The jobs of pricing scenarios

Steven Forth is a Managing Partner at Ibbaka. See his Skill Profile on Ibbaka Talent.

The past few months have shown all of us just how fast change can come and basic assumptions be disrupted. There is no one who predicted that US unemployment in April would rise to almost 15% or that the majority of knowledge workers would be working from home. This is rapid change on an unprecedented scale. But most of us mouth the truism that change is constant and think we are prepared for it. The past two months have shown that most of us have not prepared. How can we do better going forward?

For an application to talent and workforce planning, see “The jobs of talent scenarios” on the Ibbaka Talent blog

This is not the first big disruptive change to hit the economy. Those of us who are of a certain age will remember the oil shock of 1973. A confluence of political moves by the Organization of Arab Petroleum Exporting Countries (OAPEC) in support of Palestine, and in response to an American production surge in the late 1960s, caused the oil price to shoot up, as you can see in the graph below.

There was one company that anticipated this sudden change in oil prices and was ready to respond. Shell. Shell had been applying ideas from the legendary think tank RAND Corporation to scenario planning. It had anticipated the possibility of a rapid price increase and prepared an action plan in advance. The full story is on the Shell website. Shell remains a leader in scenario planning and is due to update its scenarios next month, June 2020.

Ibbaka combines scenario planning with pricing action portfolios

Over the past months Ibbaka has been developing ways to combine scenario planning with pricing action scenarios. In June we will be offering an online workshop for no more than twelve people. We will also be offering an impact learning course (a series of short - five minute - lessons) on how to combine scenario planning with pricing action portfolios. The online workshop also includes a subscription to the impact learning.

An abbreviated scenario planning method

To give you the flavor of scenario planning, here is a simplified version of the process, adapted for pricing strategy and tactics.

1. Identify trends about which there is already meaningful certainty

Examples are demographic trends, demand trends, sustaining innovations, events that we know will occur but are unsure when they will occur (like pandemics).

2. Identify critical uncertainties

A critical uncertainty is where more than one future could emerge. These uncertainties are critical because they will lead to different actions and outcomes that have important consequences. In most cases, limit this to two or three possible outcomes. Even if there is a continuum of outcomes or more than three outcomes, it is easier for humans to manage a limited set of scenarios. Trying to account for all possible scenarios can lead to 'analysis paralysis.'

3. Combine two critical uncertainties

This is a powerful exercise. Pick several different different critical uncertainties and try combining them in different ways. Look the the patterns that emerge. Which generate different futures that will require different actions.

4. Select the critical uncertainties and construct four scenarios

The common practice is to limit oneself to two critical uncertainties and four scenarios. All four scenarios should be seen as possible. It is not necessary that all the scenarios be desirable, or that one be the most desireable. In some advanced applications, it is helpful to use multiple states for each critical uncertainty. This allows one to model neutral outcomes and generate six, nine or more scenarios. One can also use more than two critical uncertainties. If you are going to use more than three you will need a software tool to manage all the interactions. But this approaches lead to complexity that can actually make it more difficult to understand and prepare for scenarios. Get started with a 2 x 2 matrix of four scenarios. This is enough to get you prepapreing for alternate futures.

5. Name each scenario

Give each scenario a name so that it becomes memorable and you can refer to it easily.

6. Analyze the implications of each scenario

Investigate questions such as
- Who is impacted
- How long will the impact last
- How will the impact change beliefs about the world
- How will the impact change behaviors
- How will the impact change decision making
For pricing scenarios, consider the impact on
- Supply and demand
- Market dynamics
- Value drivers (economic, emotional, community)
Consider the impact on people, the skills they will need, the roles they will play

7. Create stories about each scenario

Turn each scenario into a story about that future. Stories are one of the most powerful ways to promote understanding and memory. A scenario is not complete without a story.

8. Identify early indicators for each scenario

Ask what the early indicators are for each critical uncertainty, what will suggest how each uncertainty will resolve. Do this first for each critical uncertainty used for your scenarios and then for each scenario.

