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.
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:
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.
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 a retail customer 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.
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 email@example.com, 0641369590 or discuss the possibilities with your Omnia consultant.