Pricing Myopia

Guest Post by Chris Provines from Holden Advisors

In 1960, Theodore Levitt wrote the classic Harvard Business Review article Marketing Myopia.  It’s about how companies miss growth opportunities by taking the wrong perspective.  Levitt provides many examples of missed opportunities caused by companies defining their business too narrowly.  Usually, it is because they see their business as selling products and not solving customer problems.  It’s the failure to see the big picture that leads to wrong decisions and missed opportunities.

Myopia in business is about focusing too narrowly in thinking or decision making.  Pricing professionals in B2B markets can often suffer from a form of myopia.  I call it the “Pricer’s Myopia.”  Honestly, I have to admit that I have, from time to time over the years, suffered from this terrible affliction.  Pricer’s  myopia is a condition where you assume that fixing the company’s pricing strategy, price setting and price management will solve all the pricing problems.  It is also a mistaken belief that what a customer pays equals their “willingness to pay” or how much they “value” your solution.

There’s one big missing piece from this myopic view – the sales force.  If you sell products and solutions through a direct sales force, your ability to capture price often depends in large part on:

• The sales team’s ability to communicate value
• The negotiating skills and ability of each individual salesperson

In the age of the professional procurement organization in many businesses, selling in a B2B environment has pushed and tested the sales team like never before.  Salespeople are often outmatched by highly trained negotiators who have an entire bag of tricks to deploy.  The result is eroding prices, increasing requests for price exceptions, sales force frustration with price levels, and conflicts between pricing and sales.

As a former procurement person, I can tell you firsthand that what a company pays for your product or service is rarely their “willingness to pay” or how much they “value” your offering. Professional procurement has learned how to pay less and get more, and often buy far below their walk away point.  The actual price paid is more a function of the skills of the salesperson to sell value and negotiate.

So the next time you feel Pricer’s Myopia coming on, you need a dose of sales:

• Go and co-travel with your sales team.  Ride with the very best and the not so best salespeople in your company.  Ask a lot of questions, and have some fun.  It’s certainly more fun than sitting at headquarters looking at spreadsheets.  See how the salesperson brings value to the customer.
• Participate in customer negotiations.  Ask to get a copy of the negotiation plan (see if one actually exists!).  Ask the salespeople when was the last time they received negotiations training.
• Go look at the sales tools and collateral provided to the sales team.  Is it value based, or laden with features?  Would you feel confident about defending the company’s value with the tools that are provided?

Don’t miss pricing opportunities by being myopic.  In all my experience, I have always found that good salespeople are usually high achievers and big believers in self-improvement.  Selling is a tough job.  Give sales the help they need so that they can help you in the last mile of price improvement.

Guest Post: The Need for More Academic Research in Pricing

Guest Author: Stephan Liozu 

In recent publications, I suggested that the pricing field is under-researched and under-published compared with other elements of the marketing mix. Empirical research from McKinsey & Company reported by Clancy and Shulman in 1993 shows that less than 15% of companies do any systematic research on pricing. In 1996, Malhorta conducted a study on the nature of published marketing articles that concluded that less than 2% of all articles published in major marketing journals cover the subject of pricing.

More recently, a group of dedicated scholars conducted a review of the nature of 1,900 pricing-related papers published in the top 20 marketing journals over the last 30 years. Yes, some people are dedicated enough to conduct these types of analysis and publish their findings. While 1,900 journal articles sounds like a lot, only 106 of these papers related directly and exclusively to pricing strategies and tactics as well as to price–quality relationships. One hundred six papers published over 30 years in the top 20 academic marketing journals. That does not sound like a lot to me. Herein lies the main problem: not enough high-quality academic research directly related to pricing is conducted and published in top marketing journals. You might ask yourself: why should we care? Let me tell you why.  

Consultants Do Not Conduct Fundamental Research 

Let me first say that consulting research helps in many ways. It is descriptive, timely and provides snapshots of pricing practice. Consultants have access to customers and prospects, and build survey questionnaires to satisfy their need for innovation and to investigate potential trends that might enhance their pricing consulting practice. For the most part, however, consulting companies do not produce explanatory models linking variables to potential performance outcomes. Their research is sometimes qualitative, is anecdotal and lacks statistical robustness. From these surveys, one cannot draw new theory or claim significant discovery that will advance the field of pricing.