9. Decide on actions for each scenario (in this context pricing actions)

What are the critical actions you will take under each scenario? It is often useful to divide these into three time frames: at the beginning of the scenario, in the midst of the scenario, at the end of the scenario.
Apply best practices for decision making and make it clear what will trigger the action, what resources are needed to execute the action, what information is needed to execute the action, what outcomes are expected.

10. Establish a review mechanism

Periodically (usually quarterly or annually) review the other critical uncertainties that you identified in Step 2. See if any of the critical uncertainties have resolved so that there is no longer uncertainty. When you do this you may identify new critical uncertainties. Decide if you need to refresh your scenarios.

Below is an example of sixteen possible scenarios for changing market dynamics (see Market dynamics and pricing scenarios - managing pricing in a time of uncertainty).

Pricing scenarios can play three main roles in your pricing strategy:

• Prepare for rapid action

• Build resilience

• Shape the future

Three ways to use scenario planning in pricing

Prepare for rapid action

In a situation where rapid action is necessary, not being prepared for it could cause costly hesitation. John Boyd’s OODA Loops (Observe Orient Decide Act) give us a framework for preparation.

For a an interesting unfolding of OODA loops see Taylor Pearson’s excellent treatment.

A set of well thought out pricing scenarios helps with each step in the loop.

Observe: In Step 8 the early indicators for each scenario were identified. This gives an early warning system that makes it possible to see what may be happening before other people. This is what Shell did successfully in the first oil crisis.

Orient: The scenarios you have developed help get to a rapid understanding of what is happening. Even if the emergent present is not within one of your scenarios, experience with identifying critical uncertainties (Step 2) and combining them (Step 3) promote strategic agility. People who only plan and act within one scenario will not have developed the skills needed to adapt rapidly.

Decide: Once you know which scenario is emerging, your scenarios and the research you have done around them (including your research into pricing actions) will make it easier, and quicker, to decide what to do.

Act: This is where the pricing action portfolio comes in. A good portfolio includes investments that have prepared pricing actions for different scenarios. These could range from a price increase or decrease, a change in pricing metric, or an adjustment in the terms of trade such as payment terms.

Build resilience and adaptability

Speed of action is important, but it is even more important to build an organization, in this case a pricing system, that is resilient across multiple scenarios. A resilient system is one that can return to stability after disruption (see the work of C.S. Holling) . An adaptive system is one that can reconfigure in response to a changed environment (see the Wikipedia article on complex adaptive systems for an introduction). There is a creative tension between resilience and adaptation that drives the design.

One way to use scenario planning to is require a system to be viable across multiple scenarios. The Dutch pioneered this approach in the 1970s for urban planning. The key idea is that an system should be viable across multiple scenarios. Any major investment should be tested against different scenarios. See Dutch New Worlds Scenarios in Physical Planning and Design in the Netherlands, 1970 - 2000 by Christian Salewski.

Your pricing model (the combination of pricing metrics, fences, packages, tiers, discounting and terms of trade) should be viable across more than one scenario. Pricing scenarios tend to be framed in terms of changes to market dynamics and value dynamics and how these drive competitive dynamics. When designing your pricing model, test that it will deliver on your pricing goals under different scenarios. The past two months has been a good real world test of this. Ask …

• Did your pricing metric continue to work as buyer value drivers changed?

• Did your market segmentation change with some buyers who had been in the same segment shifting to different segments?

• Were you able to adjust your pricing or terms of trade in response to the changed circumstances? (See how the subscription management platform Zuora is addressing this.)

Shape the future

The most inspiring use of scenario planning is to shape the future you want. An inspiring example of this is the Mont Fleur scenarios that were used in South Africa at the end of apartheid. Key stakeholders were brought together to define possible futures and then search for a path to a desired future. The Mont Fleur Scenarios tells this compelling story.

We have found scenario planning to be especially important in designing pricing for a new category. Early on, the shape of a new category is unclear. Identifying critical uncertainties can help you find the most important leverage points. Uncertainties are uncertain, that is, they not predetermined (if they were you would have captured them as trends in Step 1). It is often in your power to shape the outcomes. How you frame value and design pricing is one of the ways you can shape a category in your favor. If you are engaged in category creation, identify the critical uncertainties about the future structure of the market and see how you can impact the outcomes. See Pricing and value for category creation