Does this sound familiar?
A Pricing Fairy Tale
An ambitious, recent college grad starts their first pricing job. In week one, they are told to dive into the pricing project for which they were hired: to implement a dramatic change in the company’s pricing strategy. After studying the status quo and learning the layout of the company’s data files, they pull up the Excel file (“Value Based Price List (v. 285).xlsx) and review the sophisticated algorithmic formula:
=((‘[Cost_File1.xlsx]Costs_Sheet1’!$F13)+ (‘[Cost_File2.xlsx]Costs_Sheet1b’!$F13))*1.085
Excited and ready to impact the business, the pricing analyst implements a new strategy. How? By changing the number (the PLUS in cost plus) from 1.085 to 1.082. After saving the file, they feel pretty good about a solid day’s work of ‘strategic’ pricing.
This only slightly fictionalized story happened almost twenty years ago. No willingness-to-pay studies were conducted, no price optimization algorithms were developed, not even any forward-looking cost projections went into this so-called strategy. Cost-plus was the order of the day.
Talking the Talk But Not Walking the Walk
In the intervening years however, much has changed. Pricing professionals now rely on both high-impact, dynamic data and sophisticated solutions that have powered a dramatic shift in the pricing view of the world…or do they?
While new data and solutions to manage it all have emerged, most pricing professionals aren’t making good use of it. In reality, value-based pricing remains a pipe dream for most companies.
Over the years, Joe Dallimore of Qualtrics and I have managed pricing teams at numerous companies and consulted with hundreds more. Sadly, this silly story is not far from what is happening with most companies throughout the world. Too many people talk “value-based” pricing but actually walk with “cost plus.” The good news is this situation marks a great opportunity for those who can establish value-based pricing ahead of their competitors.
In our increasingly digital world, the time to learn how to leverage data sources and available solutions to develop true value-based pricing processes and practices is now. And it has never been easier to get to value-based pricing.
CX and ML
To start making improvements to your pricing strategy, there are two primary disciplines to understand: Customer Experience (CX) and Machine Learning (ML) Based Price Optimization. Knowing the important roles these two different, but related practices play in B2B pricing will help you regardless of where you and your team are on the pricing maturity spectrum.