Kindle Notes & Highlights
by
Tim J. Smith
Read between
September 26 - October 6, 2019
The purpose of the pricing analysis function is to inform pricing decisions across the firm.
Market pricing sets prices for every offering of the firm.
This includes reviewing prices of
existing off...
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updating pr...
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enhanced off...
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and setting the go-to-mark...
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new offe...
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Market prices are usually set on the timescale of once-per-year
Between market pricing cycles, most variations in customer demands and competitive actions are addressed through price variance policy.
For most industries, market pricing results in list prices. In certain industries, such as manufacturing and distribution, market-level pricing might imply list margins rather than actual prices as input costs vary widely over the year.
Market research and analysis are the primary tools used to set market prices.
the three primary research methodologies used are (1) modeling the exchange value to customers, (2)
surveying customers through conjoint analysis, and (3) statistical analysis of transactional data to uncover ...
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market pricing needs to be a process.
because market pricing impacts the entire performance of the organization
much of the organization may need to be at least informed of, if not engaged in, t...
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Historically, market pricing has been considered the responsibility of product management or market research. Recent research has demonstrated that firm-level profits improve when market pricing decisions include the input from the broader executive leadership, such as sale...
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Price variance policy determines the rules for discounts and promotions.
Price variances need not always be shunned, but if they are allowed, they must be managed.
Not all firms allow discounts and price promotions.
The goal of price variance policy is to fine-tune the alignment of prices to customers’ willingness to pay at the transactional level after using the blunt tool of market pricing.
If prices were held constant at the market level, some customers would be willing to pay more and the firm would find it is leaving money on the table. Meanwhile, other customers would find the offering too expensive and the firm would lose those sales.
Using one price for the entire market leads to market inefficiencies. As we demonstrated, customers who could have profitably purchased the offering are priced out of the market, and customers that would have paid more aren’t asked to. To address the market inefficiencies created by using a single price, many leading firms allow price variances.
the firm may wisely choose to price the offering at the
maximum transaction price at the market level (center diagram). This list market price will be far above the expected average valuation of the product in the market (left diagram), yet some customers would be willing to pay this price. For those that aren’t willing to pay this price, the firm allows price variances up to, but not below, its minimum acceptable transaction price (right diagram).
That is the goal of price variance policy: to improve transaction flow and profitability through better price segmentation.
Firms pursuing both directions, either reducing or increasing price promotions, find price variance policy difficult to get right.
price variance policies also determine the decision escalation rules under which an extraordinary promotion or discount may be allowed.
Pricing analytics has proven to greatly improve price variance policy.
In the absence of a known price variance policy, the default policy is one that allows for any price at any time, as long as the salesperson and customer can get away with it.
Incentive plans for salespeople are shifting from a volume or revenue basis toward a profit base in many, but not all, leading firms. The shift has been undertaken to align the salespeople’s price variance decisions with the profit goals of the firm.
Price execution applies the right price to the right transaction at the right time.
It is the point where all the prior decisions turn into action.
The goal in price execution is to quickly apply the correct prices according to the strategic and managerial decision rules and then collect those prices from the customer in a timely manner—all with zero errors.
In retail environments,
an issue of coupon processing, discount application, rebate management, and much more. Entire industries have been created just to address these issues
In business environments,
price execution is further complicated due to the presence of individually negotiated contracts with many, if not each, customer and by the presence of highly complicated ordering with multiple line items.
the market pricing and price variance policy must be applied appropriately in the execution of these tasks.
Price execution is often managed at the interface of sales and finance, wherein sales detects and defines the customer need and willingness to pay, and finance approves the quote according to the market pricing and price variance policy, then manages
the invoicing, billing, and accounts receivable.
While price execution sometimes falls under the pricing function, it does not always and need not always be. The other pricing functions strongly depend upon fact collection, analytical thinking, and strategic creativity. Price execution depends more upon process management, executional excellence, and quick reaction times. In other words, price execution requires a different skill set and mentality than the other functions in pricing.
Much of the improvement possible in price execution focuses on identifying and rectifying mistakes or improving cycle time.
Often the challenges identified at the price execution level are actually caused by failures in price variance policy, market pricing, or pricing strategy. As such, many executives start with improving other aspects of pricing, and once
improved, wait to measure their effect on price execution challenges.
pricing analysis is charged with collecting facts, converting these facts into information, identifying possible decision options, and analyzing the relative merits of these decision alternatives.
For business strategy, pricing analytics address:
For pricing strategy, pricing analysis addresses:
For market pricing, pricing analysis addresses:
