Using Pricing Tools for Critical Conversations

As pricing consultants, we spend a fair amount of time thinking about pricing tools. When discussing pricing topics with decision makers, pricing tools function as communication aids to ensure that everyone can understand the decisions being made and have the opportunity to contribute to those decisions.

And if your entire audience does not have a quantitative background, then you will probably be better off with tools that are more visual in nature. Three vital visual analysis tools are the pocket price band (i.e., a histogram), the pocket price by market variable, and the price waterfall.

In fact, I have previously written in this very journal about investigating price variances by market variable using scatterplots and boxplots and gaining insight using the price waterfall. These tools are great for getting management up to speed on how pricing is performing at a high level.

The price waterfall: useful for overviews and nitty-gritty details

However, something that struck me in a recent engagement was that these tools are also useful when you need to get down into the nitty-gritty details of a firm’s pricing. We were redesigning a client’s commercial policy. I had already presented the client with a variety of price waterfalls to demonstrate insights into their business. Everyone on the pricing team could see how the various components of their commercial policy affected their overall price waterfall, as well as their policy’s impacts on customer- and item-specific price waterfalls.

The team was in alignment regarding their pricing reality. This is typical in a pricing project. The pricing tools help you to measure and understand your pricing by providing an insightful overview. And having a standardized approach to viewing your data ensures that you’re always comparing apples to apples.

What surprised me was how we were able to use the pricing waterfall in the next phase of the project to redesign the client’s commercial policy. We needed to calibrate sales targets, and that involved setting target prices for each item. Because different items had different market characteristics, calculating the correct target price required high attention to detail. For instance, some items were highly differentiated (and thus could command a higher premium), while others were essentially commodities that would track the market price. Some items required distributor programs, some required retailer programs, and some required a mixture.

Because we were redesigning the commercial policy, we did not have to continue with any programs that did not make sense. Nobody could hide behind the excuse of “that’s how we’ve always done it.” The team had a blank slate. Management was essentially given free rein to think outside the box and create the commercial policy that they’ve always wanted (within the guidelines that we provided, of course). There were a lot of details to account for.

In order to organize our thinking, we opened a spreadsheet and started to sketch out what their new price waterfall would look like. I think it could be difficult to jump straight to waterfall creation in Excel for some teams, but we had been discussing price waterfalls with this client for at least a month at that point. Everyone was familiar with the tool, so we could deconstruct it a bit.

Things got really interesting when the pricing team started discussing responsibility for each component of the new price waterfall. Sales was rightly concerned that their target price needed to be adjusted to reflect the fact that a new national rebate program from Marketing would effectively lower the pocket price. (Sales incentives are based on how close the achieved pocket price is to the target price for that item.) Naturally, if Sales had no control over a rebate program, they did not want it to lower the achieved pocket price, and thus lower their incentives. On the other hand, tactical sales negotiations would be factored into their incentives, because Sales did have control over those negotiations.

I saw the team engage the material, realizing that they had the opportunity to shape their own destiny. I could see them taking ownership of the process. This is my column, my calculations, my domain. I own this. I am responsible for this.

Love your dashboards, but we need a critical conversation

At the end of the day, the pricing team needed to have a critical conversation to determine which department was responsible for each price waterfall component. For a tool that is often billed as enabling a high-level pricing overview, I was amazed at how the price waterfall was essential for our very granular commercial policy design discussion.

We had to dig into the weeds, and we used a spreadsheet to wrestle with those crucial commercial policy details. It takes a critical conversation to successfully address the complexities of commercial policy design. And you need the right tool to facilitate those conversations.

So, even if you have a fancy dashboard or analytics system, keep in mind that there can still be value in going low-tech and poring over a spreadsheet with your colleagues in order to facilitate those critical conversations and get to those critical decisions.