We sat down with Alon Ellis to discuss some of the common myths associated with setting the right Pricing Strategy. During our interview Alon provided no-nonsense clarifications for common pricing misconceptions and insights into how companies can overcome perceived barriers to setting the right price.
1. Myth: “It’s all just theory”
Improving our pricing may sound reasonably straightforward on paper, but the implementation and control probably won’t live up to the expectations set by our strategy.
Alon’s response: “Implementation is an increasingly practical, data-driven exercise”
True, businesses have often failed to implement the improved pricing architecture according to plan, or have struggled to ensure that the new pricing policies are complied with. In a modern business environment, with access to large amounts of cleaner data and more sophisticated analyses and monitoring tools, implementation and control has become very practical.
Pricing has become far more analytical, which can be observed in the rapid growth of data visualisation. We can now build implementable models or drill down into reports to check compliance with the new price by a particular sales team. Companies can trust the rigorously analysed data, even when it seems counter-intuitive at first glance. A simple example is the widespread use of Customer Lifetime Value (CLV), which often involves selling at a loss initially.
The insurance industry has implemented this model with great success. Companies often sell insurance at an effective loss to young men who have high risk profiles and time to shop for a low price. Given the number of customers it attracts, this strategy engenders enough long term relationships to yield a positive CLV with considerable profits.
Unfortunately, many businesses still rely on ineffective methods of pricing such as cost plus, or insufficient measures of success such as market share. There is little excuse for this, given how practical it is to find good data and to implement superior measures and models.
2. Myth: “We don’t have the time, money or effort for a pricing strategy or function”
Pricing is a complex and difficult endeavour that will provide no gain without significant investment.
Alon’s response: “Implementation of the pricing strategy should ideally be self-funded”
There is a great deal of truth in the notion that a robust pricing strategy is very complex and difficult to achieve; this shouldn’t be understated. However, a well-designed approach often leads to a pricing implementation that is more manageable and self-funding, generating momentum through incremental value delivery.
Breaking execution of a pricing strategy into achievable components can include conducting tests and pilots. Proving the concept incrementally can provide opportunities to feed initial learnings and earnings into later phases of the implementation. The idea is to keep it as simple as possible and build a hypothesis that is tested and revised if necessary. This will generate momentum through revenues and insights that lower the risk profile of the organisation-wide rollout to follow.
3. Myth: “Pricing Strategy is purely manipulative; a sure way to annoy my customers”
Pricing tactics are sometimes seen as taking unfair advantage of customers’ willingness to pay. Firms are reluctant to antagonise customers whose business they rightly value.
Alon’s response: “Pricing is chiefly about aligning price with value delivered to customers”
It is often forgotten that customers don’t mind paying, as long as they are confident that they receive good value relative to the price paid. Pricing strategy is therefore less about charging customers for no reason and more about understanding how customers’ perceived value should be priced.
Adopting a customer lens, the business must first understand customer needs and wants. There is nothing wrong with ensuring that the satisfaction of these needs and wants is reflected in price-setting. Doing so creates mutually beneficial transactions in which price aligns with value, driving a business focus on delivering value to customers through selling profitable products.
The bottom line is that customers care less than we think about price, in isolation. Instead, what they care about is price relative to the benefits that we provide for their payment. Many businesses would benefit from focusing on properly building customer perceived value into the price.
4. Myth: “Pricing Strategy is merely about responding to changes in our market”
Changes in customer behaviour and the competitive environment dictate our pricing decisions. At the end of the day it’s all economics and we have to follow the market equilibrium reactively.
Alon’s response: “Market trends are important, but far from the whole picture”
Nobody would suggest that competitor and customer shifts aren’t important factors in pricing. Nonetheless, there are more proactive ways of viewing these changes and there are other factors specific to the organisation and within its control, which businesses neglect to their peril.
Unless the business is completely commoditised, we are not solely at the mercy of a market that decides our price for us. Determining where we can add value, or where our business is not perceived as interchangeable with that of competitors reveals opportunities to set a better price. This often involves moving toward a superior mix of products and customers. For instance, shifting the product mix to target a less price-elastic segment of demand is just one way of capitalising on the attributes of a customer segment to support more favourable pricing.
Opportunities often abound to target new customers and value-add as a product differentiator. Proactively identifying where we can add the most value and for which customers, requires us to leverage the strengths, capabilities and other factors unique to our organisation. It also grants us more control over the setting of price to reflect that value.
Conclusions and clarifications
The judgement of business stakeholders can be protected by replacing common pricing myths with the knowledge that:
- Before the rapid rise in data availability and complex analytics, pricing strategy was less practical. We now have the ability to do data-driven implementation and control
- Major decisions on pricing tend to require a significant investment of time and effort. However, the rewards can be substantial and the implementation self-funding
- Businesses can and do antagonise customers by re-pricing products. However, realigning price to value should not be at the expense of customer satisfaction
- There is a high degree of reactivity in how firms set prices. A more effective approach lies in proactively reassessing the mix of products and customers, value-adding where appropriate
Pricing strategy is not a topic devoid of difficult and controversial business decisions. However, the payoffs of a proactive and analytical approach to pricing can yield large and continuing benefits.
Alon was a Director in Deloitte’s Strategy & Operations Consulting practice, with extensive experience in Pricing Strategy for the Insurance and Energy industries. Carrying out large scale pricing transformations, Alon has integrated optimised pricing tools and techniques into some of the largest UK and US insurers, and has recently left Deloitte to lead the Pricing Strategy team with one of our key clients.