Intro

Pricing Strategy and Process

Most senior executives would agree that a company’s pricing strategy and process are key drivers of gross margins. Yet at many companies, pricing  is not strategic, the process is somewhat of a mystery (no defined process or metrics), and the ownership often is not clear. The only constant is that pricing is usually the most emotionally charged process at the company. The Boulder Group approach is to ensure that a clear pricing strategy is developed, and that a defined pricing process is created utilizing the pricing strategy as a framework with measurements and ownership.  The result is a more profitable pricing model…the icing on the cake is that essentially all the improvement drops to the bottom line. 

The most common pricing strategy is cost-based pricing, which, in theory provides a reasonable return on costs. In reality, it is a roadmap for mediocre gross margin performance since it is difficult to determine a product’s unit cost before determining its price, as cost is dependent upon volume. The bias of cost based pricing is to overprice in weak markets and under price in strong markets; resulting in an overall negative impact on gross margins.

A value-based pricing model is a customer/market product design with a target price that can be successfully sold in the marketplace providing a positive impact on gross margins. The following graphic demonstrates the significant difference in perspective between a value-based pricing strategy compared to a cost-based strategy.

Pricing Strategy

Pricing Strategy

Value-based pricing begins with the customer, identifying the value proposition, determining the price, which dictates the cost targets, and finally influences the product design.  Internally driven cost-based pricing can often lead to products that are not accepted in the market place or have to be significantly discounted to sell.

One tool that The Boulder Group utilizes to determine the baseline pricing strategy and process of a client company is a Pricing Scoreboard. The Pricing Scoreboard evaluates the current pricing performance of ten key attributes of the pricing strategy and process such as pricing strategic alignment, product value in the market place, customer price sensitivity, and profitability.

Approach

The Boulder Group Team will work with you to develop a comprehensive picture of your existing pricing strategy and process and develop team based solutions that will unlock profit opportunities in your company. The key steps in this approach would be as follows:

  • Evaluate Pricing Scorecard results
  • Establish cross functional Pricing Team
  • Determine existing pricing strategy and map the existing product management process, including responsibilities, and measurements identifying barriers and opportunities
  • Accurately assess product contribution margins
  • Review current discounting scheme and pricing compliance
  • Implement strategic pricing concept
  • Model elasticity by customer segments and reset prices and discount policies based upon pricing strategy…a useful tool is the Price Waterfall Analysis depicted below
    Waterfall Analysis
  • Develop a new pricing process based upon the strategy and objectives and communicate though out the organization
  • Optimize new pricing process, measure, and enforce compliance

Summary

Pricing Optimization is one of the greatest drivers of sustainable gross margin for two simple reasons. The first is that our experience suggests that pricing strategies and processes are often more emotion based than not and do not have well defined ownership, processes, or measurements. Thus once the process is defined, measured, and responsibility is aligned through the organization there is typically a significant opportunity. The second reason is that essentially all the pricing improvement drops directly to the bottom line.