Pricing actions and customer experience (CX)
Steven Forth is a Managing Partner at Ibbaka. See his Skill Profile on Ibbaka Talent.
Prices are not static. In today’s world, if you have gone more than a quarter without considering a price change you are asleep at the wheel. This does not make price changes easy and they should not be a knee jerk reaction. Price is a critical part of how you shape your market and at the heart of the market is the customer experience.
Customer experience, or CX, has been popularized by Forester as a way to put the customer at the center of business strategy. Forrester has a nice simple definition of customer experience.
“How customers perceive their interactions with your company.”
They unfold this by adding
“… good customer experiences are three things from the perspective of the customer. They are useful (deliver value), usable (make it easy to find and engage with the value), and enjoyable (emotionally engaging so that people want to use them)
How can we apply this to pricing actions? Before we go on, a brief discussion on Pricing Actions may be useful.
What are pricing actions?
We have introduced the concept of pricing actions with a number of our customers for two reasons. (i) To help them to see pricing as something active (not reactive) that shapes markets. (ii) To help them think about these actions in terms of a portfolio.
Pricing actions come in several different forms. The tactical actions are
Change Unit Prices (Increase or Decrease]
Change Discounting (the percent discount or the commitments needed to get the discount)
Change Pricing Corridors or Guide Rails (the minimum and maximum prices that can be charged)
Enforce Contract Terms (many contracts have price concession that depend on the customer meeting certain performance requirements (and vice versa), but in many cases these terms are not monitored or enforced)
Change Offer (the value included at each price point for each segment, this can include products, services, data and access to unique capabilities)
Change Bundle (the combination of products, consumables, data and services sold together; this will often include products from multiple businesses
There are more strategic pricing actions one can take as well. The shift from a licensed offer to a subscription offer is one example (this is still an ongoing theme in many pricing projects), more important is a change to the pricing metric (the unit of consumption for which your customer pays, ideally closely connected to the value metric, the unit of consumption by which your customer gets value).
Having a playbook of pricing actions helps everyone from product marketing, to sales, to customer success connect pricing strategy to pricing execution. Thinking about pricing in terms of pricing actions also helps you to plan your possible pricing actions as a portfolio. Karen Chiang and I will be giving a workshop on building and managing a portfolio of pricing actions at the Professional Pricing Society’s Spring Conference on Wednesday, April 29 (see page nine of the brochure).
The Customer Point of View
Customer experience should be central to planning and executing pricing actions. Let’s look at each of the three filters that Forrester proposes: Useful, Usable, Enjoyable.
Customer Experiences are Useful (deliver value)
OK, so your solution has to deliver value. How does this impact taking a pricing action? Before taking an action,
Make sure your solution is delivering value (this is generally the role of customer success)
Make sure your customer recognizes the value (you have to talk to customers to know this, before taking a pricing action talk to customers)
Connect the price action to how you are delivering value, and show customers how the price action will help you deliver even more value to them in the future
All pricing actions should be framed in the context of value. Ideally, you take a pricing action when the value to the customer (V2C) has changed. What could cause a change in value, and lead to a pricing action?
The customer’s business model has changed (how they make money)
The customer’s economics have changed (the inputs into their business have become more or less expensive)
(Note how we start with the customer)The competitive alternative has changed (there is a new alternative, a competitor has changed prices, the customer has changed its processes or business so that they have new options)
Your solution now creates more (or sometimes less) value (this could be the result of a change to functionality, new bundles, or even changed pricing - yes, that is circular)
As with most things pricing, begin with value.
Customer Experiences are Usable (make it easy to find and engage with the value)
Pricing actions are often experienced as something that is ‘done to’ the customer. If at all possible, pricing actions should be ‘done with’ the customer. Making pricing ‘usable’ primarily involves communication.
Communicate pricing actions in advance so that your customers have the chance to prepare. Give them the lead time they need to adjust their own business models and projections.
Give customers the tools they need to sell the price change internally. This can include value studies, market analysis, impact analysis. Your champions at your customer can be put at risk by your pricing action, so do everything you can to support them and help them to sell the price change for you.
Customer Experiences are Enjoyable (emotionally engaging)
It can be hard to make a pricing increase enjoyable. Few of us really enjoy paying higher prices. But you can make pricing increases emotionally engaging. The way to do this is to ensure that the pricing action is fair. Fairness in pricing comes from three things.
Transparency - the reasons for the pricing change and the impact it will have should be communicated
Consistency - similar customers should get the same treatment, there should be no special concessions, the market will find out and punish you
Value - see above, a fair price is one where there is value for buyer and seller
You can read more about pricing fairness here.
A Simple Process for Applying Customer Centricity to Pricing Actions
Your pricing action process should include a formal way to consider the customer perspective. Condensing the above gives the following:
Build a portfolio of pricing actions
Scan for opportunities to take an action
(Decide to take an action and begin to plan)Confirm that value is being created, delivered, communicated and recognized before you initiate the pricing action
Design the pricing action
Analyse the impact on your customers, competitors and your own business
Prepare your internal systems, contracts, revenue recognition, marketing team and sales force
Communicate with your customers in advance, explaining the reasons for the action and why it is needed and fair
Execute the action, move quickly but methodically
Follow up and make sure the assumptions and analysis were correct, check in with customers to see how they are feeling (emotions matter in pricing)
Course correct, almost every action will need to be adjusted as customers and the market respond
Customer Experience and Willingness to Pay
Customer experience has a big impact on willingness to pay (WTP). Service design expert Majid Iqbal expresses this in the following equation.
Offer Value - (Price / Experience) = Net Value
In other words, if the experience is positive, greater than one, then willingness to pay increases and offers are experienced as more valuable. Effectively, one can charge a higher price for the same offer value when you deliver a better than average customer experience.
If the experience is negative, less than one, then willingness to pay is decreased, and offers are experienced as less valuable. One has to offer a discount to compensate for the poorer customer experience.
For more on this topic, see Service Design and Experience - Thoughts on Majid Iqbal's O-P/E=N Model.
Customer experience plays a critical role in pricing, and shapes choices from strategy to design through the execution of pricing actions. One of the best ways to pull these strands together is with a customer journey map. That is a theme for another day, but if you are eager to learn more, reach out to us. Let’s start a conversation. info@ibbaka.com
