A good pricing strategy can drive value and growth. But creating one presents a difficult balancing act for manufacturers. If you’re successfully increasing prices with some customers, chances are you’re losing others. Understanding that dynamic will add an important tool to your competitive armoury
Any business can win or lose when it comes to pricing strategy and ultimately pricing policy implementation. But at a time when growth remains scarce and the eurozone has slipped back into recession it is an important area to address. A well managed strategy can stimulate demand, create a value perception with customers and increase revenue.
PMSI Consulting has undertaken a number of pricing strategy reviews for clients over many years, and has found that, in the current climate, their support in this area is becoming more sought after – particularly when it comes to the implementation of a pricing strategy.
Patrick Mosimann, joint founding director at PMSI says, “It’s obvious to everyone that if you can push pricing, you can grow your business. The difficulty is how to manage the value perception with customers, and how to support your front line staff when they’re the ones facing the real pressure during implementation.”
Mr Mosimann goes on to assert that pricing strategies are often defined by the culture of the business. “For instance, a cost-plus ‘x’ versus a customer pricing strategy can drive a focus on costs versus customer relationships. Understanding this difference from the outset can help you see the horizon you’re facing.”
Having said that, continues Mosimann, nine times out of 10 such nuances can be overcome and implementation supported, through issuing a clear set of guidelines. “Sales staff simply need to know where the boundaries are and how to manage pricing beyond just cost plus ‘x’ which is where you inevitably end up in tough times.”
“A cost plus ‘x’ versus a customer pricing strategy can drive a focus on costs versus customer relationships. Understanding this difference from the outset can help you see the horizon you’re facing” – Patrick Mosimann, Joint Founding Director, PMSI Consulting
Pricing in a cold climate
Of course pricing during a recession is particularly challenging. For many customers, says Adam Slader, manager at PMSI Consulting, the immediate question wasn’t around how to design or implement a pricing strategy, but how to react to diminishing demand.
“For one customer the question about pricing began with a slow-down in Europe, explains Mr Slader. “They saw a 3-5% drop off in sales revenue across three of their top five markets. But there were no obvious changes in either volumes or product mix at a high level, so understanding the dynamic was our first step. What was really happening?”
With anecdotal evidence from sales staff focused on contracting economies, the first challenge was to understand the actual drivers of this performance and what could be changed within the new economic environment Europe was presenting. A number of customers were quickly identified as cutting back volumes, while sales staff were overcompensating on price as a result.
Pricing and sales
Often competition is where pricing control faces the most pressure, as markets begin to contract and the urgency for share increases. This can drive a change within the wider dynamic of the market as a whole, which can change how pricing and customer relationships need to be managed.
Slader goes on to explain how PMSI set about understanding those pressures as a distinct part of designing the pricing strategy.
“Looking at competitive pressures, there was no clear distinction on specific categories where pricing needed to be addressed as a result,” he says. “This lead the project team to believe that the downward vicious cycle of price versus volume was not being driven by the market but rather the sales process.”
Pricing is a key tool for the any sales force and understanding how that tool is being used, or should be used, within the economic environment a business is operating in, is vital.
Slader explains what happened next. “A single question emerged from our initial discovery. ‘How are we pricing?’ We needed to understand the gap between customers’ value perception and willingness to pay; how individual sales territories were performing; and collect an overview of the actual behaviours at a local sales team level.”
Through this process the PMSI client was able to begin benchmarking sales performance and drive awareness around pricing policy. “This is where we were able to begin taking best behaviours and building appropriate pricing guidelines for almost every scenario that a sales rep could find themselves in,” recalls Slader.
“And it wasn’t just the good, it was the bad and the ugly that we were able to learn from. The change management programme allowed all performance levels to be managed upwards.”
“The downward vicious cycle of price versus volume was not being driven by the market but rather the sales process” – Adam Slader, Manager, PMSI Consulting
Forming a pricing process
As a result of its work on pricing with PMSI the manufacturer was able to gain a deeper understanding of the culture of pricing. The most immediate action was to embark on creating a pricing process by integrating:
- Basic customer segmentation
- European pricing risk models to manage the most extreme price differences
- Profitability modelling
- And support for rigorous data driven analysis to create and review pricing rules to communicate targets and floors.
Risk and ‘what if?’ scenarios are key in planning pricing changes. Understanding the potential downsides and upsides to policy implementation can help manage the impact on the business, as well as the culture.
Furthermore, Mosimann says it is crucial to take the whole business with you on the journey towards a ‘Holy Grail’ pricing strategy.
“Setting out to find the holy grail of pricing success can be a painful process for any business. There will be losses. However, the key is to obviously get more wins. Easier said than done, of course, but good change management and scenario planning can help communicate the role that not only sales reps can play, but also how to best communicate to customers.”
The answer to the age-old pricing success question won’t be an easy one. The journey is complex and littered with pit-falls. Starting the journey can also be a difficult decision to make, but with economic pressures continuing to change the way business is done, it is sometimes a decision that is made for us.
