Memorial Day weekend is the biggest weekend in auto racing. It starts with Formula One cars in the Monaco Grand Prix, followed by Indy Cars in the Indianapolis 500, and ending with NASCAR at the Coca-Cola 600. Auto racing, like business, is a competition. Each team marshals and organizes their resources and executes their game plan in an effort to win. There are some principles in auto racing that we can apply to pricing, in our efforts to help our companies win their own competitions.
Start with a Strategy
Auto racing is like every sport, the most successful teams start with a strategy that describes how they think they can win. The teams analyze their competitors, identify their strengths and weaknesses, select the option they believe gives them the best chance to win, and have contingency plans in case things are not working as planned. The team leader then makes sure the strategy is understood by everyone on the team, including drivers, pit crew, data analysts, and trailer managers. The individuals on the team then develop their own strategies and detailed plans that enable the overall race team’s strategy. Only when the group and individual member plans are integrated with the overall race team’s plan can the team win.
This principle applies to pricing – start with a strategy. Your company must have a clear strategy of which markets you will compete in and how you can win in those markets. Similarly the pricing team and all the other teams in the company must understand that strategy, and the pricing strategy must be consistent with the business strategy. So if the business strategy is to compete with the absolute highest level of service and customer satisfaction, the pricing strategy should not be focused on taking share with low prices.
Analyze the Data
Once a race team has finalized a strategy and begins to implement it, they don’t simply start driving and hope it works out, they are relentless about monitoring their performance during a race. The race team captures data from the driver, the spotters, the pit crew and sensors on the cars. They monitor fuel usage, tire pressure and wear, engine and transmission temperatures, g-forces, down-force, under-steer and over-steer, and even driver vital signs. When one or more metrics deviates from what the tea, expected, they make adjustments. Even if the team is leading the race, they sometimes make adjustments when metrics are not where they should be. They continue to measure and analyze the data, and make adjustments throughout the race.
That same analytical rigor is very important in pricing. It is not enough to simply set prices and then look at sales and margin at month end. There can be significant variation in results for certain products or customers that might not be noticed in month-end sales and margin reviews. And that variation, much like fuel usage and engine temperatures, could indicate opportunities to go faster or signal risks coming up.
Modern ERP systems and data warehouses are incredible troves of data. Each transaction is a data point that can be used. The trick is to properly organize your analytics to capture the measures that can give you the most information about pricing opportunities and risks. It is important to go beyond sales, gross margin, and average selling price (ASP), and start to measure relative price levels between segments, demonstrated price sensitivity, price realization by customer and sales person, target price achievement, the impact of price changes, and exception levels, among other things. More granular analytics will provide you with more insight into your performance and allow more precise adjustments.
Find the Edge
In addition to having good strategies, teams that win frequently share another trait – they are willing to find the limits of their cars. Drivers don’t win by simply having the fastest car in the straights, they also have to be fast through the turns. The risk of crashing or spinning is greater in the turns than in the straights, and that risk increases with speed. Going just a little slower can significantly improve a driver’s odds of not crashing, but it can also significantly reduce the driver’s odds of winning. The challenge for race car drivers is to drive as fast as they can through the turns, without crashing or spinning.
There are no instructions a driver can look up to tell him or her what the limit is for each turn. The drivers have to find the limit with the help of their teams. They do that by using their data sources and a little testing. They and their spotters can identify what line they took, whether they hit the apex, and what speed they were going, the data trackers can tell them the amount of down-force and tire pressure they had, and the drivers can feel whether the car is gripping the road or seems to be slipping. If a driver never feels the car slip at all, he or she can never tell whether they reached the car’s limit.
The best pricing organizations also look for that edge. If customers never object to a price or the company never loses a sale, you can be sure the prices are too low. On the other hand, nobody wants to crash the company by going too fast with pricing. So the best pricing organizations use their teams to test price alternatives and find the edge. They might find customers, products, or situations where they win more often than others and test moderately higher prices. Or, perhaps they identify bundles of complementary products and test packages that could drive higher adoption rates. In all cases, they measure the results of their tests and make small adjustments. Only by creating tests, measuring and making adjustments can organizations find the edge.
Focus on the Whole Race
When a race is 500 or 600 miles, it does not really matter who is leading after 100, 200 or 300 miles. Yes, there are financial rewards for leading laps, but the last lap is by far the most important lap. So it is crucial that the strategies and plans employed by a race team are designed to enable their car to lead that last lap. That means they have to manage it so they have enough fuel to drive hard at the end, but do that without getting too far behind early. It means they have to have the right tires available for whatever they expect track conditions to be at the end of the race. It also means the driver has to be within striking range of the lead, and be sufficiently hydrated, focused, and fit to drive the car to its limit near the end of the race. And it means each team has to be aware of what the other race teams are doing, how they will respond to race tactics, and how those actions can affect the race.
The same is true in the pricing world. It is critical that you consider how your strategies and actions will affect your market and company over the longer term. What really matters is not winning every deal, but having a price architecture that reflects the appropriate differentiation of your products versus competitors, captures the value that customers are willing to pay for your products and services, and captures the market share and profit that reflects your competitive strengths and weaknesses. Over time, there will be changes with your customers, new products will be introduced, competitors will react to your actions, you will react to competitors’ actions, and customers will react to both. Make sure your decisions and actions today don’t hinder your future capabilities. Organize your processes, analyze your data, and implement feedback loops so that you can compete in the short term while maintaining your ability to compete over the longer term.