Thursday, November 15, 2012

The Pains and Gains in Pricing

Guest Post by Stephan Liozu

A recent survey conducted with 557 CEO’s and Business Owners around the world showed they pay little attention to pricing. When asked how they would allocated 100 points of attention between cost cutting, growth programs and pricing initiatives, pricing received an average of 16 points. A vast majority of the time is spend on fixed and variable cost control (54%). Clearly, and even though they realize the power of strategic pricing, top executives do not pay enough attention to it. So what is behind this lack of interest and attention paid to pricing by top executives? I conjecture that this lack of attention primarily comes from the fact that the pricing function does not excel at identifying, measuring and communicating the business pains of poor or non-existent pricing management. The pricing function also has a hard time measuring the gains generated by pricing activities as well as calculating the ROI of pricing activities.

So here are some tips on how to get started and make progress with this difficult exercise.

1) Show the pains

Pricing professionals should spend more time up front identifying and articulating the pains relating to pricing. That can be done by conducting a pricing capability assessment and performing the fundamental pricing analysis: cost-to-serve, waterfall, pricing cloud, etc. These pains then have to packaged in a dramatic fashion with one or two critical numbers that might turn into a story hook. These numbers have then to be communicated inside the marketing and pricing organization without created tensions and rejection.

2) Articulate the gains

Obviously, once the financial and efficiency related pains are identified, measured and articulated, the next step is to evaluate the potential gains of investing in pricing. This remains a very difficult exercise. A focus on short term gains might be necessary to get some initial attention. Like in the Lean Six Sigma methodologies, quick wins are greatly appreciated by top executives as they have a tendency to focus on short term impact. That gives pricers an opportunity to get a foot in the door, to tell their story and to come back for more "face time" later.

3) Create a story

Once pains and gains are identified and somehow measured, the next step is to create a story. That story has to be adapted to the business context, the dynamics of the external environment, the culture of the organization and the management style of the top leaders. Story starts with a strong hook which in this case is the pains: “every year, our organization loses $1 million in profit due to poor pricing.” The hook grabs attention and creates the opportunity to give your one minute non-technical elevator speech. The message is to convince top executives what you can deliver for them in gains to help reduce the pains. That story should be repeated in business meetings, in pricing discussions, and might be translated into goals and objectives for the pricing team. The story has to be crisp, credible, well articulated and somewhat dramatic.

4) Be ready to compete internally

In an organization, you compete for attention. You also compete for human and financial resources. This competition is internal and consists of functions that are in the mainstream and are able to calculate their ROI very well. That includes R&D, operations, innovation, technology and IT for example. For them, calculating ROI and demonstrating payback is expected and second nature. It is therefore very critical for the pricing function to be able to do the same.

5) Keep It Simple Stupid (KISS principle)

Top executives are busy people who have a very short attention span. Therefore you might have to talk to them like as if they were a two-year old child suffering from ADD. It is recommended to keep the message simple, well articulated, and business like. If you manage to get 30 minutes of top executive attention, do not bore them with long analytical explanations, super technical pricing methods, or 30 pages of PowerPoint. Work on a very simple story line using plain terms. That might sound like: "We are currently leaving $2.5 million on the table by not managing our profit leakages and not fully capturing pricing opportunities. With an investment of $150,000, we could get some quick wins, get our company on the path towards pricing excellence while getting a payback for it under 2 years."

I do find it paradoxical that pricing is a very analytically focused function which is not able to calculate and articulate the ROI of programs and activities. This is why Dr. Hinterhuber and I are launching another short survey to explore more information about how the ROI of pricing might be better calculated and communicated. Please support our initiative by taking this short survey.

Here is the link:

An executive summary will be sent to you if you choose to participate. Thanks for the support.

Stephan Liozu ( is the Founder of Value Innoruption Advisors. He specializes in disruptive approaches in strategy, innovation and value management. He is also a PhD candidate in Management at Case Western Reserve University and can be reached at

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