Pricing with Conflicting Facts
Sometimes – ok, maybe often – a pricing study delivers facts that are in opposition. One measurement indicates the price should be high, while a different measurement indicates the price should be low. The facts lead to the opposite conclusions. As St. Vincent DePaul, at whose university I teach, would ask: “What must be done?”
Assume that both measurements are using state-of-the-art pricing analysis techniques. For example, a well-considered and well-informed study of the Economic Value to the Customer and capturable price indicates the price should be $80, while another well-developed and properly sampled study of the voice of the customer through Gabor-Granger or Van Westendorp Price Sensitivity Meter techniques indicates the price should be $20.
Both measurements are valid. Both delivered decision makers facts. However, the facts, if applied to the decision directly, result in decision uncertainty. What steps should be taken to address this decision uncertainty?
Construct and Deliver Your Pricing Case
It is insufficient for pricing leaders to throw their hands in the air and say, “I don’t know what you should do.” Rather, pricing leaders deliver a recommendation.
Pricing leaders consider it a challenge akin to working on a business strategy case study in graduate school, albeit, with much greater stakes and much more study required. The facts are all provided, but they don’t point to an obvious, or even singular, conclusion. Given this uncertainty, pricing leaders craft an analysis of the options, inform their decision based on facts, strategy, and industry analogues, then deliver a recommendation.
Copping out of the challenge by taking the average of the two measurements is nearly always the wrong solution.
Similarly, ignoring one measurement in favor of the other is dubious in thinking. Yes, I am well aware that converting Economic Value to Customer to capturable value is subject to many heuristics of questionable validity. I am also well aware that simple price expectation techniques, such as Gabor-Granger and Van Westendorp Price Sensitivity Meters, are also proven to be greatly flawed by much academic research. While I am biased to take the results of an Economic Value to Customer study over that of a price expectation market research technique, I cannot ignore the results in tendering a recommendation. And calling for more study is itself a recommendation, albeit one which is not always the best course of action.
Instead, pricing leaders develop a case using a broader set of facts than that revealed by the measurements. This is a defining demarcation between a pricing leader and a pricing analyst or market researcher.
There must be options under consideration in any strategic pricing decision. Define them.
Skim, neutral, and penetrate are three standard price positioning options. Add-ons, Good-Better-Best Versioning, and Bundling are three different price structure options. Starting low with the expectation of raising prices over time versus starting high with the potential to drop prices over time is trajectory option. Complex pricing metrics versus simple pricing metrics are two options to consider in price segmentation.
Pricing leaders define the options for addressing the strategic decision challenge. This demonstrates that the recommendations were made after much deliberation and also allows decision makers to consider the merits of a wider variety of options before accepting, rejecting, or altering the recommendation tendered.
Include Business Strategy
Good pricing is not simply an engineering problem nor an accounting result. It is a wicked strategic challenge. Include business strategy in the analysis.
What is the category development stage New offerings in new categories have considerably greater pricing latitude than new offerings in well-established categories. This might lead one towards pricing new offerings in new categories higher with the hypothesis that customers who value the offering the most will be attracted to the offering even with a higher price. If it is a new offering in an established category, a more price neutral or penetration positioning strategy might be necessary (depending on the financial strategy of the company).
What kind of offering is it? Is it a search, experience, or credence good? Each of these offering types are best served with different go-to-market strategies. Provide decision makers a route for not simply defining the price but also the best route for capturing that price.
Also consider the role of behavioral economics, pricing psychology, the customer purchase journey, and other corporate and marketing strategy issues. Use these broader strategic considerations to improve the quality of the analysis.
While the offering may be unique, and the category may be unique, there are likely to be case studies that can be developed that illustrate how other companies or industries have addressed similar pricing challenges.
In thinking via analogy, one provides evidence that a strategic recommendation has been demonstrated viable or nonviable. These analogies strengthen the case for the recommendations.
Assemble and communicate
With the analysis completed, it is time to formulate the recommendations and provide any follow-through suggestions.
Present the resolution to the decision dilemma using the communication tool most prevalent with the decision makers. In the past, this tended to be a PowerPoint presentation. New forms of case presentation, such as providing a well-developed memo, providing time for executives to digest the memo, then opening the discussion, work better in other situations. And there are others.
In sequence, it is highly recommended to start with the challenge definition, provide the recommendation, and then follow through with the analysis and any necessary appendices. This helps focus executives on the decision they are being asked to make and the recommendation, which prepares them to investigate the analysis and make their own decision.
Just because the facts don’t all line up, that is no reason to throw in the towel. Pricing requires leaders to act like intelligence officers at times: Identifying concrete facts relevant to the case. Assembling these facts into an information mosaic. Providing an intelligence assessment from the information mosaic.
Intelligent pricing decisions are not just possible, but required, even when the facts are in conflict.