Pricing Strategy as a Wrapper for End-to-End Pricing: Step 10

Step 10 – Pricing Strategy

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The documented Pricing Strategy can then be used to tie all the key elements together.

It should define the process for updating and changing all the elements of the end-to-end pricing process, including:

  • Roles and responsibilities
  • Values and guiding principles
  • High level objectives of list pricing & and discounting
  • Complete set of pricing metrics (not just LPPS)
  • Documented approach designing the discounting policy, programs and handling escalations
  • A description of how list pricing & discounting fits into selling process
  • How value is delivered to, consumed and sensed by customers …..
  • Etc

So this is end-to-end pricing

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Like the sculptor or bridge designer, the pricer should have an idea (thesis) what the final outcome should look like before he/she starts.

And that view will constantly evolve as more knowledge is obtained going through the ten steps …. the design assumptions are modified, the analysis re-computed, the outcomes compared to objectives, deltas analyzed, design assumptions modified etc ….. to get closer and closer to the optimal solution. A typical design process.

Anyhow, for your enjoyment, a simplified representation of End-to-End Pricing.

Extract from “10 Steps to Creating End-to-End Pricing” in April 2016 edition of The Pricing Advisor, authored by Paul Charlton of The Pricing Factory®.

Read the paper.

  • The Pricing Advisor is the monthly publication of the Professional Pricing Society, The World’s Leading Association Dedicated to Pricing Management.
  • This is the second article of Paul’s that the Professional Pricing Society has published. Read the paper in slideshow format …..
  • Any questions, please contact paul.charlton@thepricingfactory.com

 

The Pricing Factory: Making International Channel Pricing Work at the GTDC’s 2016 EMEA event

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Making international pricing work:  of  presenting at 

Great to be part of such a vibrant event!

The scope of my presentation included:

  • A brief introduction to managing global pricing …
  • A channel pricing framework that provides competitive, consistent and predictable channel discounts and pricing halos.
  • And finally a practical framework to help disties check for vendor pricing functionality vs dysfunctionality.

If your vendor isn’t proactive with their pricing and keeping their list prices consistently competitive, then your warehouse is going to be pretty full of over-priced product ….!

Pricing is always more interesting to Finance than anything else they could be doing. Believe me. I’ve been in Finance. ….. End-to-End Pricing: Steps 8 & 9

Step 8 – Financial Objectives

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Financial Objectives – such as Revenue Growth, GM% expansion, Opex, PBT, ROIC v time – need to be reconciled with the List Price Positioning Strategy

This is an interactive process with Finance, but the outcome should not be dictated by Finance.

Finance unilaterally & arbitrarily setting unrealistic financial goals in their annual target setting process is typically the second biggest cause of “pricing issues” that I come across.

 

Step 9 – Integrated Financial Plan

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Planned list prices and discounting should be rolled into a product-based financial plan along with new products introductions & discontinuations, product cost plan and demand plan.

Compare the outcome with your financial objectives. Then re-iterate ….

Make sure that your pricing plan is baked into Finance’s “official” financial plan or at least consistent with it.

Make this a joint exercise with Finance who typically will be willing to get involved because working on pricing is always more interesting than anything else they could be doing. Believe me. I’ve been in Finance.

Extract from “10 Steps to Creating End-to-End Pricing” in April 2016 edition of The Pricing Advisor, authored by Paul Charlton of The Pricing Factory®.

Read the paper.

  • The Pricing Advisor is the monthly publication of the Professional Pricing Society, The World’s Leading Association Dedicated to Pricing Management.
  • This is the second article of Paul’s that the Professional Pricing Society has published. Read the paper in slideshow format …..
  • Any questions, please contact paul.charlton@thepricingfactory.com

 

Do you have a “You Gotta Haggle” pricing strategy? ….. End-to-End Pricing: Steps 5, 6 & 7

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Step 5 – Deal Analysis

Deal Analysis will start to give insight where there is over-discounting and under-discounting, how consistent or – more likely – inconsistent the discounting is. This is where most of the opportunities are.

This will also inform the List Price Positioning Strategy, List Price Plan and ….

 

 

Step 6 – Discounting Policy & Programs

The conclusions from the Deal Analysis should be taken forward to create/update the Discounting Policy & Programs.

In most organizations this involves establishing a rational, policy-based approach to discounting which allows Sales to focus on “selling the value”.

Typically this will be a move away from a “You Gotta Haggle” strategy.

Additional discretionary discounting programs should be designed so that they are only given in exchange for something which helps your business achieve its goals.

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Contractual discounts for channel partners should be designed to reflect the tasks that the partner is contracted to perform in reselling your product.

The policy should include bid escalation criteria, process & SLA (Service Level Agreement).

