Articles
Pricing Transformation: Why it Matters and How to Implement it
Date: Nov 2022
by Tayo Korede PhD and Tunde Oloruntoba
Pricing transformation offers an opportunity for companies to rethink their pricing strategy and unlock new avenues for growth, profit and competitiveness.
Pricing strategy is a core management function. It requires organisations to constantly change and adapt their pricing for profit and sustainability. Pricing is complicated – especially when managers are required to respond swiftly to changes in the business environment, perhaps due to crisis or disruption such as the pandemic and the ongoing war in Ukraine. To realise the full potential of products and services, organisations must adapt their price offerings to meet the changing and ever-challenging market.
Pricing transformation is a reinvention of the pricing framework to enable an effective pricing decision–making process which unlocks new opportunities, generates new value and improves profit and growth. It is more than just making a minor change or improvement here and there; it is a fundamental change in pricing logic. It can unlock new avenues for sustained growth and profitability. By deploying an overarching competitive pricing model organisations can improve margins and profits.
1. Why pricing transformation matters
Businesses embarking on pricing transformation must recognise that pricing is complex, and transforming it requires a clear focus and steadfast discipline to change management principles to achieve the desired outcomes.
When done right, pricing transformation provides significant benefits, including:
- Enhance price optimisation.By figuring out the right balance between value and profit, companies can identify the pricing sweet spot based on market insight and variation in demand. Thus, businesses can attract and retain customers, maximise sales and increase profits
- Ensure price differentiation. Product and services do not command generic value. Through pricing transformation, companies can develop offers that appeal to different market segment and monetise value.
- Improve profitability and sustainability. Profitability and sustainability are not mutually exclusive. Pricing transformation delivers super value which improves profit and sustains
- Provide predictive pricing. Dynamic pricing through strategy and predictive analytics unlocks opportunities by anticipating changes. It turns changes in customer behaviour to pricing power.
- Improve value proposition. Good pricing transformation articulates a strong and compelling value proposition which is key to competitive advantage.
- Enhance customer understanding and engagement. Pricing transformation provides ongoing interactions with customers. This generates valuable customer insight and improves customer loyalty and trust.
- Personalise pricing to customers. The tailored pricing of products and services enabled by technology can drive growth and revenue. Extracting value from products and services through pricing transformation is not an easy task. A “quick fix” mindset to pricing does not maximize profit or resolve your pricing issues.
2. How to implement pricing transformation
Pricing transformation can mean different things to different organisations. There is no perfect model or template which all organisations can adopt.
Extracting value from products and services through pricing transformation is not an easy task. A “quick fix” mindset to pricing does not maximise profit or resolve your pricing issues.
But after researching different models and approaches to pricing transformation across various organisations and industries, we’ve developed a pricing transformation framework which organisations can adopt and adapt. It can be applied to your own unique goals and circumstances. It offers clarity on how businesses can implement pricing transformation by providing insightful elements and listing important factors that you may find useful when rethinking your pricing strategies to maximise profits.
The pricing transformation framework is a blend of five major components: strategy, capabilities, creative commercial thinking, technology and execution.
Creative pricing impacts positively on company profits, creates value for customers and ensures sustained growth. Yet, business managers tend to focus on product innovation while neglecting pricing innovation. By thinking differently about pricing, businesses can generate superior value through a blend of discount optimisation, bundling and unbundling, product portfolio analysis, customer needs segmentation and paradigm shift in pricing thinking.
STRATEGY
Pricing is more than an element of the marketing strategy. It is a strategic organisational capability. At an organisational level, pricing transformation can be a source of competitive advantage. As such, leadership is an important factor in achieving pricing transformation. Business leaders should not be passive when it comes to pricing strategy. To be effective, they need to lead and incorporate pricing as a key part of corporate strategy. Pricing transformation becomes difficult to achieve when business leaders are indifferent or take pricing for granted.
Research in pricing and strategy has shown that upper-management involvement in pricing strategy significantly improves pricing capabilities and firm performance, leading to increased company profit. For example, the involvement of CEOs in the pricing function positively influences profit margin, market share and competitive positioning (1). Yet only 22% of Fortune 500 companies and 15% of top 500 US firms invest in strategic pricing capabilities (2).
Pricing is fundamental to a strategic CEO’s job. Developing pricing strategy and building pricing capability are part of the executive leadership responsibility. Strategy, not just technology, drives pricing transformation.
CAPABILITIES
Implementing pricing transformation requires investment in talent, resources and infrastructure. Without the right talent competencies and resources, companies will be unable to effectively implement their pricing transformation agenda.
Companies require employees with skills and competencies to drive pricing change. Some of the skills and competencies required involves restructuring the processes used in pricing decisions, equipping those making pricing decisions with the right information, and reworking the pricing model and architecture to ensure pricing strategy aligns with corporate objectives. Empowered employees can capture opportunities that pricing transformation creates.
