The origins of this GRAPH Papers® article are in recent client requests: with deal prices necessitating robust value creation plans, clients have been continually driving projects around EBITDA growth. As commercial specialists, we think about growing the top line as four factors:
- Winning the right customers…
- … maximizing share of wallet …
- …with the right product mix…
- …and pricing those products effectively.
The right place to start on this list depends on the company: mature companies benefit most in their core business from product mix and price, as they more often have saturated their prospective customer bases; high-growth companies are often best off considering if they are targeting the right customers, and are positioned to win the maximum account potential (share of wallet) over time.
We have recently been exploring product price and mix considerations and have honed a methodology that is proving a useful tool to optimizing price. We continue to build and refine this methodology in collaboration with our clients, but I am eager to share a brief summary of it, hear your questions and suggestions, and I hope it may be useful in inspiring thinking for you.
Of course, we could expand the consideration to include product improvement in addition to pricing – but most companies do not have the capacity to continually redefine and reengineer their products, and waiting for the next product cycle to tackle pricing improvement can have a very significant opportunity cost. Furthermore, the implementation path for pricing journeys is nearly always much faster than for product transitions.
Our inspiration was seeing a gap in most organizations when it comes to pricing as a topic. Today, many organizations attack pricing in a sales lens (price controls), marketing lens (pricing strategy), product lens (product management), and/or strategy lens (typically one-off efforts). Our view is that much of the language and frameworks surrounding price are built in, and reflect, these four silos. This is fine when the pricing improvement opportunity is relatively straightforward – i.e., a technical question of price setting for existing SKUs. But more significant pricing improvements – i.e., large changes or new price structures – often sit unexploited waiting for the next product introduction to drive the coordination and analysis necessary to succeed. Our goal is to introduce a method (and critically, the framework and language) for tackling large pricing improvements more proactively.
We start the price improvement process with a detailed cross-functional brainstorm with Sales, Marketing, Service and Support, and Strategy (anyone who regularly touches pricing and customer interaction with pricing). The goal of the brainstorm is to identify feasible improved, future scenarios. Often this involves changes to one or more of:
- Pricing cycles – the frequency with which prices are adjusted
- Price coupling – the degree of contractual or de facto coupling of your product’s price against another good’s price, often benchmarked to an input, substitute, or industry competitor
- Price realization – the percent of list price that is actually realized as a pocket price
- Price premiumization – an increase in “mark-up” or gross margin
- Billing intervals – financing, subscriptions, gain-sharing, or other means for spreading customer’s cost
- Offer construction – bundling or unbundling of items in a sale
- Product mix improvement – a shift towards products with greater premiums
We call these feasible future scenarios “Destinations.” From here, you want to get deep into the customer “Journeys” that would lead to the Destinations you’ve envisioned. Journeys start with meeting customers where they’re at today: what are the needs that are addressed by your products (or services or solutions)? Does your Destination attach to any of those particular needs? What are the inhibitors that currently or in the future may stop customers from moving towards that Destination?
Journeys can differ by customer, so it’s important to think in terms of segments or archetypes for this work. Pricing improvement comes down to charting those journeys in real terms and setting realistic Destinations that you can achieve – preferably based on real market intelligence.
To start the conversation internally, we recommend sharing some of the vocabulary in this paper: “Journeys” are deliberately named to inspire thinking that involves multiple steps; “Destinations” imply that pricing strategy doesn’t need to be a one-and-done endeavor. And since Journeys can have multiple Destinations (interim and final), then you can lower the perceived stakes with your commercial team leaders and embolden them to dream bigger.
For more, stay tuned for our detailed white paper on Pricing Journeys. Or just reach out to us. We would love to engage.
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