The Discounting Policy & Programs should be aligned with the List Price Positioning Strategy & List Price Plan.

Step 7 – Sales Comp

Sales Compensation should be designed in order to support the execution of the Discounting Policy & Programs and the attainment of the business plan.

Importantly this should not be left to Sales – or even worse, the GM or CEO – to design unilaterally. Sales Comp needs to be consistent with all the other elements of End-to-End Pricing.

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Extract from “10 Steps to Creating End-to-End Pricing” in April 2016 edition of The Pricing Advisor, authored by Paul Charlton of The Pricing Factory®.

Read the paper.

  • The Pricing Advisor is the monthly publication of the Professional Pricing Society, The World’s Leading Association Dedicated to Pricing Management.
  • This is the second article of Paul’s that the Professional Pricing Society has published. Read the paper in slideshow format …..
  • Any questions, please contact paul.charlton@thepricingfactory.com

 

List Price Positioning Strategy, Value Proposition & List Price Plan ….. End-to-End Pricing: Steps 2, 3 & 4

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Step 2 – List Price Positioning Strategy

Once you’ve worked out where you are competitively, it then becomes much easier to work out where you would like to be through probably applying nothing more than common sense – deductive reasoning – which is generally a lot cheaper, quicker and more useful than any market research that could be conducted.

Good GMs, Sales VPs/Directors and Product Managers/VPs typically know where they need to be positioned: they just need a bit of help articulating it.

Also be aware that an LPPS is reactive metric (“you know, they move and then we follow them”) so it’s very easy to stumble from being a price-leader into being a price-follower without realizing it. So to avoid this, you will also need some proactive metrics in your Pricing Strategy.

The LPPS should be in a presentable format and include a brief written rationale for every element in the strategy so the purpose of the price positioning can be easily explained to management for their approval, and to Sales for development into sales tools to communicate value to customers.

Step 3 – Value Proposition

The List Price Positioning Strategy needs to be consistent with and informed by the Value Proposition at multiple business and product levels.

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The Value Prop needs to be appropriate for target market/segmentation, and implicitly captures how the business expects to create value for its customers.

There is an implication here that the Value Proposition needs to be meaningful – again, if I didn’t need to say this, I wouldn’t.

At a product level, insisting that the value proposition is:

  • quantitative – usually helps focus a product manager’s mind, or if it is
  • qualitative – include superlatives or comparatives which are independently verifiable

OK, so this section doesn’t have very many words in it. But there again, neither should your Value Prop. Succinctness and relevance are the keys to a successful Value Prop. The best one I came across was citable by the CEO. Another was developed by the CIO, not product management.

Step 4 – List Price Plan

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Now list price changes can be planned. This is where the pricer starts to apply the paint to the canvas … chips away at that stone block …. puts quill to paper.

The overall approach to & rationale for the list price changes should be documented, not only so you can remember why you did what you did, but also so Sales don’t have to work out what you intended for themselves.

 

Extract from “10 Steps to Creating End-to-End Pricing” in April 2016 edition of The Pricing Advisor, authored by Paul Charlton of The Pricing Factory®Read the paper.

  • The Pricing Advisor is the monthly publication of the Professional Pricing Society, The World’s Leading Association Dedicated to Pricing Management.
  • This is the second article of Paul’s that the Professional Pricing Society has published. Read the paper in slideshow format …..
  • Any questions, please contact paul.charlton@thepricingfactory.com

 

“He lives in a very big house house for someone who puts the price tags on PCs in Best Buy” ….. End-to-End Pricing: Step 1

 

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I told an old friend who had been a colleague of mine and had worked closely me with that “I was pleased to have been able to sort out the pricing for my client from “end-to-end””, and he replied that he had no idea what “end-to-end pricing” meant. Which made me think, if he doesn’t know what I meant, who does?

The purpose of the paper is to help pricing professionals explain to non-pricing executives and managers not only what “end-to-end pricing” is in a simplified, integrated 10-step program, but also articulate and visualize what pricing professionals create. So I am defining – for the purpose of this exercise – that the objectives of end-to-end pricing are to:

  • create competitive list prices and discount policies and guidelines which:
  • allow sales to be more efficient and focus on selling the value of the product …
  • … rather being margin managers or, even worse, sellers of deals for internal approval,
  • consistently apply your pricing strategy and price list positioning strategy,
  • align with your marketing, sales comp and financial plans;
  • All of which can be refreshed with a sustainable, efficient and repeatable process.

This is applicable to pretty much all B-2-B from those with one product to those with hundreds of thousands; small to large; regional to global; new to old; and particularly high tech.

If you like it’s like building a factory – a pricing factory – for prices & pricing processes, discounting policies and sales tools.

