The year 2016 is almost over. All businesses should reflect on what has worked, and what has not worked; and they should be prepared to adjust in 2017. That evaluation should include reviewing the results of decisions made regarding pricing strategies and tactics. Equally important, the evaluation should be rigorous and thorough, and there should be no sacred cows. Regardless of who made the decision(s) or which customers were affected, the choices should be evaluated with a goal of making continuous improvements.
As you start your review of 2016 pricing decisions, consider these four main themes, and analyze them in detail:
- Did you grow where you expected to grow?
- Did you expand margins in the expected areas?
- Did you capture the price increases you intended?
- How have your prices affected your customer/prospect buying choices?
It is important to get the facts, even if they are inconsistent with company messages and plans. At many firms, growth is celebrated regardless of how and why it occurred. We have talked with companies who have set goals at the beginning of the year to price to value provided, and to correct underpriced products and accounts. Then when measuring results, those companies ignore the fact that prices were lowered at some large customers. It is considered irrelevant if the volume with those customers grew. But how do the companies know that volume would not have grown without lower prices?
If the decision to lower prices at specific accounts is not evaluated just as critically as other pricing choices, the organization will interpret that to mean prices don’t matter. To make real pricing progress, messages and actions must be consistent, even if it is uncomfortable.
Similarly, we frequently see companies realize much lower price increases than planned, but do nothing about it. They just accept the aggregate results as being due to strategic accounts. Unfortunately, simply accepting lower-than-expected results likely means the company is earning less profit than they could.
We are not advocating a rigid approach that does not allow any deviation from planned price increases. Certainly in B2B environments, some customers can get away with smaller price increases than others due to longer-term contracts, poor competitive positioning by the selling firm, or clear tradeoffs that were made resulting in higher overall profit. However, it is very important to ensure that the lower price performance is a result of conscious decision making rather than poor pricing discipline. Only by analyzing actual price realization account by account compared to the planned price realization, is it possible to determine where shortcuts are being taken and profit is given away.
All accounts must be put under this microscope, including large accounts and strategic accounts. The fact that the accounts are large or strategic, does not necessarily mean there will be pricing discipline.
One of the more difficult things to measure in a B2B environment is the affect your pricing decisions have had on sales volume. Customers decide what to buy and from whom based on many factors, only one of which is price. That makes elasticity measurements more complicated than simply the change in unit volume divided by the change in price. However, it is still important to make your best determination of how your customers have reacted to your pricing actions rather than just listening to anecdotes. You can evaluate:
- Did customers with the smallest price increases or largest price decreases grow faster than the median customers?
- Did the customers with the lowest aggregate prices grow faster than customers with the highest aggregate prices?
- Are you gaining market share faster in segments with lower prices or lower price increases?
If the answers are no, then it is unlikely prices are driving your volumes. Conversely, if the answers to those questions are consistently yes, then your pricing actions might be affecting volumes and you should dig deeper to find out which specific actions need to change.
It can be difficult for pricing teams who have recommended higher price increases, to shine a spotlight on any results that might indicate the company raised prices too much. Nobody wants to be wrong, especially when they were advocating an aggressive approach. In addition to wanting to be correct, people naturally fear that if they are wrong, the organization will no longer listen to their recommendations. However, we believe that if you never fail, you are not trying hard enough. Learning from failures is one of the most durable ways to grow, and hiding failures is a way to ensure the loss of trust from the rest of the organization. So, pricing teams must be willing to call out the situations where prices were too high and customers left because of them.
Continuous improvement in pricing can only be delivered when results are measured critically, and in detail (not with anecdotes). It is important that all pricing decisions be measured – both for building the mutual trust of all parts of the organization and for identifying all the improvement opportunities. Regardless of who made the decision or took the action, there should be no sacred cows.
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