Price Points by Omnia Retail
24.01.2019
How to Build a Pricing Strategy
This week we have a guest post from Johan Maessen, owner of Commercieel Verbeteren. Johan has over 10 years of experience in strategy consulting, and works tirelessly to help businesses grow with deliberate, strategic...
This week we have a guest post from Johan Maessen, owner of Commercieel Verbeteren. Johan has over 10 years of experience in strategy consulting, and works tirelessly to help businesses grow with deliberate, strategic goals in mind. In this post, Johan talks about the importance of a commercial pricing strategy and how you can build your own framework for commercial success. Over the last 5 years as a commercial advisor, I've met dozens of companies with historically-founded pricing approaches. Born out of their traditional way of setting prices, their pricing is based on costs or follows a competitor who seems to have a pricing strategy. Read more: The Ultimate Guide to Dynamic Pricing Additionally, instead of documenting their strategic choices, many companies’ pricing strategies are stored in employee heads. This means it’s difficult to share the strategy with (new) colleagues. But imagine if you had your pricing strategy on a single sheet of paper, ready to implement, share, and iterate. It might seem like a far-off dream, or even unimportant, but the reality is that a practical pricing strategy helps you take control of your business. The remainder of this article describes the benefits and steps involved in setting up such a practical pricing strategy, specifically for retail companies. What is a pricing strategy, and why is it important? Without a steering wheel, controlling the direction of a car is impossible. You can end up anywhere, and the impact could be disastrous. The only thing you know is the outcome is highly unpredictable, and that there is an increased risk of accidents along the way. I like to think of the pricing strategy as the steering wheel to your business: it helps you direct where you want your business to go and gives you full control. At its core, a pricing strategy takes your company’s commercial strategy and turns it into a more actionable pricing objective. With a pricing strategy, just as with a steering wheel, the chances that you’ll veer off-course are significantly reduced. It delivers commercial peace of mind, as different scenarios are thought through and incorporated in the direction up front. In addition, the pricing strategy includes the different levers you’ll use to keep your business on track. When something changes in your market, you can adjust the business rules around each lever to maintain stability. Let me illustrate how a pricing strategy will work out in practice with an example. Imagine your main competitor drops prices of products in a certain customer segment. What do you do? Here are two possible scenarios: 1. No pricing strategy After some stressful ad-hoc meetings and internal escalations, your company decides to respond with a price drop. In fact, to prevent volume losses, you give an even steeper discount than your competitor for all of your affected products. How do you think your competitor reacts, and what does it do with your margins? This could easily be the start of a price war, which will always have more losers than winners. 2. Practical pricing strategy in place Instead of following the competitor all-in, your company looks to your pre-established pricing strategy before making any decisions on how to proceed. This strategy, which considered your positioning in relation to this competitor, has a clear framework for what to do. You just need to apply the business rules of your framework. Here you determined a percentage price bandwidth towards this competitor. In addition, you determined up-front a minimum margin per customer segment/product category. It appears that the majority of the affected products remain within the competitor bandwidth, so no action is required. The products that do go below the competitor price bandwidth are still above your minimum margin threshold, and will be adjusted according to the business rules in place. This leads to price changes for a reduced set of products and keeps margins constant for the remaining products. This way of working enables you to stay in the driver’s seat of your pricing. You stay ahead of competition by iterating the initial pricing strategy along the route and making your business rules more specific. At the same time, you probably realize an uplift in your margins compared to the initial situation. How to set up a pricing strategy There are two ways to determine your pricing strategy: from the top-down or the ground-up. Top-down, you can extract a pricing strategy from the commercial strategy. Bottom-up, you can construct it from your transaction and customer data. A pricing strategy should be practical and contain at least the following two elements: A framework The framework element means that your pricing strategy has a structure that includes all the relevant pricing levers required for your business. An example of such a lever is seasonality. For hotels this implies that the price for a hotel room could go up a bit during holiday seasons. Having such a framework gives you piece of mind, because it helps you visualize the different instances where your prices might need to change. Often this structure is missing, and with my company ‘Commercieel Verbeteren’, I often help customers create this framework for a comprehensive overview of their pricing. Business rules When the framework is ready, my customers often feel like the pricing beast finally got tamed. But to build a true pricing strategy you need to go one step further. After the framework is set, you need to discuss how these different levers should work for your company through business rules. This means putting a minimum, maximum, and/or bandwidths to the different levers. In this way you, or your pricing software, can act upon them. Together, the framework and the business rules provide you with a practical pricing strategy ready for action. The 3-step approach to a pricing strategy Ok, I get it. I also need a pricing strategy! But how to proceed? Well, there are three steps involved in setting up your pricing strategy. 