Kindle Notes & Highlights
by
Tim J. Smith
Read between
September 26 - October 6, 2019
Pricing analytics is used to measure the relationship between market pricing and market acceptance, between price variance policy and policy effectiveness, and between price execution and all prior pricing decisions.
These measures are used to adjust decisions and improve pricing performance.
“Pricing isn’t an event, it’s a process.” In this statement, this leading pricing practitioner was partially referring to the fact that pricing analysis and decisions aren’t a once-done always-done activity. Instead, prices are constantly evolving, shifting to the input of new information or changes in the marketing environment.
The Continuous Improvement Process is a useful paradigm for structuring the relationship between pricing decisions and pricing analytics
In a simple description of the concept, the Continuous Improvement Process has four key parts: Plan, Do, Study, and Adjust (PDSA).
Study is key for driving improvement, for outcomes that cannot be measured cannot be managed.
Even at the early inception of a new offering, pricing should be engaged.
process. With respect to the Continuous Improvement Process, pricing during the offering innovation process is the formulation of the initial pricing plan.
The importance of getting the price and benefits relationship right continues to increase due to the shrinking of the overall competitive life cycle itself
The duration of a firm’s ability to monopolize a market with a new capacity or offering has shrunk from decades to months, if not even shorter.
the offering life cycle is short and getting shorter, and that the importance of coming to market with the right relationship
between the offer’s benefits and price is getting greater.
We can map the integration of pricing decisions into the offering innovation process. As a template for crafting this map, we use the
standard phase-gate innovation process.
At phase 1, the offering’s opportunity is scoped, meaning the market size and competition are evaluated to determine if the opportunity is worth pursuing. Recall, market sizing and competitive intelligence are key ingredients to pricing decisions, thus pricing can enter the innovation process at phase 1.
the business case for competing in the identified market is developed in phase 2. The business case defines the offering to be developed. In defining the offering, executives are delineating the requirements for both the features and expected benefits to be delivered.
At phase 3, the offering is developed. In phase 4, it is tested and prepared for market. In phase 5, the offering is launched, the planning and preparation is complete, and the offering has entered the execution part of the Continuous Improvement Process.
In phases 0 through 2, the goal is to identify ideas with the potential to be profitable. This potential is defined through addressing five broad strategic marketing questions:
Each of these questions is core to the understanding of the value of the offering to the target customers of the innovation.
The price estimate is necessary for executive decision-making in taking an innovation from phase 0 through 2.
Informing the price estimation with facts will require market knowledge.
A proven best practice for gathering the needed breadth and depth knowledge is through secondary research into known facts about the market coupled with primary qualitative market research in the form of focus groups or executive interviews.
These qualitative research techniques, focus groups, and executive interviews have been found to be the most reliably useful approach to defining price structures that match customer willingness to pay.
In phases 3 and 4, the firm must prepare to enter the market with a price on the offering.
The more focused set of questions that may be raised in preparation for launch can be reduced to three key informational needs:
The most academically supported and industry accepted survey-based approach to measuring price sensitivity for new offerings is
conjoint analysis.
Following the Plan, Do, Study, Adjust elements of the Deming Continuous Improvement Process, Price Variance Policy Continuous Improvement starts with setting a price variance policy.
Once this policy is set, the firm executes within the plan. Following a period of execution, a transactional data analysis is conducted to understand the effect of the policy and clarify the room for improvement. Then executives meet once again, with the data in hand on the results of their plan and make a decision.
Rules, processes, culture, and incentives are the typical areas reviewed in Price Variance Policy Continuous Improvement.
The purpose of price variances is to influence customer behavior.
Since price variances are granted only in order to drive specific customer behaviors, a key part of price variance management is determining if the price variance policy influenced customer behavior, and if so, did it do so in a manner which improves profits.
Decisions have objectives. If they fail to achieve their objective, new decisions should be made.
Over the course of any year, the competition, targeted customer base, and marketing environments themselves will have evolved. Their evolutions can impact the firm’s pricing.
While offering innovation pricing will often rely on direct market research, ongoing price updates can benefit from a new source of information: actual transaction pricing and sales.
the measurements will focus on understanding the market reception to prices and price changes, competitive offers and prices, and new opportunities created through offering updates or new market openings.
the organizational design of the pricing function and the control over pricing decisions are distinct issues.
The role of the pricing function is to support and coordinate pricing decision-making and implementation.
These requirements
imply that pricing can be empowered withi...
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One of the early organizational design paradigms applied to pricing was the issue of centralization versus decentralization.
Given that pricing contributes to corporate strategy through market-level pricing, and given that pricing analytics requires gathering data from many sources and the application of specialized analytical techniques, some aspects of pricing should be a centralized function.
Given that pricing contributes to sales effectiveness, that price variance policy should be informed by sales activities, and that price execution is a front-line effort, other aspects of pricing should be decentralized functions.
Contingency theory suggests that firms should centralize authority in stable environments to drive operational efficiency and decentralize authority in turbulent environments to drive operational flexibility.
Yet complete centralization or decentralization of pricing has failed for most firms.
Even in highly turbulent environments, firm profits were higher when strategic pricing decisions were centralized and tactical pricing decisions were decentralized.
Yet perhaps the best approach has been to discard this paradigm altogether as the focal design issue, as neither end of the centralization to decentralization spectrum is appropriate.
A good alternative paradigm has been to describe the overall pricing function in terms of a “pricing community,”
a centralized pricing function.
Corporate Pricing.
