How to plan your 2021 pricing strategy
Steven Forth is a Managing Partner at Ibbaka. See his Skill Profile on Ibbaka Talent.
Many of us have begun our planning for 2021. But after the disruptions of 2021, some are even questioning the wisdom of planning and are shifting to a more agile stance. (Is this really agile, or just a another way of saying reactive pricing?) Agility is important, yes, but you don’t get to be agile without a plan and solid methodology. Now is the time to review your approach to pricing and get prepared for the coming year.
Strategic planning is a four step dance of asking what is happening, imagining what could happen, getting alignment and setting goals, and then putting a plan in place. What does this look like for the pricing function?
What is happening in the pricing environment?
We often assume we know what is happening around us. But we generally don’t. Our perception of the present is really what we think happened in the past. So the first step in strategic planning is to figure what is happening. For pricing this means three things:
What are the current market dynamics (and are they changing)
What is the value-based market segmentation (and has it changed)
How well is our current pricing model working (and is it meeting its design goals)
Let’s look at each of these.
What are the current market dynamics (and are they changing)
Market dynamics are how price elasticity of demand (how demand changes depending on price) and cross-price elasticity interact. Market dynamics are generally different for each segment. Misunderstanding market dynamics can lead to disastrous results. In normal situations good pricing people have a gut feeling for the market dynamics, but when the situation changes, it is easy to get caught out. The changes washing through the economy mean that market dynamics and market dynamic-based customer segmentations are changing for many of us. Start by finding out if this is true. We have written more about that in The jobs of pricing scenarios.
What is the value-based market segmentation (and has it changed)
The foundation of value-based pricing is a value-based market segmentation. Your customers understand the value of your offer in different ways. A good market segmentation clusters potential and current customers into groups that get value in the same way and that buy in the same way. Defining your customers by industry, size and geography is not an actionable segmentation as far as pricing is concerned.
When the economy is stable your value-based market segmentation also tends to be stable. This is why it can frame your Where to Play choices (at Ibbaka we frame pricing strategy using Roger Martin’s strategic choice cascade of Winning Aspirations, Where to Play, How to Win, Capabilities and Systems). The past year has been anything but stable with a global pandemic catalyzing change for many of us. Some of our customers are doing incredibly well, others have hunkered down into survival mode and still others are reinventing themselves. Whatever your market segmentation was in March 2020 it will be different in March 2021 and you need to test your current segmentation.
How well is our current pricing model working (and is it meeting its design goals)
A good pricing model is designed to achieve specific goals. At a macro level, these are the choices around pricing to create a new category - to grow a market, to win market share, to drive revenue growth, to optimize gross profit, to manage unit economics and so on. If your goals have changed your pricing model is likely no longer fit for purpose.
At a more granular level, your pricing model is supposed to align with your packaging and the role of each package. Take the popular tier-based pricing architecture as an example. There can be several goals for a tier based system. It can be meant to capture demand at different levels of willingness to play. It can be meant to lead buyers in with a free trial or low price, and then upsell them. The customer share and revenue share for each tier will map to assumptions about the number of customers in different parts of the market. Most pricing designers do a good job with the initial design. But over time it is easy for this to drift out of alignment. As part of your strategic review, check to make sure the design is still functioning as intended.
What could happen that would change how you approach pricing?
There is not just one possible future and projections from the past can lead to very bad assumptions about what will happen. The tonic for this is scenario planning. In scenario planning, one understands the background using trends and projections, and then calls out critical uncertainties. Critical uncertainties are the construction material for scenarios. Part of your planning for next year should include identifying five-to-seven critical uncertainties and building them into scenarios.
Once you have your critical uncertainties set up a tracking system to see how each uncertainty is resolving. Don’t wait a whole year to identify new uncertainties, make this part of your quarterly review.
What kind of critical uncertainties could impact pricing? There are three basic things to consider:
Customer: What could happen with your customers that would change how they respond to your packaging and pricing?
Competitor: What could a competitor do that would undermine your pricing or destabilize the market. Remember to cast a wide net here, and to include new market entrants and alternative ways to get the value you provide, and not just your current , direct competitors.
Environment: This is the tough one, how many of us were prepared for the global pandemic, what surprises are in store for us in 2021? The goals here may be to make sure that your pricing and pricing process is first resilient (it can withstand external shocks) and then adaptive (it can change to adapt to the new environment).
Why nothing about your own company and products? I am assuming, perhaps optimistically, that these are things you can plan for and that they are not uncertainties. Working with your solution development, marketing, sales and customer support teams to understand what they are planning for the coming year is critical to good planning.
Where do you want to go?
Once you know where you are, ask where do you want to go. This is the Winning Aspirations and Where to Play part of the strategic choice cascade. Try to get these pricing goals as specific as possible.
Here are some of the options that Ibbaka considers with its customers.
The combination of a tested value-based market segmentation and clear pricing goals makes where to play choices concrete and easy to make.
How do we get there?
The how is just as important as the why and the where. In pricing this means your How to Win, Capabilities and Systems choices.
How to Win
How to Win choices are tactical and you should be willing to change them based on what is working and in response to the environment. Your pricing model, price levels, discount strategy, alignment of pricing with marketing campaigns are all How to Win tactics. Knowing which tactics one wants to try in the coming year can help with preparations and investment planning.
Are you going to change your pricing model in the coming year?
What pricing actions are you planning?
Will the plans from product and solution development, marketing, sales or customer success place demands on pricing’s how to win choices?
What new demands might finance place on pricing?
Do you know how you will respond to the critical uncertainties that you identified in your ‘what could happen’ work?
Capabilities
A good strategic plan will include a plan to develop your capabilities. Think of capabilities as a bundle of people’s skills (check our Open Competency Model for Pricing Expertise), the frameworks and tools they use and the data that informs them. Typically the software that ties skills, frameworks and data together is part of the capabilities, but it is so important that it gets its own planning.
Systems
What software systems do you use for pricing work. The four most common questions you will want to ask here are:
Are there constraints that need to be removed to give you more freedom of action? (Sometimes limitations to financial or billing software prevent you from executing on your preferred pricing strategy).
Are there integrations that would give you better access to the data you need for pricing work?
Do you need a pricing software package?
Will communication and analytical tools like Value Pricing Calculators help you execute on a value-based pricing strategy?
Need some help pulling together your 2021 pricing strategy?
Check out our Strategic Choice Cascade for Pricing.
Or contact us at info@ibbaka.com
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