The elephant in the room

Prices and pricing are something that executives seldom talk about with enthusiasm, especially to their customers. But this is shortsighted, as in fact few levers in business pack the same strategic punch. It may not seem like it at first, but a price is far more than a number; it is also a means to sort the good customers from the bad, nudge customers into doing the “right” thing, advertise your competitive advantage, and stir lasting emotions. When all is said and done, the elephant in the room is a powerful but misunderstood ally.

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A better harvest

“Take what you want, God said to man, and pay for it.” (Spanish proverb)

Every business has to price what it sells. It is inescapable, yet also deeply misunderstood. This session explains that managers mostly characterise pricing as a dry, tactical exercise in “running the numbers.” In fact, pricing decisions are as much about creativity and strategy as they are about dollars and cents. And prices shape a market as much as they mark the value of a sale. Ultimately, the problem in organisations is often one of scope: there are multiple challenges and perspectives that must be recognised and tackled in order to improve this basic business skill. Getting all of it right can reveal unexpected opportunities to capture, communicate and even grow value in the eyes of paying customers.

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The digital revolution comes to pricing

The digital revolution affects just about every part of a business … including how it prices. What is important now is understanding what aspects have changed, how and why they did change, and, importantly, what we can do about it tomorrow. This session stresses four mega trends that are disrupting pricing potential: accountability, transparency, fit, and automation. Failure to understand how each of these forces affects your environment virtually guarantees that you are not tapping the full potential of your customers. Importantly, it also signals that you are exposing the organisation to serious threats.

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The ends game

“The buck stops here.” (Harry Truman)

Customer orientation is the defining mantra of the 21st century organisation. We have been trained to see the market from the eyes of those we serve, thinking in terms of solutions rather than products and services. Yet even the most customer-loving enterprise reverts to old habits when it comes to turning value into money it can bank—rather than taking a hard look at customers and what they need and want, we take a hard look at what we make. Given today’s technologies and a growing interest in transparency and accountability, this has become a problem. The result is fascinating: albeit at different speeds, just about every industry that I can think of is heading toward a form of compensation that rewards real, tangible outcomes. The session describes this reality via several examples, providing a roadmap and straightforward advice on how to orchestrate a revenue strategy fit for the digital times we live in.

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The price is right!

“There are two fools for every market: one asks for too little, the other for too much.” (Russian proverb)

There are only four ingredients that matter when setting a price: company, cost, competitor and customer. When prompted, most business professionals cite these “4 Cs” in a matter of seconds. However, they then struggle to define each input or combine them into a proper decision. The session proposes a simple “two-finger” framework to address this problem. We draw several lessons, but two stand out. First, finding the right price implies striking a balance between looking inside and outside of the organisation for inspiration. Second, the key criterion is a solid understanding of how one’s offering differs from those of competitors. Indeed, a business that cannot translate value added into dollars and cents is a business without confidence or control.

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$$$elling value to customers

“A cynic is a man who knows the price of everything and the value of nothing.” (Oscar Wilde)

At the heart of every sound pricing strategy lie the actions that businesses take to understand and document value to their customers. Indeed, there is truth in the statement “when the value of an offering is clearly understood by both firm and customer, price is seldom a problem.” This session discusses the complications that arise when an organisation tries to sell value in a market plagued by stubborn, cynical buyers. Specifically, it preaches to “keep calm and sell value:” a five-step framework that highlights remedies and invites several conclusions. Two stand out. First, a better understanding of what value actually means to customers, and how the business can be true to its promises, gives a sense of calibration and confidence that helps fight off the pressure from clients and competitors. Second, a better process to sell value quickly improves the performance of the firm–and this improvement is enduring.

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Anchors, nudges and charms: the psychology of price

“We want to educate leaders who make a decent profit decently.” (Wallace B. Donham)

Perceptions of value are not only measurable, with some degree of error, but also malleable. Indeed, customer preferences are not as clear, accessible and stable as the classic economics textbooks predicate. Rather, one’s needs and wants can shift across situations and time in ways that researchers in psychology and sociology have been mapping for years, and that business people are only now starting to grasp. A practical means to understand how customers deviate from rationality is to challenge established assumptions at each step of their engagement with a company—at each step of the “customer journey.” This popular lens helps us understand how the nuances of human thought and behaviour (should) influence even the most mechanical of pricing decisions. Importantly, while it is true that organisations can exploit anchors, nudges and charms to sway people into buying something that perhaps is not in their interest, a more satisfying strategy in the long term is to use these concepts to motivate and empower. This ability is critical when the organisation continues to invest in innovation, quality and differentiation but faces customers who appear disinterested in anything but a lower price.