Step 1 – Competitive Analysis

I think this is the piece that everyone knows that pricing folks do – that is in between putting price tags on PCs in Best Buy as the parent of one of my daughter’s friends thought – but there are lots of opportunities for pratfalls. And I’ve seen some pratfalls in my time ….

The analysis needs to make sense and be easily understandable.

If it doesn’t instinctively make sense to your sales people, then there’s probably something wrong with it … and you’ll never be able to transform the analysis into a sales tool for communicating value to your customers.

The methodology and format needs to be consistent and repeatable … and timely.

If I didn’t need to mention any of this, obviously I wouldn’t.

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Ah, and the link between qualitative and quantitative analysis is the valuation/$-ization of those previously qualitative, subjective valuations …. everyone’s favorite topic. But for a lot of businesses, those valuations are the reason – not a reason, the reason – why the business exists, or is able to command a premium. So you gotta learn to love them … even if you don’t like them.

Extract from “10 Steps to Creating End-to-End Pricing” in April 2016 edition of The Pricing Advisor, authored by Paul Charlton of The Pricing Factory®Read the paper.

  • The Pricing Advisor is the monthly publication of the Professional Pricing Society, The World’s Leading Association Dedicated to Pricing Management.
  • This is the second article of Paul’s that the Professional Pricing Society has published. Read the paper in slideshow format …..
  • Any questions, please contact paul.charlton@thepricingfactory.com

 

“10 Steps to Creating End-to-End Pricing” has now been published by the Professional Pricing Society …

 

  • End-to-End Pricing 589x594 ©TPF … in April 2016 edition of The Pricing Advisor, authored by Paul Charlton of The Pricing Factory®Read the paper.
  • The Pricing Advisor is the monthly publication of the Professional Pricing Society, The World’s Leading Association Dedicated to Pricing Management.
  • The purpose of this article is to help pricing professionals explain to non-pricing executives and managers not only what “end-to-end pricing” is in a simplified, integrated 10-step program, but also articulate and visualize what pricing professionals create.
  • This is the second article of Paul’s that the Professional Pricing Society has published. Read the paper in slideshow format …..PPS logo 166x74
  • Any questions, please contact paul.charlton@thepricingfactory.com

 

Paul’s Pricing Dictionary: Inter-Regional Delta – a globally used metric … so why not use it?

Man playing chess with monkeyWhen people outside the US are buying any significant item for either business or personal use, they will always compare the local price to the US price – or that of some other low-friction trading zone like Hong Kong or Dubai or the UK or the Netherlands – both at a list and promo price level. Then that data is used to negotiate a bigger discount from their local supplier, or they’ll import it or have their brother-in-law export it to them. The transparency of global prices on the internet, the low cost and ease of international communications, shipping and payment – as well as movement of people around the world – has made this much easier than it used to be.

Yes, it’s called the gray market. Yet an inter-regional price delta doesn’t have to trigger a grey market shipment to cause an adverse financial impact to you. This is the big gotcha that most people don’t get. Most of the time the information is used by your customers to screw a better discount out of your local sales people who are generally pretty powerless to resist, particularly if you haven’t armed them with basic information like inter-regional price comparisons that your customers have. And in the process you will have ticked off those customers too – did they really have to put all that effort in just to get the discount they “deserved” out of you – as well as left your sales-force demoralized and disenchanted?

So what I like about this metric as a pricing manager is (a) applying it your own prices is a quick, simple control mechanism, particularly with today’s volatile exchange rates (b) applying it to your competitors’ prices yields a deep understanding of their behavior.

Did I mention that this is a quick, simple, inexpensive metric to monitor? No product feature adjustments required as with competitive analysis ….

Did I also mention that much more expensive competitive analysis will not identify this as an issue? Particularly if your competitors are monitoring your inter-regional deltas – knowing that you are not – and are pricing accordingly.

Yet for some reason a lot of execs think that they can choose to ignore this metric. It is very strange behavior. I think that it is to do with over-confidence: see my blog Pricing: which other discipline would give you a B+ for being smart enough to be a “Don’t Know”? Because there are absolutely no benefits to be had in ignoring this inexpensive metric, but potentially huge disadvantages and costs if you do.

Pricing: which other discipline would give you a B+ for being smart enough to be a “Don’t Know”?

SKP - Price Underestimation 1280x720Knowing that you “Don’t Know” – and having the courage to admit it – can often be a very smart option. The best option – rather obviously – is to be able to calculate the correct answer, but in many situations including this one, the next best alternative is to know when you don’t know and be prudent enough to say so. In this case 17% of the respondents in this research would – in my view – get a B+ for being smart enough to admit that they “Don’t Know”. Let me explain.

If most people had answered this simple question correctly the “Don’t Knows” wouldn’t get a B+. They would just get a F for not getting the answer correct because the realistic expectation would be that they should be able to get it right, after all, most people did. But in this case only 4% of respondents got the answer correct so the expectation is very different.

