Buying behavior and AI are transforming pricing - an interview with Craig Zawada of PROS

By Steven Forth

Craig Zawada has been shaping our thinking about pricing since 2004, when the first edition of The Price Advantage was published. This book, co-authored with his McKinsey colleagues Michael Marn and Walter Baker and published in a Second Edition in 2010, introduced many of us to critical pricing concepts like the Pocket Price Waterfall and Value Maps. Then, in late 2010, he surprised many of us when he moved to the leading revenue management software company PROS as Chief Visionary Officer. We caught up with Craig recently after he gave a compelling keynote talk at the Spring Professional Pricing Society conference in Atlanta.

Ibbaka: What drew you into pricing? What experiences from outside of pricing do you bring to your work?

Craig: I didn’t plan to get into pricing or become a consultant. My original goal was to run an outfitting company and spend my time outdoors. But I did go and do an MBA, at York University’s Schulich School of Business in Toronto, and I interned at Ernst & Young. One of my projects was to design new pricing for a door skin manufacturer in Quebec. The project was very successful and when I followed up with them months later they were delighted with the measurable impact of the work. We know that does not always happen in consulting. I realized that pricing was a place where I could both have an impact and make a contribution to the basic ideas. Pricing brings together strategy, analytics, people and business impact.

Ibbaka: Moving from McKinsey to PROS was a big change. What changes when you move from consulting to leading a technology platform?

Craig: I worked at McKinsey for 13 years and was a partner co-leading the pricing practice. It was at McKinsey that we got the experience and developed the ideas in The Price Advantage book. When I had the opportunity to learn more about PROS, I was impressed and intrigued by the possibilities of applying technology to pricing. The early companies in pricing software had been focused on estimating price elasticity and using this to try to set prices. It didn’t really work. PROS came in with a different approach.

Their background was in pricing science. Rather than applying theory they were building up their models through experiment and observation. They were able to connect pricing science to revenue management to solve some important pricing problems – and it was working extremely well.

Many McKinsey clients needed this as part of the solution. We often built tools for clients, but these were generally fancy spreadsheets that were hard to deploy and manage. Pricing discipline needs to get built into the technology and this requires a software platform. Moving to PROS let me help shape a technology platform that can be used to drive pricing strategy. I have never looked back. My guess on where the market for pricing expertise was going proved to be correct.

Strategy consultants tend to take a deductive approach to pricing strategy. They spend a lot of time gathering data, figuring out what it means and then making recommendations.

With a technology platform one can take an inductive approach. One generates hypotheses and can then use the software platform to test the hypotheses. With a software platform one goes through a process of modeling, testing then evolving. One can do this much faster and in a more sustainable way than a team of consultants alone are able to do.  There is a significant opportunity for the strategic pricing consulting firms to work with technology like PROS to deliver value to their clients.

PROS is a great company to do this as we have a long-term view of the market and we put our customers first. We reinvest close to 30% of our revenues into research and development, which is much higher than most software companies. We do this to continue to lead innovation.

Ibbaka: You have spoken about the ways in which the buying process is changing and how that will lead to changes in how prices are set, managed and communicated. Can you share your latest ideas on this?

Craig: We commissioned independent research into this over the past year. Based on this research we are seeing a number of trends which have major implications for pricing.

First, is that the sales experience is driving revenue growth. Look at this data from CEB. Sales experience accounts for 53% of the buyer’s decision. This overwhelms all other aspects. B2B buyers increasingly expect the sales experience to be fast, frictionless and relevant. How value and price are communicated is a key part of this. Which brings me to the next major change.

PROS is on the cutting edge of delivering on this “inductive approach”. PROS customers express delight in the innovation roadmap saying that they expect PROS solutions to deliver on their pricing needs for the long-term. PROS delivers on the requirements of some of the most sophisticated pricing organization and leverages that innovation to help organizations just getting started in their price transformation journey. Our experience across hundreds of implementations allows us to guide businesses to fast and meaningful ROI through price improvement. 

The second thing is that speed is the new currency. Here is the slide I used for my PPS (Professional Pricing Society) keynote.

