«Why executives should make pricing their personal mission I magine a world in which over 80% of companies have come under increased pricing pressure, ...»
Moving away from these examples, one could imagine prices based on unbundling (such as Ryanair) or on other metrics (per user, per click). Ryanair broke up the industry’s all-inclusive bundle (the air fare) into important constituent parts such as food and beverage, baggage fees, fees for airport check-in, and even in-ﬂight smoking. Customers can customize their entire experience as they see ﬁt, knowing two things: the more they want, the more they’ll pay. But if they want to simply ﬂy from City A to City B with absolutely no frills whatsoever, they also know that Ryanair will not charge them an artiﬁcially high, bundled fare that subsidizes the enjoyment or convenience of other passengers.
Price models and metrics in the software industry have evolved to match needs, but with an element of ﬂexibility (usage-based metrics, storage-based metrics, etc.). This also applies to telecommunications. The Swiss mobile services provider Swisscom had a high price perception, which their former price metric only reinforced. By charging customers for the length of their call (price per minute), they forced callers to look at their watches and constantly wonder how much a longer call may cost.
The Key to Higher Proﬁts: Pricing Power - Page 18 When the company switched its usage-based metric from price-per-minute to price-percall, they created something new which made price comparisons difﬁcult. This kind of intransparency usually favors an expensive incumbent. The new model meant that customers could now focus on their conversation, not their costs. Swisscom capped the length of a call at one hour, but turned this into an advantage by communicating an eye-catching, low “price per hour” for a phone call.
Developing and implementing a new revenue model is truly a strategic exercise, not a mechanical or technical one. You can’t simply ask someone “over there” in your organization to model some alternatives. It requires experience and market knowledge, as well as the foresight to understand the indirect beneﬁts from the change. These include the “easy” price increases and lower sales effort (Michelin) or changes to customer perception (Swisscom).
But good price models must respect two dimensions. You have the customer beneﬁt on one side, and the costs on the other. Flat rates are a common example of price models that try to satisfy one dimension (the customer) but neglect the cost side. When AT&T decided to offer iPhone users up to 400 MB per month for $30, the uptake created a spike in AT&T’s capital expenditure to keep up with demand. Costs followed usage, but the price model didn’t.
The Key to Higher Proﬁts: Pricing Power - Page 19 It’s not senior management’s job to create these new models or adapt old ones. But as an executive, you make success more likely when you ask simple questions to make sure the work gets done. The simplest two questions rework and amplify the comment from Mr.
• How well does this revenue model reﬂect the beneﬁts we provide our customers?
• How well does this revenue model align with the costs we incur?
Now you can beneﬁt from the positive side effects of holding your company accountable and from having installed a pricing strategy and organization: First, it keeps the business unit focused on the question of beneﬁts to the customer. You turn your company’s attention towards what the customers need and what they value. Even the development of new products or line extensions should have a link to the revenue or price model early in the development process.
We recommend that you encourage a lot of creativity and welcome radical new ideas when it comes to new revenue models, especially when it leads to more thinking around the beneﬁts that your products and services provide your customers. The fact that you also need to consider costs and implementation will provide a “reality check” on the ideas anyway, so it makes sense to cast the net as wide as you can at ﬁrst.
The modeling of the effects of the change will need to take costs into account. This ensures that you can afford to create the beneﬁts you provide and also that success won’t kill you because the revenue you generate does not keep pace with the costs you incur.
But implementation can pose an even trickier challenge. You may hear the standard comment from marketing and sales that “We have always done it this way” when a business unit tries to implement a new price or revenue model. Instead of dismissing the comment as a sign of resistance or defensiveness, we suggest at ﬁrst that you respect the comment and try to understand what it is a symptom of.
If market conditions – customer needs, competitors, technology, costs – have all changed to such a degree that a new model is warranted, you have a strong argument. But the comment may signal a lack of conﬁdence. Or it may mean that a certain segment of customers will legitimately resist the change.
Any new model – be it revolutionary or evolutionary – will not work unless customers accept it. The ultimate challenge may be to prepare your salesforce better to “sell” customers who are used to your old revenue model.
The Key to Higher Proﬁts: Pricing Power - Page 20 Finally, a change in a revenue model can serve as a strategic coup for companies. If you have enough pricing power in a market, being the ﬁrst company to change the industry’s revenue model may put your competitors at a disadvantage long enough for you to make signiﬁcant gains in share or proﬁt.
This can also work the other way around. A clever revenue model can allow a new market entrant to establish itself in a way that the incumbents cannot afford to counter. But not every company can redeﬁne the basis of competition in certain market segments in this manner. In the end, success always hinges on customer acceptance.
Communication is an essential part of gaining customer acceptance. That is what we will talk about in the ﬁnal chapter.
-level executives are a company’s best pricing ambassadors. The reach and the power of what they say – or don’t say – will set the tone for pricing within the organization and also in the marketplace. Granted, what executives say about pricing support must match with what their companies do about pricing. Consistency is of paramount importance if you want your communications to maintain credibility and avoid confusion.
The ﬁrst step is to take a close look at what you say already and how you say it, regardless of whether the word “price” appears explicitly.
Representatives of a company, from a C-level executive down to a junior sales rep, only have a limited amount of time to convey an impression to an audience. Spending too much of time talking about price causes damage in two ways. First, the more someone stresses price, the more they sensitize the audience to price. Second, every expression you make about price is a lost opportunity to talk about value instead.
