size as examples, but there are many others. Do you want recurring revenue? Are there certain market segments to expand into? How important is customer satisfaction vs. revenue gain? Etc.
Step 2 – Brainstorm pricing strategy components that help fulfill objectives: For this activity, you can use the Step 3: Pricing Structure phase of the Pricing Strategy section of the Workbook. Think about Revenue Model, Price Metric, Price Fence, Versioning, Packaging, and Continuing Monetization approaches that would support your prioritized objectives.
Step 3 – Validate with voice of the customer: Test the reaction to these strategies directly with your customers, using interviews, focus groups and/or surveys. Use the results to evaluate your potential approaches. Then select options that work for both your customers and the company.
Companies that align their pricing strategies to their business objectives have an advantage. Why? Their pricing strategies are just that – strategic. They are picked consciously to help them achieve an objective they selected. And consequently, they are far more likely to achieve that objective.
Have expectations gone up and left you wondering if you have the right pricing strategy to support your revenue growth goals? Here is an that will help you understand if you have a chance at success. Take the Revenue Growth Diagnostic test and rate your Pricing Strategy against SBI’s emerging best practices to find out if:
- Your revenue goal is realistic
- You will earn your bonus
- You will keep your job