The Journey to Pricing Excellence
Faye Feldstein, Pricing Director at Siemens, and Patience Mutiso, Revenue Management Director at CHEP, jointly discussed their journeys creating multiple pricing centers of excellence at the 2021 Ardensi Pricing Strategy USA virtual conference. Their experience, derived from stints in multiple companies, lent credence to their voices.
The pricing maturity model Feldstein and Mutiso shared is similar to several I have seen. I first heard of the maturity model from Paul Hunt in a Brussels 2007 Professional Pricing Society conference where he discussed his then new book World Class Pricing. However, he had been talking about the same since at least 2002. Stephan Liozu joined the chorus in 2015 discussing Hunt’s maturity model in his book The Pricing Journey. Fernando Ventureira adopted a modified version of the same also in 2015. When PriceFX approaches customers, they too provide a similar maturity model. Even firms like Deloitte and McKinsey have begun measuring and scoring companies with some version of the same.
Foundational Pricing Maturity Model
Pricing maturity models tend to have five levels and follow a similar path.
Level 1: Ad Hoc Pricing aka Fireman. This is the starting point of many companies in their engagement with a pricing consultancy or software provider. At this level, prices are set but price management is lacking. Sales will request discounts and finance will react on a one-by-one basis. The inevitable result is profit leaks, where low prices and high discounts or rebates are extended in situations where the customer should have, and would have, paid more.
Level 2: Price Management aka Policeman. Firms at this level have developed pricing guiderails for closing sales and price-management processes to keep prices within the guiderails. Generally, these guiderails are constructed from a statistical analysis of historic transactions that deliver an expectation of the price capture. According to many, simply moving from Ad Hoc Pricing to Price Management will deliver 5–12% higher profits.
Level 3: Competitive Differential Pricing aka Business Partner. At this level, firms are adding to their internal metrics of price performance external metrics of their competitor’s prices and the relative value differential. Firms will increase their prices over their competitors if they provide greater value, decrease them if they provide less, and match them when their differential value is negligible. According to many, moving from Price Management to Competitive Differential Pricing will deliver another 4–8% profit lift.
Level 4: Price Segmentation aka Value Miner. At this level, price guiderails are adjusted based on the customer and transaction situation. Price segmentation at the transaction level is often generated from a historical transaction analysis using more advanced statistical studies that incorporate factors that define transaction specifics. We have seen models that customize the price guiderails by customer size, market share, wallet share, annual spend, transaction size, location, time of the year, and many other factors. Many people refer to this as value-based pricing or price optimization, yet I eschew these terms to disambiguate these concepts as they relate to transactional price segmentation from those of price setting via economic value to the customer or economic price optimization based on choice-share measurements from market or econometric research, respectively. Many claim that moving from Competitive Differential Pricing to Price Segmentation provides a further 3–6% lift in profits.
Level 5: World Class Pricing Excellence aka Star. As a pricing star, price segmentation is iteratively improved, and pricing becomes more dynamic. Importantly, pricing has completed a transformation from an administrative task to a strategic capability, recognized by the CEO and delivering higher-than-peer company profitability.
Moorman and Day Capability Model
In my reading of the Moorman and Day Capability Model, achieving that last level of improvement, Pricing Star, requires greater exposition.
The Moorman and Day Capability Model has five levels as well. It too ends with pricing becoming a strategic capability. The route is somewhat similar, but it differs greatly in clarifying the depth of organizational work required to deliver excellence.
In the Moorman and Day Capability Model, the first two levels refer to identifying predictive knowledge and skills, and iteratively building on those skills to execute on those insights. In reflecting on the Pricing Maturity Model, this would encompass levels two through four and skip level one. Recall, Level 4, Price Segmentation of the Pricing Maturity Model is, at its core, the application of statistical analysis to deliver reliable predictions for individual transactions through price guiderails. Once past that point, the Pricing Maturity Model states that the firm is ready to enter Star mode. But how?
Moorman and Day identify three further distinct maturity levels required to drive pricing from a Value Miner to a Pricing Star. These capabilities make pricing excellence difficult to imitate and therefore drives pricing towards delivering a sustained competitive advantage.
Recall, competitive advantages derive from an inimitable resource or capability that enable the firm to earn economic profits. This is the goal of pricing as a strategic function rather than an administrative headache.
The further three maturity levels of the Moorman and Day Model explore the organizational changes required. Moving from operational excellence in mining value at the segmented transaction level, one then embeds this process in formal and informal processes to make them routine at the third level of the Moorman and Day Model. At the fourth level of the Moorman and Day Model, one then integrates these capabilities into other business functions to create organizational complementarities. It is at this level where the organization develops a common language and understanding of the value of pricing as a strategic capability. One doesn’t achieve full capability maturity within the Moorman and Day Model until those capabilities are iteratively improved, leading to greater experience and learning across the organization.
Feldstein and Mutiso discussed the organizational challenge of achieving pricing excellence. Pricing Done Right by Tim J. Smith discusses these organizational issues at length. And others have touched on them as well. But the Moorman and Day Model makes them explicit.
Maturity Model Refinement?
Should the pricing maturity model be refined from the five levels first offered by Hunt to seven levels that would incorporate the thoughts of Moorman and Day? If so, we might have the following, Full Pricing Maturity Model.
Will this fuller pricing maturity model with greater detail be widely adopted? I doubt it. It violates the rule of having specifically five levels.
Moreover, it isn’t necessary. The current Pricing Maturity Model, though broadly applicable, isn’t appropriate for all businesses. Some businesses have no to few discounts to be managed, especially at the transaction level, and thus some might mistakenly believe they are at pricing excellence to begin with even though they are far from it. Other businesses should reconsider how they are setting prices in the first place before embarking on a data science project. And still others should start by refining their basic price structure, aka revenue model.
The Moorman and Day Capability Model encompasses these alternative starting points much better than the standard Pricing Maturity Model, and it highlights the organizational challenges better too. Perhaps management should use the one that best addresses the specific challenge the firm is facing. Maturity models are, after all, just models. Sometimes, it is best to chart your own roadmap.