1. Assess your place in the market Much like the previous blog post in this series on defining your commercial objective, developing your pricing strategy begins with self-reflection. I call this step the As-Is Situation. Before you start building a new pricing strategy, you need to understand what you are already doing for pricing. Gather the relevant stakeholders and try to answer the following questions during your review phase: What does our current price model look like, and what are the pros and cons of this model? Where do you stand in the market? Is your company the leader or the challenger? What is the current commercial focus of your company? Are you more concerned with volume of sales or the overall profit? There are certainly more questions you should ask yourselves, but these will help start the conversation. 2. Build your pricing strategy framework Subsequently, involve relevant internal stakeholders in solution sessions. The first goal of such a session is to share the common understanding of the As-Is situation. In my experience, this is often regarded as “known” information — meaning it’s a step that many clients breeze over or ignore. But in reality, it’s not safe to assume that everyone has the same understanding of your existing pricing tactics. That’s why I encourage clients to use this time to go over the findings of the As-Is analysis and refresh everyone on the existing pricing strategy. The second goal of this solution session is to create the first draft of the previously mentioned framework. This requires good knowledge of your business from sales and segment managers, combined with pricing knowledge on options and viable alternatives. Use all the talent in your organization to develop a strategy that matches your commercial objective and consumer expectations. 3. Set business rules When you know the levers of your framework, you can work on the business rules and create what I call the To-Be situation: how should your pricing work in the future? This involves setting the levers of your framework and finding the right calibration based on all the information you have available. Start iterating and testing After you’ve set your business rules and are internally aligned, the fun really starts. You can take those rules and put them into a tool like Omnia to start testing what works and what doesn’t. What does it bring me? Recent input from a case study If you have a large product assortment, it’s most practical to use pricing software like Omnia to implement your pricing strategy. Recently, I worked with Profile to set up their pricing strategy, which they implemented in Omnia. The pricing software helped them (dynamically) set prices, and save time by doing so. At the same time, it contributes to future iterations of the pricing strategy, based on realized data points and competitive behavior. In this case, it led to double digit margin improvements within a month of going live, with more potential to come based on the framework developed. You can grab your copy of the case study here. Final thoughts As the second step in the Five Steps to Successfully Implement Dynamic Pricing, your pricing strategy is extremely important to your company’s growth. A pricing strategy sets you up for success and gives you more control over unexpected changes in the market. Curious what a pricing strategy can mean for your business? Contact me directly on johan.maessen@commercieelverbeteren.nl, 0641369590 or discuss the possibilities with your Omnia consultant.
04.01.2019
How to Define your Commercial Objective
In our blog Five Steps to Successfully Implement Dynamic Pricing, we encouraged you to start by defining your company’s commercial objective. But how do you determine your business goals? And how do those goals relate...
In our blog Five Steps to Successfully Implement Dynamic Pricing, we encouraged you to start by defining your company’s commercial objective. But how do you determine your business goals? And how do those goals relate to your pricing strategy? A good commercial objective needs work. In this post we’ll explore the process of defining this objective and give you practical advice on how to get started. What is the commercial objective? The commercial objective is an explanation for why your company exists and what customers can expect from your organization. In many ways, the objective is a compass that helps you make business decisions that align with your brand, goals, and consumer interests. Creating a commercial objective might seem easy at first, but it’s actually difficult to pin down exactly: Why you exist What makes you unique What your overarching message is Who you’re targeting But once you have the answer to these questions, you can make more strategic decisions that match your organization’s goals. An example of a commercial objective Home Depot has a great example of a commercial objective: “The Home Depot is in the home improvement business and our goal is to provide the highest level of service, the broadest selection of products and the most competitive prices.” This simple sentence clarifies several aspects of the company. They target consumers working on do-it-yourself projects around the home. It’s also clear what they want to achieve: quality service, numerous choices, and competitive prices. What does a commercial objective have to do with pricing strategy? A defined commercial objective is crucial for both your internal and external aspects of business. Internally, it helps to add measurable objectives for your departments. For example, Home Depot’s internal goals could include: Our service need a Net Promoter Score (NPS) of at least 8 (Operations team) We always offer 10,000 products per store (Category management) Our prices will never go above the market average (Pricing team) An important link with pricing already starts here: it’s hard to combine low prices with high service offering. Services cost money, so if a high quality of service is part of your objective, you need to factor these costs into your product prices. Looking back at Home Depot, you can see this in action. Notice that the company specifically keeps its language about prices vague with the words “most competitive.” This