Pricing and the performance improvement cycle
By Steven Forth
To be really effective for our clients Ibbaka has to go beyond its normal pricing strategy, analysis and design work. One of the key things we do with our clients is provide them with an understanding of market segmentation, customer targeting and above all value-based pricing. We do this in several different ways, all of which we organize using the performance improvement cycle.
We have been using this cycle with some of our larger clients to organize how an organization can build pricing as a core capability.
Performance begins with goal alignment
The overall goal is to drive superior performance. To execute on pricing an organization needs to be aligned on its pricing goals. Pricing can deliver on many different goals, but not all at the same time. The most common goals are …
Creating and growing a market
Increasing market share
Driving top line revenue
Growing operating profit
Improving unit economics (Value to Customer, Customer Lifetime Value, Customer Acquisition Costs)
Driving sales effectiveness
Clarity on goals is especially important once one gets to measurement.
Even with the best goal alignment, a pricing strategy will fail without great execution. Many things feed execution, one of them being competencies. What skills and competencies are needed to develop a pricing strategy and then execute?
Skill and Competencies
In 2018, Ibbaka Market and Ibbaka Talent connect to identify the skills required for pricing expertise. One of the more interesting outcomes of this work was the identification of three quite distinct roles that pricing experts play plus one emergent role.
The strategist – works with the C suite on how to use the pricing lever to achieve organizational goals.
The analyst – crunches data, lots of data, and finds patterns. This role was prominent in the B2C and distribution industries, but with new technologies like deep learning, it is becoming more in demand at B2B companies.
The coach – works with other functions to clarify, shape and help implement pricing strategy. There are sub-patterns depending on whether the focus is sales, sales operations, product development or product marketing.
The designer – combines pricing skills with skills from design thinking and customer service design. This is the approach that Ibbaka is taking and may be an important part of our differentiation.
For more information on the evolution of this model, see our work on the pricing open competency model.
Let’s dissect the performance improvement cycle and how it applies.
Learning
Once you identify skill gaps, your own and your organization’s, you need a plan to close them. Learning can play a large role in this. Over the past few years, Ibbaka has been working with one of our major clients to build online learning and performance support on marketing strategy in general and pricing in particular. These are customized modules to introduce core marketing and pricing concepts and to provide a wealth of case studies and examples from within the company.
The Professional Pricing Society also provides a good set of basic learning materials and as president Kevin Mitchell indicated when we interviewed him last year, their plan for 2019 includes the introduction of a series of advanced courses.
My own learning plan for 2019 includes going deep into the work of Judea Pearl and his team on causal inference, to develop better ways to use Monte Carlo modelling in pricing analysis and to find ways to use conjoint analysis in market segmentation. I will complement this with ongoing study of design and business model innovation.
Performance Support
Learning is not enough of course. What is critical is how learning gets put into action. Pricing can involve a lot of analysis. There are good frameworks to support that from Economic Value Estimation (EVE) to models for the interaction of price elasticity and cross price elasticity, and on and on. One can learn these concepts, and have a good understanding, but applying them consistently in collaboration with other people is not easy. Performance support tools make a big difference. At Ibbaka our key performance tool is our internal data analysis platform that we call Geode. Geode is built in R (the statistical programming language) on Ruby on Rails and it applies a variety of different clustering algorithms to help identify market segments.
One question that frequently comes in pricing is the impact of a price change. When we do this at Ibbaka we generally build some fairly complex predictive models using clustering data from Geode. We apply Monte Carlo methods to explore a range of outcomes and identify where the key risks are. But this can be overkill. Sometimes you just want to explore some simple questions around the impact of a price change on volume, revenue and profit. If you understand the math you can easily build a spreadsheet to do this. But why? It is better to provide a simple tool that let’s you do this and explore different elasticities and prices. These performance support tools are also easy to share and are a great way to build a shared understanding of the impact of pricing decisions.
Measurement
Performance improvement relies on measurement. This works on many different levels. We need to be able to reflect on our performance. One of the most important books on high-level work is The Reflective Practitioner by Donald Schön. On a computational level, today’s machine learning systems rely on constant training to improve. AlphaGo would not have become the best Go player in the world if it did not get feedback on which games it had won and which it had lost. Measurement is a key part of the performance improvement cycle.
Ibbaka measures outcomes across several levels. We ask if the skills in the competency model and the learning are actually contributing to performance. We evaluate the market segmentation, value proposition and see how these are impacting pricing. We review the pricing model to test its assumptions and see if it is performing as intended or if things are drifting. Too often, pricing is a frozen accident. Good measurement can catch this and bring pricing, markets and strategy back into alignment.
