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Pricing – the hardest (proven) value creation lever?

Updated: Sep 26, 2023

Have you been frustrated by conversions about pricing you’ve had as part of a Management team, or as an investor?

Throughout my time as both a strategy consultant and investor, pricing strategy has been a topic that has fascinated me. Whilst I’ve had many conversations with Management teams about pricing, I believe that price has been consistently underutilised as a value creation lever.

I’m planning to write a series of pieces on this topic, so I thought I’d start by introducing how I think about pricing, and why it seems so hard to focus on pricing strategy in SME businesses - not least when I still see TV ads for mobile phone contracts and broadband providers hiding a CPI + 3.9% annual price increase in the small print!

Why is pricing an attractive value creation lever?

There are five key reasons why price should be something that every CEO and investor thinks about when putting together a value creation plan:

  1. It can really move the needle - pricing changes rarely require additional costs, so a 1% price increase will be much more meaningful to profits than a 1% increase in volumes, all things being equal. My broadband provider hasn’t given me faster speeds after my 14% price increase earlier this year!

  2. There are typically multiple ‘quick win’ opportunities in SME businesses, who have rarely spent much time thinking about price until they start to consider institutional investment.

  3. A pricing opportunity review can be very evidence based. You can triangulate between historical customer data, external benchmarks, and primary research. Recommendations can often be proven in a small-scale pilot before being rolled out. There are many common pricing levers between different types of businesses, and consultants who have seen many examples of these working in practice. Such empirical evidence & predictability means that future investors may be willing to ‘pay’ for the benefits of a new pricing strategy even before it is fully implemented.

  4. Pricing as a value creation lever blends pure strategy, tactics, and execution – essentially there are lots of different sub-levers available, meaning that you have a high probability of identifying meaningful opportunities in a pricing review (at least enough to justify the effort of the review itself), even if they don’t come from the area you were initially expecting.

  5. Pricing is especially important in periods of high-cost inflation/macro-economic headwinds, when other sources of growth will be harder to come by (and potentially when customers are already primed to anticipate some pricing changes).

Isn’t this just about increasing prices?

Pricing is about much more than headline prices. In fact, I think of it about being about customer value, in other words understanding how customers derive ‘utility’ – value - from your product/service and matching up your pricing model to this. The perfect pricing model is one where every customer is paying the maximum they are willing to pay but not a penny more (otherwise in the long run they will all churn). As the saying goes – “some of your customers would have paid more, the challenge is working out which ones”.

This is why at the heart of any pricing review should be a meaningful piece of customer research – to understand how much each aspect of your product/service is valued by different types of customers.

As you start to break down your product/service offering into its constituent parts, you can uncover things that you may not even perceive as explicit features of your offering today. For example, having a named account manager, or a fast response to customer enquiries. These previously unrecognised features may be really valued by some of your customers (who are willing to pay more for them) and not at all by others (who risk feeling like they are over-paying)

This is why many pricing projects focus on ‘packaging’ – how to create bundles that combine different aspects of your offering that are differentially priced, and appeal to different customer segments. The classic example is the ‘good, better, best’ ranges on supermarket shelves.

A lot of pricing value creation can also happen without changing prices or packages at all, but rather by focusing on how your chosen pricing strategy is communicated and executed during the sales process. Are your sales team price getting as opposed to price setting? Pricing reviews often cover areas such as the use of discounts, the incentives of the sales team, or even the utilisation of existing contractual terms such as annual pricing reviews or volume limits.

Why is it hard to change pricing?

Given the multiple ways in which pricing can be used to create value, why can it be hard to convince Management teams to commit time and money to a pricing review? I think that the main reason is that pricing can be an intimidating subject, for a few reasons:

  • It is often new and unknown for SME management teams (the flipside of there likely being multiple ‘quick win’ opportunities)

  • It can feel ‘anti-customer’, which is particularly difficult to reconcile for founders who are often incredible customer advocates. This is a good spirit to retain so that you avoid pricing changes that might yield benefit in the short term but in the long run could be damaging – where they create an incentive for someone to start a lower-priced competitor business, or risk negative coverage of your brand.

  • It can be hard to identify a single owner for pricing – should it sit with the Chief Financial Officer? The Chief Revenue Officer? The Chief Marketing Officer? A Head of Pricing?

  • Recommendations can be hard to implement, especially when they involve changing the incentives and behaviour of a large sales team.

  • It can be analytically complex, with techniques such as ‘Van Westendorp analysis’ and ‘Conjoint’ only adding to the complexity – and in my experience pricing consultancies can sometimes over-emphasise their analysis over the conclusions.

As a result – many other value creation projects are prioritised over pricing, and money is left on the table. The most effective approach I’ve found to get past these objections are to frame a pricing review as a customer value project. If we get it right, most SMEs should be able to both increase pricing and increase (or at least maintain) customer satisfaction, as they will be better aligning our product/service offering with the customer’s willingness to pay.

How can you spot potential pricing opportunities?

This topic merits its own discussion but I think there are two areas I would start with when trying to build a case for investing time & money in a thorough pricing review:

  • Ask some simple questions:

    1. Who is responsible for pricing in the management team?

    2. Have you increased prices in the past? What happened?

    3. Have you lost pitches, or customers, based on being too expensive?

    4. Do your standard contacts include routine (e.g., annual) price increases?

    5. Which parts of your product/service are most valued by customers?

  • Run some simple analysis:

    1. How variable is customer profitability? If there is a lot of variability this could point to sub-optimal pricing

    2. What happened to customer retention after the most recent price change?

    3. What % of sales involve the highest discount % that salespeople are allowed to offer?

    4. How does your pricing and packaging benchmark vs competitors? This isn’t to say that you should copy your competitors, but it is helpful to understand the context in which a potential customer will be evaluating your pricing.

    5. For software businesses, review the product roadmap for features that are tied to specific price increases vs being included ‘for free’.

These ideas are of course not exhaustive, but hopefully give you enough to at least start a conversation about pricing. If we keep focused on how a better understanding of customer value can yield both profitable growth and improved satisfaction, I believe that we will see more effective deployments of pricing as a value creation lever.

If you’d like to discuss how to start identifying pricing opportunities for your business, please Contact Me.

All views expressed in this post are the author's own and should not be relied upon for any reason. Clearly.



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