And before we go any further – given that 79% of the respondents attempted to estimate the answer and got it wrong, of which 75% of them got it “strongly” wrong – I think it might be worth interjecting that there is an exact answer to the question posed. You know like 2 + 2 does have a unique and exact answer, which, by the way, isn’t 3 which sounds ridiculous to say it, but that’s not dissimilar in business terms from what the majority of the respondents in this research came up with when answering this simple pricing question.

Now let’s contrast the B+ execs – the “Don’t Knows” – with the 75% who thought that they knew the answer while they clearly didn’t, yet nevertheless guessed wildly and – as it turned out – inaccurately at the answer. Before we do though let’s also note that 74% of the 75% “strongly underestimated” – and only 1% “strongly overestimated” – the impact of a price reduction. That’s a hugely significant bias.

And what’s the consequence? Well, the 74% will be much more likely to cut prices which have a hugely negative impact on their own business and also probably run the risk of inadvertently starting a price war with negative consequences for their entire industry. That’s why I’d grade them an “F”: the consequences of strongly underestimating the answer to this question in business are serious and far reaching.

This reminds me somewhat of Joe McNally, country manager of Compaq UK, who was somewhat anxious at the prospect of hiring another MBA who might think that they knew everything but in fact didn’t. And I think this excellent research from Simon-Kucher & Partners shows why he was right to be worried. His encouragement to me on my first day at Compaq was, “If you don’t know, just say you don’t know. No-one will mind.  We far prefer you say that you don’t know than you pretend that you do, and screw it up for everyone”. Wise words indeed.

 

Paul’s Pricing Dictionary: Inter-Regional Delta – Positive Illustrations …

P 38x38 I was asked if could explain the value of inter-regional deltas a little more or at least give an example. It’s a metric which lots of folks don’t get, and so they dismiss it, which is great for me because when they do that, their pricing is automatically “sub-optimized” and so needs someone to come along and “optimize” it for them – Pricing Problems? Better Call Paul 281-782-9821.

While I have a lot of great negative examples of things that have gone wrong when people have ignored and/or been blissfully unaware of inter-regional deltas, I thought I’d start with a couple of positive ones in this blog. So imagine these two real cases (numbers, countries changed):

a) a guy on the US bid desk calls me up: could I send him the latest inter-regional deltas by product and also send the overall trend for the past couple of years? Sure. He is US-based but bidding on a global contract for a multi-national based in Germany and thought it might give him a better idea of how to discount in Europe relative to the US. You know, if our list prices are (say 5%) higher in Europe than the US then he could discount (say 3%) more in Europe, and – given the same product mix, etc. – still get the same margins. That’s right. He had been paying attention. But if the competitors’ inter-regional delta was greater and much higher in Europe than we were (say 15%), then they would have to increase their discount in Europe by a much a bigger amount than we would (say 10%) to be competitive. But they would have to know their inter-regional deltas to realize that they had to do this. Right. So could I confirm that our major competitor was still unaware of this inter-regional delta stuff? I could: their inter-regional deltas were still inconsistent and showed that they were clearly not monitoring it. I could hear the wheels turning in his mind. I could sense the opposition were already being out-maneuvered. We won the contract.  Imagine that in reverse: your competitor has worked out which metrics you are ignoring and is playing the game in the full knowledge that he knows what you’re ignoring and funnily enough you lose the bid.

b) a business unit leadership meeting at their QBR sitting around and reviewing their competitors’ pricing. Not their own pricing. Nor even the competitive premiums between their pricing and their competitors’. Just the competitor’s pricing, viewed through the lens of inter-regional deltas. This was sort of fun because we knew they didn’t monitor inter-regional deltas. It’s also sort of creepy when you start to realize that you understand more about your competitors’ pricing than they do themselves. So the questions began. So six months ago their lowest pricing was in China and now it is Canada? Yes. And before China it was the US. Yes. And their current up-sell strategy in APJ is structured completely different to and inconsistent with US & Europe. Yes. Why would they do that? Well, we know that they are not doing it deliberately. It’s just a consequence of neglect. Now, if we just …….. so you can imagine how the conversation goes. Or maybe you can’t. Also we knew we were having a discussion about our competitors’ pricing that we knew they weren’t having about ours. Precious.

So here’s a metric which most people on the planet are familiar with and use – more on that in a following blog – and yet some either ignore it through blissful ignorance or think they can choose to ignore it, presumably because they think they know better. So, knock yourselves out. Ignore it at your leisure. As the pulmonologist said when he was asked why he was at the cigar smokers’ convention, “These people are meant to be intelligent, they’ve been warned: but it’s great for business.”

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