Translating Pricing Strategy into Results.
BY ANDREAS HINTERHUBER AND STEPHAN LIOZU
Chapter 1
The implementation of pricing strategies is not easy. As the chapters in this book show, even small organizational changes can be very hard to implement. What looks simple from the outside is difficult when viewed from inside organizations where entrenched habits, a bias towards the status quo and risk aversion work against change, including change for the better. Pricing strategy implementation has two broad aims: one, behavioural change. Two, an improvement in company performance. The implementation of pricing strategies, i.e. the achievement of consistent behavioural change that improves firm performance, entails a true organizational transformation. The textbox provides an illustration.
The digital transformation of Adobe – the implementation of an innovative pricing strategy
Adobe, a US$ 9 billion software company, is an excellent example of a successful digital transformation, where the implementation of a new pricing strategy is the central element. In 2011, more than 80% of the company’s sales were product-based: the company sold perpetual licenses to customers. In 2018, close to 90% of the company’s sales are subscriptions: the company predominantly sells usage rights to customers. The move from products to subscriptions is driven both by a strong customer orientation – subscription sales allow immediate product updates, as opposed to product sales that are driven by release cycles – as well as by a healthy profit objective. Comments Mark Garrett, CFO of Adobe: “We were driving revenue growth by raising our average selling price—either through straight price increases or through moving people up the product ladder. That wasn’t a sustainable approach” (Sprague, 2015, pp. 1-2). The implementation of the new pricing strategy follows a substantial internal and external analysis. Again, Mark Garett comments: “We spent hours knee-deep in Excel spreadsheets modeling this out. We literally covered the boardroom with pricing and unit models. Through this discussion, which took about a year, we saw that we could manage through it and that we, our customers, and our shareholders would come out on the other side much better off” (Sprague, 2015, p. 2). The digital transformation and the implementation of the new pricing strategy are delivering results: from 2011 to 2018 sales revenues double and operating margins increase from 26% to 32%. This successful implementation of the new pricing strategy can be read in light of an organizational capability that is relevant in the context of digital transformations: digital business agility, consisting of (1) hyperawareness, (2) informed decision making and (3) fast execution (Wade, 2015). In the context of the implementation of the new pricing strategy, Adobe fundamentally changed its culture, structure, sales force capabilities and incentives, communication to customers, and communication to investors (Gupta and Barley, 2015). The case of Adobe allows to illustrate another principle of a successful pricing strategy implementation. Major, structural changes in pricing strategy such as the one implemented by Adobe in the context of a digital transformation require significant, upfront communication to customers. Small changes, ranging anywhere from 1% to 3% (Monroe, Rikala, and Somervuori, 2015), do not. Companies simply need the confidence to implement them without a blink.
Finally: It is noteworthy that the average selling price to customers increased from about US$ 30 per month under perpetual licensing to about US$ 37 under subscriptions (Gupta and Barley, 2015) – despite the stated intent of the company’s CFO of not increasing company profitability via price increases. The Adobe case study therefore offers many fascinating lessons, a few deserve to be highlighted. First, innovation in pricing allows to increase customer satisfaction and profits conjointly (Hinterhuber and Liozu, 2014). Two: an understanding of B2B customer psychology allows to favourably influence customer perceptions of value and price without actually lowering the price (Hinterhuber, 2015b). Three: pricing strategy implementation is all about action, the confidence to overcome internal and external resistance in order to get things done (Liozu, 2015).
THE CONTENTS OF THE BOOK
This book is one of the few books—possibly the only book—exclusively dedicated to the topic of pricing strategy implementation. This book examines implementation from three different angles: first, the organizational perspective. Leaders in organizations frameworks in order to direct and structure for pricing strategy implementation. Two: the sales force. The sales force clearly is the critical link where pricing excellence manifests itself most visibly. Three: marketing. The role of marketing is changing: from supporting the sales function to creating new markets, from understanding customer needs to contributing to influencing customer purchase criteria, from communicating product features to documenting and quantifying customer value. In the contact of pricing strategy implementation, value quantification is arguably one of the critical responsibilities where sales managers depend on the marketing function to develop tools, case studies, and best practices for quantifying and documenting customer value. These three perspectives on pricing strategy implementation thus provide the basic structure of the book.