This was a critical insight for one of our major customers. This company sells through channel partners and they were finding that win rates went down 40% if the response took more than 24 hours for a quote. Further analysis showed that determining price on a deal accounted for 67% of the time required to make a quote. Most pricing groups are not tracking the length of time it takes to generate a quote, but this is emerging as a critical metric for pricing performance.

Now that pricing is part of customer experience, we need to think about our pricing teams differently.

Just putting list prices on the website is not enough to accomplish this. There are a lot of challenges in doing this today as one is either going to set a high price and have to negotiate, which slows things down, or one does not frame things properly and leaves money on the table. Buyers want to get transactable prices online. This is one way that the B2C experience is impacting B2B. Buyers are increasingly not going to put up with a lack of transparency or a slow buying experience.

In some cases, buyers are willing to pay a price premium for fairness, transparency and speed.

Another important change in buyer behaviour is that people are trusting algorithms to set prices more than they trust people. When you get caught up in a price negotiation with two people there is always a concern that the other side has out negotiated you. Not many people enjoy buying a car from a car salesman. A well-designed pricing algorithm gives a sense of authority and independence from human bias.  We had a sense that this was the case, but we were surprised when our independent research found that about 2/3 of B2B buyers preferred algorithms to determine pricing rather than negotiating price with a seller.

Traditionally pricing guidance has been framed in terms of ‘floor,’ ‘target,’ and ‘expert’ prices. This begs the question of what do you do when you can only present one price? Pricing software algorithms use data to answer this question.

Most enterprise pricing has been 80% high touch and 20% “no touch”. We expect this to switch to 20% high touch and 80% algorithmic, “no touch” pricing.

Ibbaka: How will it change the role of pricing software and other applications?

Craig: In a fundamental way. Pricing professionals will think differently about how to drive business with pricing. In the near future it will be the technology that enables and drives strategy. Pricing power will come from how businesses create impact, and this means getting comfortable with letting the technology drive pricing decisions.

This includes aligning with your customer’s need for speed. ‘Time to price’ will become a critical metric. To achieve this, pricing will need to work with smaller, agile teams and avoid getting bogged down in deal desks.

Pricing technology will enable strategy by making possible hypothesis testing, the rapid exploration of different pricing models and much better portfolio management.

Ibbaka: Who is good at this today?

Craig: The airlines have been doing this for over thirty years. These ideas are now relevant to B2B. Examples are dynamic pricing, unbundling and a focus on customer experience. Airlines have to operate with big fluctuations in demand.

When the Toronto Raptors made it to the NBA Finals, their fans wanted to be there and demand for flights to San Francisco ticked up quickly. For the sophisticated airlines that leverage AI-powered Revenue Management technology like PROS, the system sees the surge in demand and quickly adjusts their ticket offerings to optimize the balance between their inventory and demand.

Ibbaka: You and PROS have a great deal of expertise in AI and machine learning. How will AI change pricing and related areas over the coming decade?

Craig: The impact will be substantial. The first thing that needs to happen is that people be able to evaluate claims about AI. Many claims are being made and there is a lot of noise in the market. People need to understand the basics of AI and be smart at evaluating what is most relevant for their business.

Artificial Intelligence applies well to pricing since there are quantifiable and measurable ways in which the algorithm can continue to learn from new results. However, it is necessary that the system be purpose built for pricing in order to deliver on the unique requirements for price segmentation design, price testing, scenario modeling, and price rationality. Accuracy and precision in the price outputs are vital as you can do great damage by presenting the wrong price to a customer.

Effective application of AI depends on meaningful data and those built for pricing are able to integrate transactional data with marketing data, CRM data, and external signals. The algorithms improve and deliver more precise, relevant recommendations/decisions as they incorporate different types of data. They get smarter over time, so the earlier you start the more opportunity your AI has to gain capability.

AIs are  already giving better pricing advice than ‘pure judgment’ and they are only going to get smarter.

Ibbaka: You have chosen an extraordinarily beautiful place to live. Can you share some of the best things about it?

Craig: Yes, I moved to Kimberley, British Columbia in 2009. My family and I wanted to be closer to the outdoors. The area is great for hunting, fishing, hiking, skiing, just about anything outdoors. It is easy to get to Calgary and from there I can get anywhere I need to go.

We live off grid using a micro-hydro electric power system. There are a lot of possibilities here.