is because they need to factor in their high-level services, consumer perception, and more into their prices. If they promised to have the lowest prices, they could never provide the same level of service to their consumers. Since your commercial objective manifests in your prices, it also is crucial for the external aspects of your business. Price points act as signposts for consumers, and customers know what to expect from a service at every price point. If consumers see high prices for your products, they’ll assume that it includes a certain amount of service. High prices with low service offerings will brew customer resentment and be detrimental to your business. Your competition will either out-price you or offer a better value-for-money option for consumers. How to define your commercial objective There are two major steps in the process of determining your commercial objective: market research followed by business introspection. Both reach to the foundations of your business and serve as the base for your commercial decisions. Step 1: Analyze your market How do you want consumers to perceive your company? What is your ideal position and image? Before you can answer these questions, you need to analyze your market and see where you stand among your competition. There are numerous ways to do a market analysis, but for our purposes it’s important to drill down what you want to know about your competition. Consider the metrics you’ll use for bench-marking, and which companies you’ll analyze. At a minimum, evaluate your competition’s: Product prices Service agreements with customers Assortment size Specialization levels Use this information to evaluate different stores in your industry, then categorize them broadly. The graphic below is an example of how you can organize the data in a benchmarking map. This graphic looks at the number of products vs. price and service across a market: A matrix like this clarifies who your direct competition is and where there are gaps in the market. Step 2: Think about your goals After examining the market, it’s time to turn inward and focus on where your company stands in relation to the rest. Ask yourself what kind of company you want to be, and how you want to achieve those goals. Do you want to be a discounter with loads of products? Or a specialist in one product category (such as bags and suitcases)? Or somewhere in between the two? As a specialist you could have a higher price and a better value offering through services (such as fast delivery and product knowledge), but you will also make fewer sales. As a generalist you’ll make more sales, but you can only raise your prices to a certain point. Other good questions include: What are the opportunities in the market? Are their gaps in the above matrix? What are your current strengths and weaknesses? How do consumers perceive you now? How large is the gap between your current position and your ideal position? The answers will help you decide where you want to be in the market. Remember to write your goals according to SMART principles: Specific, Measurable, Achievable, Relevant and Time-bound. These principles help ensure your goals are actionable. Mission Statement vs Vision Statement What is a Mission Statement? A business mission statement describes the purpose for existing. For example, a company may exist to solve problems related to education, healthcare, or society. Defining and promoting such helps educate investors, employees, customers, and the general public. Let’s examine Amazon to survey a mission statement example: “To be Earth’s most customer-centric company, where customers can find and discover anything they might want to buy online, and endeavours to offer its customers the lowest possible prices.” What is a Vision Statement? A business vision statement articulates aspirations and intended impact upon consumers, society, the globe, etc. It entails what a company is, yet is more interested in establishing what it aspires to become. IKEA’s is often among vision statement examples: “Our vision is to create a better everyday life for many people.” Difference Between Goals & Objectives Let’s first define a goal in a business context to distinguish a goal vs objective. A goal is a set outcome a business seeks to achieve. This could be more general, as to have a profitable year. Objectives seek to be more specific. For example, factoring a dollar amount and amount of time to define “profitable.” So, what is an objective? Business objectives are specific steps taken toward achieving company goals combined with a clear method of measurement. An objective is described in more quantifiable terms. Organisational strategic goals are more qualitative, such as aspiring to increase the quality of customer service. But, objectives can be measured, such as to reduce response times of customer inquiry to four hours by the end of the first quarter. Goal statement examples: We will maximise profits We will increase employee revenue We will be an industry leader Strategic objective examples: Increase profits by a minimum of 20% in the next fiscal year Average salary within the company will rise 15% in the next five years We will penetrate an additional 30% market share by the second quarter Move on to your pricing strategy After you’ve done the work of determining how you want the public to view your brand and what level of service you plan to offer, you can build a strategy that reflects your goals. We’ll cover this more in another post, but this is a good time to think about how your business goals translate into monetary needs. Conclusion Since your commercial objective should drive your pricing strategy, not the other way around, this process is an important foundational step towards automated pricing. As the overarching goal of your company, it should answer the question of how you want consumers to perceive your company and what they can expect from you. It’s an important step towards achieving your maximum profitability, and it’s the basis for everything to come. Have you defined your commercial objective and are interested in automated pricing management? Click the button below to request a free demo of Omnia today.
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