THE STRUCTURE OF THE BOOK
“Section I—Introduction” contains this introductory chapter, by Andreas Hinterhuber and Stephan Liozu.
“Section II – Aligning the organization around pricing strategy implementation” contains several chapters that address the organizational capabilities needed to implement pricing strategies.
In the chapter “Implementing pricing strategies – the frameworks to drive profits by pricing actions” Andreas Hinterhuber discusses a series of frameworks that guide the process of pricing strategy implementation. A common thread of these frameworks is that they recognize the challenges of achieving behavioural change at the individual level: pricing strategy implementation is an instance of managing organizational change.
In “Elevating the cost of doing nothing – An interview with Mark Shafer”, Andreas Hinterhuber, Evandro Pollono and Mark Shafer, discuss the implementation pricing and revenue management at Disney from the perspective of the company’s Senior Vice President of Revenue and Profit Management. Highlights of this interview include the comment that “the cost of doing nothing is not zero”, suggesting that elevating the cost of inaction can overcome internal resistance to change and may thus be an important instrument for articulating the need for change. The interview also highlights the characteristics at the level of individual decision makers that facilitate the implementation of pricing and revenue management and reminds us of the ever-present, frequently invisible biases in this process. Finally, the interview illuminates the importance of data and analytics as the basis for rational decision making in order to drive profits via pricing and revenue management.
“Section III – Pricing strategy implementation – the role of the sales force” contains several chapters that highlight the role of the sales force in pricing strategy implementation.
In the interview “The role of the sales force in pricing strategy implementation” Andreas Hinterhuber and Frank Cespedes explore capabilities and personality traits of sales managers in implementing pricing strategy. Cespedes suggests that buyer expectations influence sales manager capabilities: and indeed, value quantification capabilities at the level of individual sales managers are the result of buyers demanding or, at least, responding positively, to quantified value propositions. Cespedes then suggests that the search for personality traits linked to sales manager effectiveness is inherently flawed: effective traits depend strongly on product type, customer type and price range so that, in the end, all traits can be, under different circumstances, effective. While this is arguably true, current research suggests that a restricted set of personality traits is associated with sales manager effectiveness. In terms of behaviours, this interview sheds light on critical elements of value-based selling – understanding customer needs, customer segmentation, customer selection, value proposition development, value-based pricing, and value quantification – that are critically important also in the context of pricing strategy implementation. A critical aspect of pricing strategy implementation are sales force incentives which should be margin-based and reward price performance. In practice this frequently is not the case: most sales force incentives are based on volume.
In the interview “The strategic account manager as ecosystem captain – driving profits via pricing” Andreas Hinterhuber and Bernard Quancard explore in detail the changing role of the strategic account manager (SAM). In the future, Quancard suggests, the SAM will be ecosystem captains capable of managing complex relationships and teams, of organizing data and of telling stories with analytics. The role of the SAM with respect to pricing is a function of the customer relationship: Quancard suggests the following alternatives: a purely transactional relationship (no role for the SAM), a supplier shortlist (a very limited role for the SAM), standard solutions (a consultative role for the SAM) and trusted advisor relationships (SAMs drive pricing). In this view, SAMs should have value quantification capabilities, but not necessarily pricing capabilities which SAMs should be able to access – via, for example, a dedicated pricing function – but are not necessarily part of the capabilities that SAMs should master. Incentives do play a role with respect to strategy implementation: Hinterhuber and Quancard suggest that the compensation of a SAM should be based on five items: activities, competencies, intermediary results, sales/gross margins and the amount of quantified business value that the SAM has created. Finally, Quancard also points towards emerging capabilities of the SAM highlighting three capabilities: diagnostic skills, value innovation and transformation agent. In sum, this superb interview is a must read for all sales and account managers that are looking for ways to expand their impact in organizations.
In “Sales Force Compensation to Improve Pricing Execution” Stephan Liozu discusses the results of qualitative interviews with twelve pricing executives regarding the challenging topic of changing sales force compensation to drive pricing execution. This chapter proposes the modification of compensation plans in steps over time with a strong focus on change management. It proposes practical ways to include pricing metrics in an overall compensation basket while underscoring the need to model past versus future compensation impact with each sales rep. Modifying sales force compensation can be one of the most explosive and emotional topic of every pricing transformation. It needs to be prepared with care and intention.
