Building a portfolio of pricing actions
Steven Forth is a Managing Partner at Ibbaka. See his Skill Profile on Ibbaka Talent.
Too much of what we do in pricing is reactive. Sales says that customers need a price cut or we will lose deals. A competitor brings in a new offer that erodes our differentiation. The CEO has promised the board revenue growth. Private equity investors are demanding more cash flow.
Pricing is a powerful lever, and it can contribute to all of these challenges, but like anything in business, successful pricing requires research and planning. One wants to have a number of plays prepared in advance, so that you can execute quickly when necessary.
Karen Chiang and Steven Forth are giving a workshop “YOUR PRICING NEEDS ACTION: Building and Managing a Portfolio of Pricing Actions” at the Professional Pricing Society Spring Conference in Chicago.
The workshop will give you an opportunity to work in a team to build a portfolio of pricing actions and then simulate the outcomes.
We will also offer this workshop as a webinar for people who are unable to travel at this time.
Workshop and webinar attendees will be given a set of templates to use in developing their own pricing action portfolios.
Contact us if you are interested in this webinar.
There are many possible pricing actions. You can let us know what actions you are planning in this survey. We will share the results of the survey with people who participate and present the results as part of the workshop.
Here are some of the actions that the Ibbaka team frequently helps our clients with.
Change list prices
Change packaging
Introduce a new pricing metric
Rebalance a tiered pricing architecture
Adjust discounting, pricing bands or pricing corridors
Launch a short term market campaign with campaign pricing
Test dynamic pricing
Offer performance or outcome-based pricing
With so many possibilities, you need some way to manage them. As we have suggested in “The data you need to collect to inform pricing actions” the best way to do this is with a portfolio approach.
A portfolio will cover a range of pricing actions, each with different investment requirements, lead times, time to execute, anticipated rewards and risks. A good portfolio will offer a mix of actions that cover a time spend that can range from as short as a day (or much less for companies using dynamic pricing) to years for pricing actions that include changes to the product or even market structure.
A good pricing portfolio is meant to provide options and to shorten response times to critical events. This means that not all of the options will be exercised. That does not mean these are wasted money. They are a form of insurance and a way to think through and prepare for the future, which is by definition uncertain.
There are no hard and fast rules on how many actions a portfolio should contain, but here are some guidelines.
Cover a full business cycle - have some actions that you expect to implement in the immediate future, some that are medium term, others that are long term. The time scale here depends on the business cycle in your industry. For large capital equipment the business cycle could be a decade or more. For a fast moving space like cloud AI the business cycle may be three months or so.
Have a diversity of risk profiles - actions range from near sure things to long shots, have a range of different bets.
Anticipate your competitors - plan in advance for how you will respond to different competitor moves. Do your research, have your playbook ready.
Work with your customers - let your customers know what pricing actions you are exploring, get their input, understand how each pricing action will impact Value to Customer (V2C) and Lifetime Customer Value (LTV).
Collect data in advance - good pricing choices require data, and if you wait until you need to take the action before collecting the data any action will be delayed. Have a data collection plan and execute in advance.
Regardless of how many actions you have in your portfolio. there are some basic things that should be included.
Below is a an abbreviated screenshot of part of a pricing plan. There are several things worth noting here.
Each action is associated with a goal. This could be the pricing goal, but the best practice is to connect this to a larger business goal.
The data required are called out. Collecting the data is the main driver for the Time to Decision and the Investment to Make a Decision. Collecting data takes time and costs money. It is the most important work to be done in building a portfolio of pricing actions.
The risk and return calculation below is simplistic. In a real portfolio Monte Carlo modelling should be used. Monte Carlo modelling gives a range of outcomes to reflect the uncertainty involved in any pricing action.
Outcomes. Outcomes are what matters. A good portfolio is also a record of the outcomes of each pricing action taken. The outcomes are another form of data, only in this case they are used to inform and improve the overall portfolio and not just the specific pricing action.
Investigating pricing actions requires that we explore different possible outcomes. One way to do this is with a pricing calculator. These calculators help you make explicit your assumptions and to explore the implications of different assumptions. If your pricing team does not already have a set of pricing calculators you should consider developing one (or contact us and we can help you do this).
Pricing is too important to be left to chance. And if you are not prepared in advance, most of your pricing actions will be reactive and determined for you by your competitors. Don’t let your competitors set the rules of the game.
