by Vibeke Enger, a Senior Pricing Analyst at Pricing Solutions

The last couple of weeks have brought on a whole new set of challenges for businesses. The isolation and disruption to daily life presented by the COVID-19 virus is unprecedented and has been more far reaching that anyone expected. The current crisis will leave a lasting mark on businesses and the economy as many companies rethink their business strategies going forward.

The focus on pricing is increasing in intensity across industries as businesses recognize pricing as a key player in their business development and growth. Indeed, pricing is a powerful tool to be leveraged during a time of crisis. The question then becomes what can businesses do to better prepare for the future and create a more resilient pricing strategy to help mitigate an adverse business environment?

The answer involves establishing a comprehensive pricing framework that will ensure your pricing strategy is both resilient and adaptable.

First, identify your current level of pricing maturity

The first step to pricing resiliency is identifying your current level of pricing maturity and then understanding how to improve with the goal of evolving to a higher level of pricing excellence. At Pricing Solutions, we have developed a framework of 5 Levels of World Class Pricing^TMExcellence that leverages over 20 years of experience and more than 700 projects. This framework helps organisations benchmark their pricing maturity and ensure their offerings are optimally priced every day. The 5 Levels of World Class Pricing Excellence acts as a roadmap to help our clients build an effective pricing strategy as they journey through these five levels:

Ad hoc/Firefighting – reactive pricing driven by exceptions and person-driven sales
Control – reliable and controlled pricing structure, driven by data with clear guidelines and rules for sales concessions
Value – good understanding and delivery of value of products to customers, with pricing decisions based on cross-functional communications
Optimized – a scientific approach to pricing that incorporates value and data driven understanding of purchasing behaviours, with specialised function revolving around pricing
Master – well recognised and established pricing approaches and tools with continuous monitoring and development.

Businesses at Level 1

Approximately 70% of organisations fall within the first two levels of pricing maturity. At these levels there are several opportunities to improve the pricing structure to reduce profit leaks and make quick wins.

Organisations operating at a Level 1 pricing maturity often have a haphazard pricing approach that’s led by their sales teams. During times of distress, a lack of guidance and absence of data-driven pricing structures results in reactive price cuts as businesses attempt to maintain market share and sales as demand declines. Reactive price cutting quickly leads to a race to the bottom on prices, which puts increasing pressure on margins. Under extended periods of distress this move could create a change in customers’ perceptions of price and be difficult to recover from when markets return to normal.

Pricing inconsistencies are another problem for organisations at this level of pricing maturity. Running a dispersion analysis, as illustrated below, is a strategy to identify the variations in net price paid by customers. This analysis highlights sales where the inconsitincies in pricing are damaging profit and margins. Identifying and addressing these profit leaks by implementing a more controlled pricing structure will result in quick wins and improved profits.

Profit leaks identified by a dipersion analysis

Companies that mitigate these effects through a more controlled pricing process will rise to Level 2 in the Pricing Maturity Scale, and no longer lose out on profit unnecessarily. However, if there are no processes to allow for flexibility during a time of distress, a control structure that’s too rigid can have an equally negative impact on performance.

Organisations at Level 2 and Above

Typically, businesses at Level 2 and above with a higher level of pricing maturity have a dedicated organisational function or internal pricing committee in place. This mechanism enables organisations to quickly react to a drastic change in the business environment and adjust pricing accordingly by leveraging the key customer value drivers.

Having a pricing committee in place ensures that the decisions made during difficult times are strategic, well informed, and are aligned internally across different teams. Good communication and transparency both internally and externally during a period dominated by uncertainty plays an important role in maintaining confidence in sales staff and building long term relationships with customers.

Understand your customers and their needs

When the current pricing maturity level has been identified and quick wins and profit leaks addressed, the next step towards a shock-proof pricing strategy is developing a better understanding of your customers, their perceived value and the business’ pricing power. This understanding will allow your company to separate customers and products into segments, facilitating highly targeted pricing moves while minimising negative impact on profit and market share in the short term.

In order to address key segments and to build a resilient pricing strategy that is capable of responding to drastic changes in the business environment, there need to be internal processes and reporting systems in place to ensure there is no relapse to old pricing habits. Having a dedicated pricing team and structures in place will allow your organisation to implement a highly targeted pricing strategy while avoiding unnecessary discounting and promotional activities that may be harmful in the long term. It is impossible to maximise profit without optimising pricing, and it is impossible to make the transition to pricing optimisation without linking the changes to processes, tools, technology, and company culture.

At Pricing Solutions, our team is dedicated to helping our clients increase their pricing maturity level from Level 1 by optimising their pricing strategy. We are committed to help companies establish where they are on the 5 Levels of Pricing Maturity and ensure that our clients are confident in implementing changes by equipping them with pricing tools and providing them with guidance throughout their journey.