“Section IV – Pricing strategy implementation – the role of marketing” contains several chapters that highlight the role of marketing in pricing strategy implementation.
In “Implementing pricing strategies: intelligent customer segmentation and pricing authority” Evandro Pollono and Jose Vela also discuss the evolving capabilities of sales managers. Vela, like Quancard, stresses analytical skills and the emerging role of sales managers as transformation agents. With respect to pricing strategy implementation Vela highlights the important role of discounting guidelines and customer segmentation. Managers should analyse transaction-level data in order to develop discounting guidelines that can serve as a guide and benchmark for sales manager pricing behaviour.
In “Executing your B2B Segmentation for Pricing Success” Stephan Liozu and Katie Richardson highlight the various implications of designing of B2B segmentation process. This chapter first proposes a refresher of what segmentation is. Second it lists six best practices on how to make segmentation a success exercise in any B2B organization. The authors then focus on the need to operationalize the segmentation in the go-to-market process to really reap the benefit of such a challenging exercise. The benefits are in the execution of superior commercial strategies guided by the segmentation process. Managers often struggle with the execution of segmentation in their business. This chapter focuses on critical practical steps they must make to get to the next level of marketing and commercial success.
In “Training Programs to Boost Pricing Execution” Stephan Liozu discusses the importance of redesigning training programs to make pricing execution programs impactful. The author posits that traditional lecture-style training programs are not the most optimal way to train experienced sales professionals. The chapter starts with a four-step approach to getting started with the design of a unique and disruptive training program. Then the author proposes practical learning and training tips to increase the level of absorption and stickiness of pricing-related knowledge. The key is to focus on the blend of training methods, delivery style, and diversified content. These tips can be immediately included in your on-going pricing transformational roadmap.
In “Implementing a structured Pricing Strategy approach” Hennecke proposes a practical application of John Kotter’s change management framework to pricing transformation. The author goes through every step and proposes practical recommendations on how to apply the process. This chapter reinforces the need for deep change management focus to make pricing transformation and pricing execution successful.
“Section V – Implementing pricing strategies than win deals” contains chapters discussing how managers can identify the specific price points that win deals profitably.
In the chapter “Pricing large deals: Insights into capabilities and tools that help to win large deals profitably” Andreas Hinterhuber discusses how value quantification and mapping of B2B purchase criteria mapping can help to win large deals profitably. Offers are frequently concentrated in industrial markets: winning the 4%-10% of deals that account for 80% of revenues is thus very important. Value quantification is the process of translating competitive advantages into quantified, monetary, customer-specific value (Hinterhuber, 2017). This idea is explored in several subsequent book chapters by Hinterhuber, Snelgrove, Liozu and Marshall. Value quantification thus identifies the total value or maximum price of an offer. B2B purchase criteria mapping, by contrast, examines the impact of specific price points on the likelihood of winning the deal. By performing both value quantification and B2B purchase criteria mapping industrial sellers can substantially increase the likelihood of winning large deals profitably.
In “Pricing to Win – A framework for strategic bid decision making” Gerhard Riehl offers a further perspective on deal pricing. Riehl outlines four steps: understanding customer demand (customer stakeholders, customer budget, customer value), understand competition, value quantification and measurement and, finally, bid pricing. The two papers by Riehl and Hinterhuber are complementary with Riehl stressing to a larger degree the need to understand customer stakeholders and customer budget constraints. Both papers stress that the application of a structured process and the use of tools (value quantification, purchase criteria mapping, stakeholder analysis, competitor analysis) increases both win rates and selling prices.
Value quantification is the topic of the next two chapters. First, in “Value Quantification—Processes and Best Practices to Document and Quantify Value in B2B,” Andreas Hinterhuber presents the results of an empirical survey on value quantification capabilities in European and US-based B2B companies. This chapter presents five key steps that can guide managers in industrial companies in quantify value: generation of customer insight, value creation through meaningful differentiation and collaboration, value proposition development, value quantification and implementation/documentation. This chapter also highlights several case studies of quantified customer value propositions, SKF, Tieto and SAP among them.