People make technology and transformation work. If the right talent is absent, organizations should consider recruiting digital and data talent or seeking external support to enable the pricing transformation. Pricing training programmers and internal communication will provide support and insight to plan and effectively manage the transformation process.
Investment in key infrastructure is also critical to pricing transformation. It provides the right architecture for implementing pricing transformation.
CREATIVE COMMERCIAL THINKING
Pricing is often the least creative element of the marketing plan for many organisations. However, the days of traditional and reactive approaches to pricing are over. Creative and entrepreneurial orientation to pricing enables companies to navigate disruptive business environments. Creative pricing impacts positively on company profits, creates value for customers and ensures sustained growth. Yet, business managers tend to focus on product innovation while neglecting pricing innovation. By thinking differently about pricing, businesses can generate superior value through a blend of discount optimisation, bundling and unbundling, product portfolio analysis, customer needs segmentation and paradigm shift in pricing thinking.
Innovative companies tend to adopt a variety of pricing strategies across their product and service portfolio. Pricing transformation helps to inform these strategies, including preventing price leakage by enabling discount optimisation.
Importantly, by combining pricing transformation with customer segmentation and product portfolio analysis, businesses can package or unpackage their products to unlock value and increase profit. Product bundling offers complementary products to offer additional customer value and enhance customer satisfaction. By contrast, unbundling provides choice and flexibility. Businesses can avoid head-to-head competition through innovative product bundling and unbundling. By bundling product offerings and grouping customers into different segments based on their needs it is possible to improve pricing tactics by providing each customer group with distinct price points based on their needs. However, traditional customer segmentation based on demographics alone is not enough to support optimal pricing strategy and profitable growth. Dynamic pricing based on value-based segmentation through data analytics offers more promising potential for growth and profitability.
We advocate an entrepreneurial approach to pricing. Entrepreneurial pricing is opportunity-seeking, embraces risk and is proactive, flexible and innovative. Such entrepreneurial pricing may involve usage-based pricing, risk-based pricing, value-based pricing, point-based pricing, environmental-based pricing, etc.
TECHNOLOGY
Pricing technology plays an important role in pricing transformation as it helps to automate pricing processes and activities, allowing companies to quickly and accurately adjust prices to meet changing market conditions. Of course, technology won’t solve all your pricing problems, but technology will facilitate your pricing transformation strategy.
Pricing and data technology tools such as CPQ, PMS, and BI solutions provide data-driven insights that can help companies optimise their pricing strategy and stay competitive. These technology solutions provide advanced analytical backbone fit for today’s dynamic and competitive marketplace.
Additionally, pricing technology can help companies identify opportunities to increase profits, reduce costs, and improve customer loyalty through personalised pricing. With pricing technology, organisations can streamline the pricing process, automate pricing activities, and gain real-time insights into customer data to optimise pricing decisions.
Moreover, the adoption of artificial intelligence and data analytics in pricing transformation can help companies to make more informed pricing decisions. By using AI and analytics to interpret data, businesses can identify trends and preferences that were previously undetectable. This information can then be used to adjust prices in response to changing market conditions.
EXECUTION
Often, the real challenge of pricing transformation is execution. Execution is a known weakness in any transformation agenda. Research suggests that about 60% of transformation strategies are not implemented successfully. While the execution of pricing transformation may be process-based and system driven, important components to consider include integration and alignment with corporate strategy, customer involvement and carrying customers along, collaboration and your communication strategy.
Pricing should be a conversation. It becomes effective through collaboration and communication with stakeholders. Collaboration is of huge importance in a fast-paced and competitive market environment. Businesses that want to capture value must co-produce value through constant engagement with their customers and suppliers. Customer interaction and collaboration provide not only customer insight but also competitor insight. Clear, open and transparent communication through a cohesive communication strategy is critical to the implementation of pricing transformation.
Our team @Trellisi.com is here to support you
Pricing transformation is a complex process for many organisations, and understanding the different dynamics of pricing can be challenging. However, with the right guidance and expertise, organisations can successfully navigate the process and reap outsized benefits.
Want to transform your pricing or set a new pricing strategy but not sure where to start? We can help.
How we support you:
- Diagnostics and discovery
- Modelling and analytics
- Monetisation and strategy
- Execution and monitoring
Contact us today at: connect@trellisi.com to get the conversation started
References
- Hinterhuber, A. & Liozu, S.M. (2013). Innovation in pricing: Contemporary theories and best pratices. New York: Routledge
- Liozu S.M. & Hinterhuber, A. (2021). pricing and CEOs: why top executives need to get involved. journal of Business Strategy.
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