Pricing Strategy Implementation

Translating Pricing Strategy into Results

Andreas Hinterhuber, Stephan M. Liozu

• Publisher: Routledge
• Year: 2019
• Print ISBN: 9781138332164
• eBook ISBN: 9780429822919
• Topic: Business
• Subtopic: Business General
• Index: Business

Pricing can truly transform organizations. The impact of pricing on organizations is a result of two factors: pricing strategy development and the implementation of these strategies. Implementation is arguably the most difficult part in the pricing strategy process where even seasoned practitioners demand guidance. Pricing strategy development requires creativity, analytical rigor, and an ability to master the internal political competition for scarce resources, but it takes place in a well-defined environment. Fast forward to strategy implementation: competitors that stubbornly fail to behave according to assumptions, new entrants, internal resistance, new opportunities, changing customer preferences, leadership changes, regulatory interventions, or market growth rates that change unexpectedly are some of the intervening variables between the pricing strategy originally developed and the strategy actually implemented. This book provides the theories and best practices that enable the effective implementation of pricing strategies. It offers:

• a best practice overview on how to convert a pricing strategy into superior results

• insights from current academic research on driving profits via pricing strategy implementation

• examples on how to deal with digital transformation in the context of pricing

• tools and insights into how to overcome internal resistance, align the organization, and forge win-win relationships with customers

Taking a new approach, Pricing Strategy Implementation is a critical and practical tool for practicing executives and managers, as well as academics and researchers in pricing, marketing strategy, and strategic management.

Part 1

Introduction

1 Introduction

Implementing pricing strategies

Andreas Hinterhuber and Stephan M. Liozu

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: (1) behavioral change and (2) an improvement in company performance. The implementation of pricing strategies, i.e. the achievement of consistent behavioral change that improves firm performance, entails a true organizational transformation. The following 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 percent of the company’s sales were product-based: the company sold perpetual licenses to customers. In 2018, close to 90 percent of the company’s sales were subscriptions: the company predominantly sold 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. Mark Garrett, CFO of Adobe, comments, “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, Garrett 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 doubled and operating margins increased from 26 percent to 32 percent. 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 illustrates 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 percent to 3 percent (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 for customer satisfaction and profits conjointly (Hinterhuber and Liozu, 2014). Second, an understanding of business-to-business (B2B) customer psychology allows the company to favorably influence customer perceptions of value and price without actually lowering the price (Hinterhuber, 2015b). Third, pricing strategy implementation is all about action, the confidence to overcome internal and external resistance in order to get things done (Liozu, 2015).

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 provide frameworks in order to direct and structure pricing strategy implementation. Second, the sales force. The sales force clearly is the critical link where pricing excellence manifests itself most visibly. Third, 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, and from communicating product features to documenting and quantifying customer value. In the context 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.

Structure of the book

Part I, “Introduction,” contains this introductory chapter by Andreas Hinterhuber and Stephan M. Liozu.

Part II, “Aligning the organization around pricing strategy implementation,” contains several chapters that address the organizational capabilities needed to implement pricing strategies.

In Chapter 2, “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 behavioral change at the individual level: pricing strategy implementation is an instance of managing organizational change.

In Chapter 3, “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.

Part 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 Chapter 4, “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. Although this is arguably true, current research suggests that a restricted set of personality traits is associated with sales manager effectiveness. In terms of behaviors, 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 is 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 Chapter 5, “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 an ecosystem captain 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 toward 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 who are looking for ways to expand their impact in organizations.

In Chapter 6, “Designing sales force compensation to improve pricing execution,” Stephan M. Liozu discusses the results of qualitative interviews with 12 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 topics of every pricing transformation. It needs to be prepared with care and intention.

Part IV, “Pricing strategy implementation: The role of marketing,” contains several chapters that highlight the role of marketing in pricing strategy implementation.

In Chapter 7, “Implementing pricing strategies by developing and implementing effective discounting practices,” 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 analyze transaction-level data in order to develop discounting guidelines that can serve as a guide and benchmark for sales manager pricing behavior.

In Chapter 8, “Designing and executing your B2B segmentation,” Stephan M. Liozu and Katie Richardson highlight the various implications of designing a 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 Chapter 9, “Training programs to boost pricing execution,” Stephan M. 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 wi...

Table of contents

• Cover
• Half-Title
• Title
• Copyright
• Contents
• List of contributors
• PART 1 Introduction
• PART 2 Aligning the organization around pricing strategy implementation
• PART 3 Pricing strategy implementation: The role of the sales force
• PART 4 Pricing strategy implementation: The role of marketing
• PART 6 Implementing pricing strategies that win deals
• Index