Theory Building in Pricing 

Theory is built through a thorough and transformational research agenda. Getting published in top marketing journals can be a very difficult process requiring multiple iterations of the paper, the analysis and the research framing. Because papers undergo blind peer review by top pricing scholars, their research frameworks, methods and findings are profoundly challenged. Theory is built over time. Theory building is incrementa. It happens when new research builds on past research, contradicts past research or proposes another angle to it. In the pricing theory space, little of that has happened since the golden years of Nagle, Monroe, Anderson, Noble, Gruca and Cressman. Recently, thanks to your support and to support from the PPS, we have been able to conduct academic pricing research on a variety of topics. We hope that our papers might survive the grueling review process.

The Bridge Between Pricing Theory and Practice 

It does take time to build theory in academia. I think it is a journey and not a destination. It is real, hard work that requires patience and resilience. Besides the recognition in academic circles, the exciting outcome to generating knowledge and theory building is to see them used in practice. For example, it took decades of research supporting and contradicting the positive influence of firms’ market orientation on profit performance, but eventually, theory-based knowledge was moved into practice, and firms embraced a market orientation. Could we envision a similar outcome for the study of value-based pricing and its impact on firm performance? Value-based pricing has been linked to superior firm performance by many consultants. However, that link has never empirically validated. It is time for our profession to conduct such a study so that we can convince top executives to embark on the pricing transformation from cost to value.

Please Join the Next Wave of Exciting Academic Research 

In 2011, the Professional Pricing Society supported my Ph.D. academic research process by circulating an electronic survey to their current and prospective members. We were able to use 748 complete surveys out of over 1,200 total responses. But given our less than acceptable response rate, the chances of our results being published in a top marketing journals are slim. At the same time, a consulting company gathered 3,000 responses from their annual pricing survey. I was puzzled by these statistics. I give a lot of credit to the Professional Pricing Society for embarking on more academic research that will hopefully lead to new knowledge and theory. The profession needs it to make sure pricing gets its well-deserved place at the marketing table. It is time to bring new, robust empirical findings to the world so that pricing practitioners can benefit from them in their daily work. It is time to bring the pricing profession to new heights and to reach the next frontier.

At the end of May 2012, we will launch another academic research project on the topic of change management. We would like to ask for your support in making this research a successful endeavor. We will all benefit from that. Thanks in advance for your support.  

Stephan Liozu is President & CEO of Ardex America Inc (ardexamericas.com), an innovative and high-performance building-materials company in Pittsburgh, PA. He is also a PhD candidate in Management at Case Western Reserve University and can be reached at sliozu@case.edu.

Guest Post: LeveragePoint Adds Value to B2B Pricing

Guest Author: PJ Jakoveljivic 
Intro: Technology Education Center's (TEC) PJ Jakoveljivic is a well-known and astute software analyst who covers pricing software platforms and systems. He recently conducted an interview with Steven Forth, CEO of LeveragePoint, that focused on the separate, but complementary, roles of value management and price execution. An excerpt of that interview is below. Other articles by Jakoveljivic can be accessed at http://blog.technologyevaluation.com. 

PJ: Why do you believe that a value-based pricing approach is better than segmentation on customers’ willingness to pay (WTP)/sensitivity to price?

SF: Value-based pricing and value-based selling are focused on the customer’s business model, not the seller’s historical pricing data. This focuses the seller on the customer and how the solution helps the customer, which is the best way to understand customer needs and business requirements, built trust, and justify a price premium.

Value-based pricing recognizes that the customer has alternatives, i.e., competitors, internal solutions, doing what they do now, even doing nothing. Value models include these alternatives as a reference price and formally model the advantages that the alternative may have. Acknowledging the value of alternatives builds trust and allows sales to deal with price objections more systematically.

Value-based pricing is outward-facing and depends on customer and competitor data and not on internal legacy data. This makes it much more effective in addressing changing market conditions where historical value and pricing relationships are being disrupted, for entering new markets, and for setting the price on new products. Finally, value-based pricing builds a collaborative and mutually supporting relationship between pricing and sales organizations. Instead of pricing analysts telling sales reps what the price should be and sales pushing back or defaulting to undisciplined discounting, it gives these two key business functions a framework and meaningful customer and competitor focused data that can be used to optimize pricing and messages.

PJ: What are the traditional hurdles to better pricing software adoption and how can they be overcome (sales folks’ anxiety, general unawareness of the potential benefits, companies being secretive, etc.)?