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It takes 3 to tango

“There is no victory at bargain basement prices.” (Dwight D. Eisenhower)

How can you stop a costly price war or, better still, avoid it altogether? What does it take to become a price leader? These questions are pertinent in many markets, and the answers lie in understanding that the “fight” unfolds on three fronts. First, part of the blame certainly rests on the actions of the rival, and your task here is to influence behavior by sending unequivocal, credible and legal signals. However, price is not the weapon of choice unless there are enough customers in the market who demand it. As such, you must also mitigate customer habituation—what I call the “commodity mindset.” Finally, you may be unaware or too proud to see that your actions trigger a response from the rival. This cannot persist. This double session uses different means to present these perspectives on competition and suggests ways to gain the upper hand.

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One size does not fit all

“If everyone is equal before God, then everyone is equal before price.” (John Wanamaker)

Not all customers are created equal. Certain groups find more value in a given good than others do. A smart professional spots this and realises that pushing the same price across the market is inefficient: in some cases it leaves a good chunk of money in the pockets of customers, in other cases it prevents sales that would still be profitable at some lower price. This session explores the fascinating challenge of tailoring prices to individual valuations. One lesson is that proper price discrimination requires some input from customers– the traditional “take-it-or-leave-it” is not sufficient because it is the customer who ultimately decides whether something is cheap or expensive. Second, while there are many forms of discrimination, they fall into one of three buckets: observation, offering or mechanism. The session presents several examples to explain these labels and suggests an action plan.

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The promotion of things

“You can’t put a price tag on love. But if you could, I’d wait for it to go on sale.” (Jarod Kintz)

Discounting is often likened to a potent, dangerous drug. Many businesses “give it a try” in response to external pressure. The immediate bump in sales gives great pleasure. However, the drop that ensues once the deal is retracted is agonising. As time goes by, the concessions get deeper and more frequent to satisfy a customer who is increasingly accustomed to—and, frankly, bored with—receiving offers. One interesting aspect is that, for the most part, the downward spiral is predictable. This begs the questions: Are organisations discounting intelligently? Is there a healthier way to entice customers without mortgaging the brand? This session provides answers and a useful checklist. First, we have to understand that “discounting” is not synonymous with “tactics.” Quite the opposite, the strongest sign of a clever campaign is its ability to serve the broader objectives of the business. Second, there are steps that managers can take to ensure that their investments in price cuts are, indeed, investments. The overarching goal is to put an end to the all-too-familiar “can’t live with them, can’t live without them” feeling that hounds discounting.

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Brand, price and the customer relationship

“A cheap price is a shortcut to being cheated.” (Chinese proverb)

Marketing professionals believe that growing a business implies cultivating brands that inspire a deep, meaningful connection with customers. When it comes to generating revenue, however, companies often implement policies that seem intent on destroying all the hard work that goes into building a strong brand. We have already seen such instance in the course: the design of the revenue model. Now we take this paradox a couple of steps further, studying how a company’s efforts to discriminate among customers or minimise the pain of high(er) prices can go awry. Knowing that pricing decisions are effective at spurring all sorts of behaviors and communicating what a company stands for, what it truly thinks of its customers and how it wants to engage them in a relationship is an important first step to formulating counter measures. The session makes this point salient and suggests practical solutions. The broader message is that, instead of using price in a way that ends up turning customers into adversaries, companies can use it as a starting point for a collaboration that is empowering and more engaging.

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Asking about price

“If you have to ask how much it costs, you can’t afford it.” (John Pierpont Morgan)

Perceptions of value are not only measurable, but also malleable. Indeed, customer preferences are not as clear, accessible and stable as classical economic thinking predicates. Rather, one’s needs and wants can shift across time and context in ways that researchers in psychology and sociology have been mapping for years, and that business people are only now starting to grasp. One way to understand how customers deviate from “rationality” is to challenge established assumptions at each step of a journey toward (and beyond) a purchase. This lens helps us appreciate how the nuances of human thought and behaviour influence even the most mechanical of pricing decisions. Importantly, while it is true that organisations can exploit anchors, nudges and charms to sway people into buying something that perhaps is not in their interest, a wiser strategy for the long run is to use these concepts to motivate and empower—something critical when organisations invest in quality but face customers who appear disinterested in anything but a lower price.

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Housekeeping

A fresh start is always made with dirty laundry.” (Teri Louise Kelly)

What does a well-oiled pricing organisation look like? We explore three questions. First, and perhaps most important, there is the issue of structure. In particular, management needs to decide how far down the company to push responsibility, and how many different job profiles to involve in the process. Clearly, there is no “one-size-fits-all” solution. The second question is one of incentives. What is the best way to compensate those who are responsible for the “health” of the prices we actually achieve in the market? In the session, I present several possible schemes and discuss their strengths and weaknesses. Third, remember that pricing decisions exist at three levels of abstraction. At the highest point, that of the industry, the goal is to gauge the tone of a particular market: significant fluctuations in demand or supply, new regulation, changes in customer sentiment or economic wellbeing, changes in the competitive landscape and so on. At the product level, monetisation is focused on the goal of capturing value from customers, keeping in mind that differences in valuation are expected and should be exploited. Finally, at the transaction level the management team needs to ensure that the pricing protocol does not result in costly leaks: there needs to be a logical argument for each and every deviation from list prices.

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