In this article, we asked pricing and business strategy consultant, Erick Bouwer, to share his experience and thoughts on how organisations can determine and overcome the common pitfalls in pricing strategy execution.
How would you describe the current practice of pricing as a discipline within ICT?
During the past 12 years I have spent six years in strategic pricing for solutions and services, followed by a further six years dealing with customer pricing and contracts. Throughout this period, I’ve seen pricing grow in awareness, maturity and adoption. Yet, we still have a long way to go to achieve excellence.
What is required in order to achieve excellence?
Pricing is slowly but surely making its way to the boardroom as it is increasingly seen to be of strategic importance to meet company objectives. However, what good is a well thought through pricing strategy when it is executed poorly?
As the old saying goes, you are only as strong as your weakest link. If we take the evolution of music streaming as an analogy; consumers can now subscribe and download or stream music at extremely high audio quality levels. However, one can only experience this superb audio quality when using the right tools within the right environment. In other words, bad sound kills good music. Based on my experience in pricing, the weak link often tends to be the poor execution of a good pricing strategy.
What do you consider the main reasons for poor execution?
One critical issue I have found is a lack of confidence. Colleagues, primarily in sales roles, simply not trusting or being able to rely on what is in front of them, for example, list pricing and sales discretionary discounts. However, the real challenge underneath that lack of confidence, is that many in frontline sales roles, do not always properly understand pricing and how to apply it within a live scenario. These low levels of confidence and competence contribute to losing customer opportunities or leaving revenue and profit on the table.
Do you have examples of common pitfalls and how they materialised in your experience?
I have come across countless scenarios that illustrate how levels of confidence and competence can negatively impact your ability to execute your pricing strategy successfully.
- A common situation I come across is whereby one sales representative manages to offer a product to a customer at 20% above list price, whereas his/her colleague offers the same product in quite a similar customer case at a 25% discount from list price. One might consider this example as a case of ‘price elasticity’ – to a certain degree it is, but in reality this rather demonstrates that the value of this product is perceived differently. On many occasions, I’ve experienced sales representatives, often with their best intentions, guessing what the right customer price is.
- Another recurring scenario is where the special pricing team is engaged for a price reduction down to a certain margin level ‘in order to win the deal’. As with the example provided earlier, this is a situation with a high level of ‘intuitive positioning’. List prices are often perceived as outdated, too costly and with too high margins and as a result a lower x% margin sounds and feels about right.I recall cases of sales personnel engaging the special pricing team for a significant reduction from list pricing by obtaining executive approval to go as low as a 20% margin. Whereas this action was expected to lead to a reduction from list pricing it actually led to a price increase of 12%, as the margin of the current list pricing was already lower than the margin requested.
- An additional scenario worth sharing is one whereby a strategic pricing team reviews and reduces the list price of a product, yet the same team is engaged to approve the same high list price discount percentages prior to that list price review.I remember a customer case which was submitted for approval of a 40% list price reduction, while the list prices were reduced by 30% a few weeks earlier. Needless to say that this has an unforeseen impact on top and bottom line. As with example 1, this demonstrates a typical behavioural aspect mainly driven by poor communication between and within various teams throughout an organisation.
How did you manage these challenges?
The examples provided are just a few of many common pitfalls in pricing execution. They illustrate an unsustainable modus of pricing operation with the potential of leaving revenue and profit on the table, and in some occasions put a deal or customer relationship at risk – or even create a price war.
Clearly an understanding of foundational aspects of pricing, such as costs, customer and competition are absent in these kinds of scenarios, which again demonstrates the importance of developing competence and confidence. In addition, they demonstrate the contagious behaviours that could lead to becoming a default and it can be challenging to turn them around without the right people, knowledge and tools in place. Situations like these call for organisational change with executive buy-in in order to have a sustainable effect.
By now, you may have noticed that I mention a number of key words starting with the letter C. This was part of a programme which I put in place to address pitfalls like the ones I shared earlier. This programme involved participation of not only the pricing and sales community, but also the main bid/customer supporting functions such as legal, product management, finance, pre-sales, service & contract management, commercial management, bid management, project management and operations. Using the letter C as the common denominator and recognisable factor, this programme was initiated and offered in the form of training and frequent update sessions to improve the overall pricing practice by further building on the basic principles of pricing – customer, competition and cost.
What is your recommendation to organisations experiencing performance below expectations?
“Price is only an issue in the absence of value” and price drives margin not the other way around, provided you understand your customer, costs, competition and conditions.
My advice is to develop and maintain pricing management skills to build both trust and confidence within the pricing practice, but more importantly within teams that face customers on a daily basis. Train your organisation with a focus on the sales community and provide them with the pricing knowledge and skills that underpin an appropriate level of competence to enable confidence in customer interaction. Finally, connect and communicate on frequent basis to facilitate the crucial interaction and education between teams.
In certain markets, routine can easily become your enemy. As such, it can be helpful to engage objective experts to assess and address your needs in securing both excellence in pricing strategy and operations. So don’t stand still, evolve and disrupt to make your customer king and the competition irrelevant.
ABOUT THE AUTHOR
Erick Bouwer is a Business Strategy & Economics Consultant with a track record of successfully developing, implementing and managing profitable pricing and commercial strategies for services, products and customer opportunity cases in international business environments. For more than decade, Erick spent his career in the information and communications technology business sector holding leadership positions to help build, develop, transform and manage high performing teams and practices in pricing management, bid management and commercial management.
Erick studied Business Economics and Commercial Economics at Amsterdam University of Applied Sciences, followed by advanced professional development at Stanford University and Harvard Business School, focusing on strategic decision making, risk management and disruptive strategy.
A boutique search firm, helping technology and outsourcing companies navigate complex, challenging disciplines and senior employment markets to ensure they hire the best talent that will positively impact the business. Operating as a strategic recruitment partner and offering expertise across executive leadership, finance, commercial management, pricing and bid management.