SF: Our entry point into most large companies is the pricing function, but in the pilot process we develop cross-functional teams and ensure that these teams get to use the software and directly experience its power. The VP of Sales and the VP of Product Development is our ally in winning the sale and driving adoption. At this point, companies are adopting value-based pricing software for the following two main reasons:

1. They want to do a better job of pricing new products or new markets and segments. To that end, value-based pricing software provides them a way to link price to differentiated value, which is essential if they are to capture their investment in innovation. 
2. They want sales to negotiate prices based on the value to the customer rather than defaulting to discounting or basing price targets on “willingness to pay” as customers and sales people are skeptical about claims coming out of black box software. 

PJ: What motivates customers’ product managers to act as advocates as well? (I understand why sales folks would be)

SF: Product development has learned to think in terms of how product features provide customers with benefits (feature-to-benefit mapping, which is something for which we provide explicit support). But in today’s competitive markets this is not enough. In the B2B space, economic factors loom large in the buying process and product managers have to go beyond benefits and link features and benefits to differentiated value.

If a feature does not either provide a differentiated value or eliminate the differentiated value of a competitor then it should not be developed at all. Product managers have to make many trade-off decisions. A feature may deliver differentiated value, but how much and for which sectors of the market? The holy grail for product management is to focus resources on those feature sets that deliver the maximum differentiated value for the lowest cost to develop and the lowest cost to serve.

Product managers also need to think in terms of the whole solution – what is the package of goods and services that the customer needs to maximize differentiated value and how much will it cost to deliver this. Value-based approaches help product managers think through trade offs. Companies using value-based pricing are able to launch products at higher prices and actually win those prices in negotiations.
Value driver and data libraries that are developed as companies use pricing software platforms provide an important source of customer and competitor information that are valuable to product management. The product increases in value over time. Its ability to share resources and collaborate multiplies that value.

Value-based pricing is a standard part of many of the stage-gate processes used in new product development and introduction (NPD&I) at many companies. Companies want to ensure that what they are developing will have a differentiated value and will sell at a price premium that will enable them to get a high return on investment.

PJ: Competitive offerings are important. But what if both the company’s sales reps and competitors’ folks are out of touch with what the market can bear (i.e., WTP)?

SF: You need to know the next best competitive alternative as this establishes the reference price. If you have a differentiated offer you provide value above the reference price, but the price for the commoditized part of your offer is set by the market. The next best competitive alternative is sometimes a competitor, but it can also be an "internal option" (make it in-house) or even “doing nothing” (and even doing nothing can have a cost). The problem with WTP is that it does not parse out into actionable information for sales. Sales force has to know why different segments have differing willingness to pay and not just that they have them. Part of the sales process should be to uncover the next best competitive alternative, and most prospects will share this with you or it can be inferred from an request for proposal (RFP)/request for quotation (RFQ). The customer is often coy (or misleading) on cost, but a good pricing team invests time in understanding the competitive alternatives and how they are priced. Pricing cannot be purely inward focused on legacy transactional data. It must look out to competitors and customers.

PJ: How does segmentation come into play with value based pricing?

SF: In regards to segmenting using WTP, it is actually quite straightforward. You are basically trying to find groups of customers that show the same demand elasticity at the same price levels. You then define these as a segment. Normally you would also layer in your price waterfall data so that you could create a grid with one axis being demand elasticity and the other being the components of the price waterfall such as cost to serve, shipping costs, etc. Personally I don’t think this is a very good approach for most companies. If I was putting in place this sort of segmentation, I would want to first test for any legal issues as my understanding is that in the US there are restrictions on selling the same thing for different prices. But more to the point, I think this approach does not help understand the customer or why the willingness to pay differs. Segmentation is most useful when marketing and sales can use it to execute, and I think that generally requires insight. The most powerful segmentation has the following three axes:

1. Key value drivers 
2. Buying process 
3. Cost to serve (or, in some cases, by cost to serve plus customer acquisition cost) 

PJ: How applicable is value-based pricing to selling configurable products with multiple options?

SF: For configured products, the standard approach is to build a large value model that supports the different configurations. Depending on your business process and how involved pricing is in individual sales one can then either use the “save as” feature and make a new value model for the case or have sales reps turn value drivers on and off and tweak parameters. We have heard from some customers that the sales force must be able to build new value models and we are looking into accelerating development in this area.

The full interview, as well as a link to Part I of this analysis, can be accessed at http://blog.technologyevaluation.com/blog/2012/02/08/leveragepoint-adds-value-to-b2b-pricing-%E2%80%93-part-2/.