A recent survey conducted with 557 CEOs and business owners around the world showed they pay little attention to pricing. When asked how they would allocate 100 points of attention between cost cutting, growth programs and pricing initiatives, pricing received an underwhelming average of 16 points. A vast majority of their time is spent on fixed and variable cost controls (54%). Even though they realize the power of strategic pricing, top executives clearly do not pay enough attention to this important subject.
So what is behind this lack of interest and attention paid to pricing by top executives? My conjecture is 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 no pricing management. Pricing managers also have a hard time measuring the gains generated by pricing activities, as well as calculating its ROI.
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 to identify and articulate 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 should then be packaged in a dramatic fashion with one or two critical numbers that might turn into a story hook. These numbers must then be communicated inside the marketing and pricing organization without creating tensions and rejection.
2) Articulate the Gains
Obviously, once the financial and efficiency 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. Just as with 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 you an opportunity to get a foot in the door, to tell your 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. The story starts with a strong hook, which in this case underscores 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 that what you can deliver for them in gains helps to 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 not only for attention, but also for human and financial resources. This internal competition consists of functions that are in the mainstream and are able to calculate their ROI very well. It 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, critical for the pricing function to be able to do the same.
5) Keep It Simple Stupid: The Kiss Principle.
Top executives are busy people who have a very short attention span. Keep that in mind. And keep the message simple, well-articulated and business-like. If you manage to get 30 minutes of top-executive attention, don’t 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 toward pricing excellence, while getting a payback for it under two years.”
Take the Survey
I do find it paradoxical that pricing is a very analytically focused function that is not able to calculate and articulate the ROI of programs and activities. This is why Dr. Andreas 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.
An executive summary will be sent to you if you choose to participate. Thanks for the support.