SKF is object also of the subsequent chapter. Todd Snelgrove, the former Chief Value Officer at SKF, highlights the role of quantified value propositions in the context of value-based selling and value-based pricing. In “Quantified value propositions: a key tool to implement pricing strategies in B2B” Snelgrove emphasizes that quantified value propositions are a key element to shift B2B purchasers from price to value. Quantified value propositions are either total value of ownership calculations (Snelgrove, 2012) or value quantification tools (Hinterhuber, 2015a). For sales managers, value-based selling requires two conditions: ability and motivation. The ability to sell value depends on the ability to conceptualize value in a way that resonates with customers, on processes encouraging a focus on value, on the availability of value-selling tools, on initial training and on ongoing experience in value selling. The motivation to sell value is a function of sales force compensation, of the ability to build long-term collaborative relationships with customers where both parties are committed to creating mutually beneficial value, of a company culture led by a strong CEO committed to value-based selling and, finally, of customers that recognize the opportunity to work collaboratively with suppliers. This chapter thus explores the multiple facets that companies can and should control in order to implement value-based selling and value quantification. The chapter also illustrates vividly the difference between a given price savings and total cost of ownership savings of equal amount. If total cost of ownership savings occur year after year and if price savings occur just once, then the effect of the former will by far outweigh the benefits of the latter.
In “Using VBP Cloud-based software to drive and track sales force action in the field” Peyton Marshall outlines the necessity to have proper process and tools to drive the implementation of value selling projects. Have standardized process and templates help with the systematic adoption of new methodologies especially when they impact the daily routine of sales people. The author proposes four considerations that are essential in the design and execution of value-selling pilot projects. He then describes is a simple checklist that is effective in driving initial sales adoption of value selling at a time before there is evidence of success.
In “Execute Pricing Control in Five Simple Steps”, Mitchell Lee and Edward Brice make a strong argument that taking control of pricing by consolidating information, formalizing policies and standardizing language and practices should be your first step toward systematically increasing an organization’s growth and profitability. To do this, they offer five steps to help control price using technology. The authors make a strong case for the use of pricing systems to improve the level of pricing control and therefore the level of pricing execution. With technology as a key enabler of pricing execution, teams can focus on selling and rely on relevant pricing guidelines to steer them in the right direction.
Finally, the book finishes with a very practical list of eight best practices to improve pricing execution. This chapter, written by Stephan Liozu, provides specific actions managers can use to improve their level of focus on pricing execution. Lots of people discuss execution or think they are good at it. Until you implement these practices, you might not be executing well!
This book is thus a call to action highlighting how managers and leaders in organizations can change organizations so that performance improves as a result of pricing. We hope that readers will listen.
REFERENCES
Gupta, S., & Barley, L. (2015). Reinventing adobe. Harvard Business School case study, 9-514-066, 1-17.
Hinterhuber, A. (2015a). Value quantification – the next challenge for b2b selling. In A. Hinterhuber & S. Liozu (Eds.), Pricing and the sales force (pp. 20-32). New York, NY. : Routledge.
Hinterhuber, A. (2015b). Violations of rational choice principles in pricing decisions. Industrial Marketing Management, 47, 65-74.
Hinterhuber, A. (2017). Value quantification capabilities in industrial markets. Journal of Business Research, 76, 163-178.
Hinterhuber, A., & Liozu, S. (2014). Is innovation in pricing your next source of competitive advantage? Business Horizons, 57(3), 413-423.
Liozu, S. (2015). Pricing superheroes: How a confident sales team can influence firm performance. Industrial Marketing Management, 47, 26-38.
Monroe, K. B., Rikala, V.-M., & Somervuori, O. (2015). Examining the application of behavioral price research in business-to-business markets. Industrial Marketing Management, 44(5).
Snelgrove, T. (2012). Value pricing when you understand your customers: Total cost of ownership- past, present and future. Journal of Revenue & Pricing Management, 11(1), 76-80.
Sprague, K. (2015). Interview: Reborn in the cloud McKinsey & Company white paper.
Wade, M. (2015). Digital business transformation: A conceptual framework Global Center for Digital Business Transformation. Lausanne, Switzerland: IMD.