We would like to reiterate the deﬁnition of pricing power used at the outset of this eBook:
Pricing power is the ability of a company to get the prices it deserves for the value it delivers to customers.
The most elegant communication from a company with high pricing power should focus consistently on three things, in order of priority: customers, the value the company delivers to them, and the prices the company deserves.
Anything else risks creating a situation in which someone misunderstood or misinterpreted the communication. And amidst confusion in business, competitors will tend to assume the worst motives rather than any noble or innocent ones. Price aggression is often the result.
It’s no wonder, then, that some companies talk their way into price wars that they think someone else started.
The Key to Higher Proﬁts: Pricing Power - Page 22 The study’s ﬁndings revealed that perception rarely matches reality when it comes to discussing price wars. Some 59% of respondents said that their company is currently engaged in a price war. But when asked who started that price war, 88% of respondents said that other companies did it. Of the 12% who took responsibility for the launching the price war, roughly half said the move was accidental, the other half said it was intentional.
Please reﬂect on that last sentence for a moment. If you take any 20 price wars raging today, on average only 1 of those 20 resulted from a conscious management decision that the company admits to. The others resulted from some misunderstanding, misinterpretation, miscalculation, or were initiated by the competitors.
That is a shame, because more often than not, price wars do little more than drain revenue and proﬁts from a market. Market share gains, even when they appear signiﬁcant in the short-term, usually dissipate after competitors retaliate. Often the unfortunate cycle repeats itself.
Price wars The vast majority of companies involved in a price war blamed the competition for starting it
In those situations, companies have a decisive advantage when they know precisely where and when to respond or not respond, and also what levers they should use. A response in a price war or amidst rising price pressures need not always involve changes to prices per se. In fact, in the absence of a more reﬁned plan, the best response to have ready if a price war threatens is the word “no”.
The Key to Higher Proﬁts: Pricing Power - Page 23 In other words, you do not react until you have a very thorough understanding of the risks, the potential upside, and the next moves your competitors may take. In many cases, companies heavily overestimate both the impact that their competitors’ price changes will have, and the speed with which those impacts might occur.
No reaction is usually better than an impulsive one. You should respond to a price war only after you have fully assessed the risks and consequences. Even then, you should proceed with smaller, very focused or “surgical” countermeasures.
One crucial element in pricing communication is a company’s ability to project a pricing identity. Over the four actions in this change mandate, you will have learned a lot about
your company’s pricing identity. You should be in a position to answer these questions:
• Do you want to be a leader or follower on pricing?
• Do you want your pricing to be simple or complex?
• Do you want to emphasize price or value in your communications?
• Do you want your brand perceived as discount or premium?
• Is your focus more on skimming or on market penetration?
The answers to these questions – which should go hand in hand with the guidance you provide your business units – form the core of your pricing identity, the way that parties ranging from investors to customers to competitors will perceive you. Most importantly, the price identity is the translation of a brand’s USP and pricing strategy into a pricing proposition understood by the customers, to increase the likelihood that your target customers choose you and stay with you.
Think of Amazon.com and imagine how Jeff Bezos, its customer-centric founder and CEO,
might answer those ﬁve questions above:
Leader Slightly complex Price-driven Discount Market penetration That represents how most people perceive Amazon, because of the company’s remarkable consistency in hammering home those messages. The answers make sense for Amazon individually and collectively.
The Key to Higher Proﬁts: Pricing Power - Page 24 In its latest annual ﬁling with the US Securities and Exchange Commission, Amazon ofﬁcially described its pricing identity as follows: “We strive to offer our customers the lowest prices possible through low everyday product pricing and shipping offers, including through membership in Amazon Prime, and to improve our operating efﬁciencies so that we can continue to lower prices for our customers.” It is a well-crafted pricing identity, especially because Amazon does not always charge the lowest prices for books. When we undertook a detailed analysis of Amazon’s pricing for top-selling print books in the UK in late 2012, we learned that print titles in the Top 20 on Amazon were on average 6% less expensive than all other competitors. But Amazon charged an average premium of 13% on print books in its Top 21-50 and 15% on print books in its Top 51-100 compared to the competitor with the lowest price.
Our comment that Amazon’s actual prices do not correspond exactly to pricing identity is a compliment, not a criticism. Because so many book buyers shop for reasons other than price, Amazon’s convenience and service – combined with the widespread perception of offering the lowest prices – are a formidable marketing combination.
The same applies to Ryanair. The unbundled “pay for what you want” approach and the very low base fare create the impression that Ryanair always has the lowest prices. Depending on how a passenger conﬁgures a ﬂight, however, he or she may actually pay more for a Ryanair ﬂight than a ﬂight on a competing airline. But the power of the price image discourages passengers from constantly making comparisons. The element of control and inﬂuence that a customer has in planning a ﬂight provides the customer a positive, intangible beneﬁt, as does the conﬁdence that they will pay low prices without investing lots of time in research and comparison shopping.
Your answers to those ﬁve questions may differ greatly from those of Mr. Bezos. No matter how you answer the questions, however, your communication needs to reﬂect those answers. You are managing your pricing identity internally and externally. Confusion is a big risk. Consistency is a big asset. You need to provide guidance and establish and enforce accountability in this aspect as well.
Over time, executives can use their pricing power as the basis for creating a proﬁt culture within the company. This extends beyond communication and extends to incentives. Companies with a proﬁt orientation introduce incentives related to proﬁt and pricing performance. They also set standards for price controlling (KPIs, pricing cockpit, including price implementation performance) and elevate “price performance” to a ﬁxture on the agenda of every board meeting.