Pricing Done Right Today
How should executives frame their pricing initiatives and is it still relevant today?
Pricing Initiative Smorgasbord
Since publishing Pricing Done Right, we have been digging deeper into paradigms for guiding pricing initiatives which will transform the company and improve performance.
In Pricing Done Right (2016), we laid out the Value Based Pricing Framework for driving better pricing decisions across the organization. Many organizations have relegated pricing to an administrative job, something that must be done accurately but otherwise has little impact on overall performance. Others have begun the process of moving pricing up the chain towards addressing the company’s strategy itself. Regardless of where an organization is in its pricing journey, the Value-Based Pricing Framework provides a vantage point to reflect on the potential areas of improvement.
In “Day One Pricing Leader Agenda” (2020), we shared eight different hypotheses for improving pricing without impacting sales volume. These varied from examining improvements in price variance (commercial policy, negotiation, and other tactical decisions) to market pricing (offering prices and sales mix).
In “The Journey to Pricing Excellence” (2021), we reviewed Paul Hunt’s pricing maturity model and contrasted it with that of Moorman and Day’s Capability model. Hunt’s maturity model leads companies to reduce profit leaks related to poor price variance in the Value-Based Pricing Framework. While useful in many situations, it isn’t applicable for every firm. Fast food, casual dining, and consumer packaged goods manufactures have experienced strong impacts from improving market prices and offering mix.
And still other articles have focused on improving competitive pricing, organizational strategy and pricing routines.
Reflecting on all these missives, whitepapers, presentations, and books, I feel as though the groundwork has been laid. Should we now focus on repetition and iterative improvement? After all, getting the message to CEOs that pricing deserves greater attention is a journey in itself.
As they say in Russian, da nyet (yes but no).
Relevancy during Market Turbulence
Research has proven that better organizational structures, routines, and cultures enable firms to manage turbulent markets better as well. But during turbulent times, it has proven difficult to begin the very initiatives that create better organizational structures, routines, and cultures. Or has it?
Consider some of the existential fires executives are fighting during the pandemic.
First, primary market demand itself is not something one could have easily predicted based on the past decade of precedent. In some markets, demand has ramped up while supply has been constrained (e.g., Phillips Health Care, Moderna, TSMC, and anything to do with bicycles) creating pricing power previously unprecedented. In other markets, demand retreated to a trickle and is only barely showing a return (e.g., Carnival Cruise Lines, Marriot Hotels, Southwest Airlines, AMC and anything to do with full-service restaurants) where lower prices both unsustainably destroy profits and are incapable of driving demand. And still other markets have seen both demand retreating (Tyson or Constellation Brands selling meat or beer to restaurants) and expanding (Tyson or Constellation Brands selling meat or beer to grocers).
Second, input cost pressure has risen faster than normal across several industries. Logistics, labor, parts, chemicals, lumber, copper, chips, and a plethora of other items that impact variable costs or investments in new fixed costs have risen. One executive stated, “I can’t think of anything that has gone down in price in the last year.”
Third, customer engagement and marketing communication itself have been greatly disrupted, impacting secondary market demand. In order to sell to new people, you have to meet new people and Zoom doesn’t cut the mustard. The challenges of consumers entering stores and venues has been well covered, but also consider the challenges in business markets. Business marketing communication has historically focused on event marketing. The rush to build blogs, vlogs, podcasts, and other collateral on Facebook, LinkedIn, Twitter and other social media platforms is a relative newcomer to the business marketer’s bag of tricks. Social media marketing may work for inbound marketing, yet it is a poor substitute to meeting new qualified prospects in person. Despite the best efforts of conference organizers to move to virtual meetings, peer executives I have interviewed have repeatedly stated that they are failing to produce new sales. This has greatly harmed sales of non-covid related medical equipment, business products and services, industrial construction, and many other companies. In the absence of meeting new qualified prospects, companies have had to rely on existing customer relationships with customers themselves that are sometimes in peril.
The pandemic has created pivots, reshuffled markets, and snarled supply chains. Today, CEOs are rightfully focused on keeping the team motivated and moving in the right direction while adjusting the directive rapidly and frequently. And yet, we also saw pricing actions being driven by all three of these pandemic market turbulence sources.
Consumer product firms first worked to reduce or eliminate price promotions. Similarly, many industrial market firms reduced discounts and rebates. Daniel Cho, Head of Strategic Pricing Centre of Excellence at Phillips Healthcare, stated that putting a stop to “crazy discounting” delivered 1.5% more margin in itself.
Across many industries, we also saw price increases generally attributed to costs increases but often greater than the costs pressures themselves. Tyson Foods and McDonalds both reported price improvements greater than costs challenges in the recent reporting quarter.
So, starting a long-journey pricing initiative may not be the most important endeavor a CEO can drive today, but in each of the origins of market turbulence the pandemic has driven, the steady hand of experienced pricing experts has helped CEOs avoid the most egregious of errors and seize the most promising opportunities.