Five Pricing Best Practices for Organizations
In my year and a half of pricing strategy consulting, I’ve seen a variety of companies in different industries working to make themselves better in a competitive business environment.
I’ve pulled together five aspects that exemplify the companies that are dedicated to pricing excellence from those that can only hope to play catch-up. Although specific situations vary, I’ve noticed these pricing best practices time and time again:
- Understanding Customers
- Focusing on Value Delivery
- Hiring the Right People
- Tying Pricing into Wider Decision Making
- Pricing as a Verb, Not a Noun
Companies that make the effort to understand their customers know that it is key to their own success. And companies that do so orient themselves differently from companies that don’t. Salespeople are encouraged and empowered to get to know their customers well and figure out how best to make life easier for them. This decentralized knowledge is critical to sales success, but also to the rest of the company.
With clear processes that bring such market information to the home office, sales also become an important source of intelligence for the rest of the company. Marketing gains a better sense of how to talk about their products and where messaging has been unclear. Product gets to look beyond technical specifications and to how customers are actually using what the company has created.
Dedication to understanding its customers makes a company more knowledgeable about the competitive landscape and better equipped to anticipate changing conditions. The entire company feels less insular and more connected to its existential purpose: serving customer needs profitably.
Focusing on Value Delivery
By now, it’s an old adage to many that customers are interested in what your product or service can do for them, not in what the product or service is. But it is surprisingly hard to find that concept implemented in practice within an organization. However, when you take the first step to understand your customers, you can speak in their language, not in internal jargon.
Conducting an Exchange Value to Customers helps organizations think about the benefits that their goods provide in concrete numbers. You customer may indirectly care that your product lasts twice as long as the competition’s, but most directly they care about the time and money saved by more reliable performance and fewer replacements.
What if you don’t know what your customers value? That’s a great reason to empower salespeople, as discussed in the first point.
Another way is to get customers to tell you themselves through revealed preferences. If you don’t know how your customers value placing orders with individuals versus an online form, offer a discount for using the one that is better for your company. You will start to get an idea based on how customers adjust their purchasing behavior.
Hiring the Right People
With so much technology at our fingertips today, it is tempting to want to find a technological solution to every problem. Or to think that if an organization is simply engineered in the right manner, then everything will fall into place.
But getting the right people on board and giving them the ability to grow is still a critical facet, not only of pricing but of organizational management in general.
Incentives aren’t everything. They can certainly help, but for the vast majority of companies, a system of processes is still only as good as the people it supports.
The people who interface with your customers are especially important. They are the aspect of your company that the public sees. Getting a wider swath of the company involved and invested in pricing decisions increases everyone’s engagement. And a customer can tell when your people believe in what your company offers. Can’t you, when you’re the customer?
Tying Pricing into Wider Decision Making
Our engagements with clients frequently begin with in-person interviews with employees from across sales, marketing, finance, product, IT, and more. Without fail, we find that a communication breakdown somewhere along the way is leading to information being under-utilized or teams inadvertently working at cross-purposes.
One way to minimize these difficulties is to establish a pricing council. Leaders from sales, marketing, finance, and other departments who have information to contribute to pricing decisions form a pricing council. Participation by the chief executive is paramount so that decisions have heft across the organization.
Without some type of formalized pricing council, communication internally is difficult. Pricing strategy affects and is affected by overall business strategy. The pricing council should review strategy, product positioning, internal processes, sales discounts and rebates, and any specific clients or transactions needing evaluation, as required by the company, with regular meetings.
This in turn illustrates the critical mental shift needed to address pricing actively and proactively: pricing as a verb, not a noun.
Pricing as a Verb, Not a Noun
If your company thinks of pricing as a noun, it treats it as a one-off event. You set the price of your product according to a gut feeling or to what your competition is doing, then mostly keep your hands off. Maybe you drop your prices if you hear that your competitors are doing so, and watch your margins shrink out of your control.
For companies that treat pricing as a verb, however, it’s a proactive set of decisions needing regular attention. Competitors’ prices matter, but what’s more important is understanding the value to customers that your product or service provides. Decisions cascade from competitive strategy through pricing strategy, market pricing, price variance policy, and price execution. All steps require routine analysis and alignment for your company to take full advantage of its potential.
Our recent book, Pricing Done Right, helps walk executives through applying these lessons and many more to their own organizations. Every company is different, but the principles of pricing excellence stretch across organizations and industries. Check it out, or drop us a line.