Setting the right price for your products, services, and customers begins with your pricing model. Whether you are using cost-plus pricing, value-based pricing, or something in-between, these methodologies require codification into a centralized formula to dictate how to price or quote across your sales reps, regions, products, services, and order scenarios. The formula used to produce a pricing output – whether simple and static, or complex and dynamic – is your pricing model. An effective pricing model takes the guesswork out of setting and optimizing price and informs reliable decision-making across your business.
Is Your Pricing Model Working?
It may not be clear right away if your pricing model is working to your advantage. Your business may be experiencing margin or volume growth with a limited or suboptimal model, or you may be using a functioning model and still aren’t seeing the results you’d like. Your pricing model should work for you to deliver your business goals through centralized operational efficiency, reliable data-driven recommendations, and price optimization. Whether you are seeing the results you’d like right now or not, a working pricing model and supporting infrastructure will accelerate results and bring more confidence and reliability to your pricing decisions.
Why Your Pricing Model may not be Working
- You’re not quite sure how it works
How long have you been using the same pricing model? Is the method you use to set price documented? Is there a clear owner who sets price and owns tactical decisions on how to execute those decisions? If you aren’t sure how to answer any of these questions, there are likely gaps in understanding how your pricing model works.
Misunderstanding the logic behind how you set price can lead to unintended consequences. Any changes in your pricing method may affect certain areas of your business – customers, product lines, regions. These can lead to an increase in price deviations by your sales reps. If that happens too much, your list price or quote recommendation may lose relevancy, resulting in a lack of trust in your pricing model and your overall strategy.
There are many factors that can go into your pricing model. Even cost itself changes over time, affecting the output. If there are changes in competitors, customers, services, regions, inflation, or even your sales team, these all impact your ability to optimize price. Visibility to how your pricing model works allows you to make tweaks that don’t disrupt the areas of your pricing strategy that are already functioning successfully.
- Sales isn’t using it
There are multiple reasons why sales may not be using your pricing model. This could be by design – sales teams know their industry very deeply and have valuable experience in determining the right price for their customers. While that may be true for many of your sales team members, this doesn’t help new reps. And it certainly doesn’t guarantee your commercial team is working toward a similar, unified goal. When your team is on the same page, then you can start to empower sales to manage their scenarios within guidelines that support overall business initiatives. Decentralized sales decisions, while good-intentioned, can easily and unexpectedly lead to behavior that may increase volume, but doesn’t optimize the bottom line.
Another reason sales might not be using the pricing model is because no one took the time to sell them on how it works. A good sales team will want to know how the formula works – even at a high level – and why the business is using it. Otherwise, why would they use it, or trust it, more than their own experience?
Take this example: ABC Company provides heavy equipment rentals. They had experienced growth through acquisitions which resulted in multiple ERP systems, disparate processes across regions, and sales had the authority to make pricing decisions in the field. This business was using a cost-plus pricing method, had limited price differentiation, and recently learned that their rates were low compared to market competitors.
INSIGHT partnered with ABC Company to develop together a new pricing model based on relevant factors such as customer size, end market, rental duration, equipment utilization, market demand, and product class. Because it is so crucial for sales to understand the pricing formula, we conducted multiple workshops for feedback, training, understanding price exceptions, and to ensure everyone was on the same page moving forward. We then implemented an ongoing sales effectiveness structure to help sales navigate various situations with their customers such as negotiation tactics, ongoing coaching, and accountability for the long-term.
Success is found when the sales team is confident in their ability to price, and their pricing supports business goals. Confidence begins with understanding the why and how your pricing model works.
- It’s too static
Going back to an earlier question – how long have you been using the same pricing model? A static model usually doesn’t change much, typically leverages only a few factors in its formula, and as a result is fairly manual. For some businesses, this is plenty. Maybe your only pricing actions are annual adjustments. Other businesses, however, are generating dynamic quotes by the second. If you think your pricing model has gone stale – or you just haven’t reviewed it in a while – it’s worth assessing what upgrades you could benefit from.
First, identify the cadence that works for your business. In a typical year, how frequently do you change prices? What is commonly done in your industry and how visible is it? How often are your costs changing? How many new customers do you acquire, or quotes do you experience? Look at your current model factors – product/service, customer, and order attributes – and assess how static or dynamic those attributes are. Then, create an infrastructure that supports your determined cadence.
After you’ve set your model review strategy and cadence, don’t be afraid to make changes. Key market signals such as inflationary conditions call for immediate reassessment of your pricing model no matter where you are in your typical review cadence. For example, any businesses with costs tied heavily, or even partially, to indices will benefit immensely from more frequent reviews and a pricing model that can adjust in real time as market indices are changing.
While a static model might be right for your business, reviewing the model factors at a set frequency will ensure you stay market-relevant and optimize price appropriately. Consider if your customer or product segmentation has changed or if you’ve introduced new pricing rules that require an additional model, e.g., discounting, contract terms, promotional rates. For others, it may be time to move to a more dynamic model to account for quickly changing market conditions or customer quote scenarios.
- You aren’t leveraging results and other business analysis to understand what is or isn’t working
Perhaps you have a working pricing model that is institutionalized across the business. You understand the model factors, and you have a set cadence to review them ongoing. While your model may be functioning, there is opportunity for ongoing price optimization through a closed-loop feedback process.
Price measurement should include the basics such as volume growth, revenue change, and win-loss % that can be drilled down by customer, region, sales rep, product line, etc. However, there may be hidden signals that indicate something isn’t quite right. For example, you may report month over month margin % increases which is a key pricing KPI for your business. However, win-loss rates could be going down because you’ve been pricing too high. It’s important to understand the product and customer mix of what’s occurring in your business to determine the optimal path forward.
This level of data understanding will allow you to make small tweaks to your pricing model, and the way your pricing and sales teams make decisions, that generate incremental profit opportunities.
Find a Pricing Model That Works
A pricing model doesn’t function in a vacuum. There are a variety of elements that affect success, some of which you can’t control. Even so, there are steps you can take to optimize your current situation and gain incremental impact. If one of these scenarios fit your circumstance, you may be leaving money on the table. If you aren’t sure where to start, contact us to discover a pricing model best suited to help you reach your business goals and realize measurable impact.