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Author: DeAnn Hammer We often find that we can be an anomaly in the pricing world when we begin to engage our stakeholders in the pricing topic of operational efficiencies and transactional customer ease.  It’s a topic that many in the pricing community may not focus on, however, it’s become the fabric of our being in trying to elevate our company into a world class pricing organization. Why the focus here?  It starts with a turbulent experience in moving to a new operating system and swimming through a riptide of data.  You begin to ask portfolio managers if they understood the complexity of their flexibility in price options and prior negotiations.  Those portfolio managers are focused on launching new products, conducting price adjustments, and developing pricing strategies…well there is just not enough time to reflect and look back.  And if dared to turn around and look back at the mountain of data and creative pricing agreements, the task is more than daunting. Imagine the time investment required and the emotions of sales leaders.  It’s overwhelming and consuming.  There’s no rearview mirror in marketing.  How that pricing mess was created is not a concern.  Look forward and gain share.  The focus is only forward to gain share and volume. How do pricing operations professionals begin?  Listen. Hear from internal stakeholders and external customers.  What are the pain points that are expressed when it comes to pricing?  It has rarely been the price itself that presents as the problem. The external market often has similar responses around the world.  Even in the B2B space, customers are asking for a B2C experience. External Customers Seek ·      A high functioning easy to use ecommerce experience ·      24/7 pricing ·      Self-service options ·      Easy to analyze pricing options to compare vendors and value for the intended purpose Some Internal Customer Feedback ·      Pricing can be overwhelming ·      Margins can be difficult to see and understand ·      Clarity in price options available to target customers isn’t always transparent ·      Global business teams struggle with currency fluctuations, import/duties/tax ·      If pricing isn’t’ centralized, who do I call for help and how do I get this fixed? As pricing leaders, a very large part of our value is taking an assessment of the situation and understanding that if you can make your pricing strategy simple, does this leave room for growth?  If customers find it easier and easier to shop your offering will transactions increase?  Simplicity in pricing boosts sales effectiveness. Our motto has become, if you can’t see the data or strategy clearly, neither can your customers.  Do you need to manage thousands of price points?  How can you reduce manual work or work that requires a subject matter expert?  Can you automate your quoting process and minimize approvals? Think about the customer experience journey in placing a purchase order.  Can customers independently push forward an order with accurate pricing without a phone call to customer service or their sales professional?  All purchasing agents sometimes ask for is a matching a purchase order to the material delivered on their dock with an invoice that has the same information.  MIND BLOWING. While this seems intuitive in the B2C world, in the B2B space in certain industries, software and capabilities are investments yet to materialize as operational priorities.  Be careful that your approval processes, promotions, volume buys, and special pricing agreements can be received and programmed into your customers systems.  In many cases rather than looking at your total pricing offering, your customers leave margin on the table when complexity is present.  Are you expecting your customers to unravel your tangled data set if a competitive option is available and easier to buy.  You need automation, clearly defined processes, leadership engagement, and governance. In conclusion, the journey towards mastering the operationalization of pricing demands a relentless pursuit of simplicity in the face of complexity. Strive for pricing excellence by embodying the principles of speed, accuracy, and an unparalleled B2C experience. Rise to the challenge and elevate your strategies through heightened standardization, seamless automation, and an unwavering commitment to simplification. As you embark on this transformative course, remember true mastery lies not in the intricate, but in the art of making the complex appear effortlessly simple.  May your pursuit of pricing proficiency be marked by innovation, efficiency, and a resounding success that leaves an indelible mark on the landscape of your business.

Author: Steve Peppler Rebates and incentives have evolved to improve sales and profitability, not to put a leaky bucket in the system or strain relationships. By embracing intelligent automated rebate management, businesses can unlock their true value. No discrepancies or disputes and no revenue leakage, as the author explains. Steve Peppler, a founder of Flintfox , has extensive pricing experience honed from senior finance and sales management roles at Kraft, Pepsi, Western Digital and Hewlett Packard. During his 20 years at Flintfox, Steve has worked closely with distributors from all sectors and all regions, developing pricing solutions at companies including US Foods, WESCO/Anixter, SiteOne Landscape Supply, PartsTown, Opici Distribution, Sonepar Norway, PJP, Sarnova, Horizon Beverage, Dagrofa FoodService, L&F Distributors, and CERTCO. Right now, consumer goods businesses are turning over every stone to seek out ways to improve profitability - from cost savings to price rises. So, for any business operating an incentives and rebates program, this should be the first place to look. As an essential part of the retail-manufacturer model, incentives and rebates have the power to boost sales and strengthen relationships, but they can also be a cause of added friction and lost income. As rebate programs have become ever more complex with various tiers, thresholds, and terms and conditions, it’s become almost impossible to manually manage them efficiently and effectively, leading to issues. This complexity in rebates regularly results in errors which are estimated to cost businesses $3.07m on average every year. No business can afford this kind of revenue leakage, but for manufacturers operating on lower margins where rebates are a large contributor of profit, this can be catastrophic. Another common rebates pain point is the struggle to manage the added complexity that arises when brands sell through various alternative channels. New channels create additional layers and processes for rebates, and without having all data in one central location, tension can arise from inconsistent execution. Rebate processing errors inevitably lead to disputes, which are time consuming to resolve and create cashflow headaches. With inflation causing mounting tension in manufacturer-retailer relations, rebate discrepancies can damage relationships even further. The solution so far has been to throw more bodies at the problem, manually spotting and rectifying these errors, but this is another money drain. One consumer goods manufacturer was experiencing disputes on 90% of its rebate claims, which required a team of six people dedicated to unpicking the issues. Unlike other areas of finance or operations, rebate management has been slow to embrace change. But, by transitioning to intelligent automation, businesses can eliminate errors without additional resources. Pricing automation and rebate management systems can handle the entire process from start to finish - rebate creation, submission, validation, and payment. Everything is managed in one easy-to-use place, and fully automated. Sell-side, automated intelligent rebate management automatically accrues the expense, verifies the eligibility of the rebate claim from customers, and ensures that all required documentation has been submitted. Buy-side automatically generates accurate and timely claims to land swift payment while providing clear and auditable backup details to speed up vendor approval. By using these types of systems, businesses can gain real-time visibility into how their sell-side rebate programmes are performing and where changes to terms might be needed to improve margins. With buy-side rebate management, you have an accurate and up-to-date rebate balance sheet to ensure you’re not leaving money on the table, and can ensure prompt payment by suppliers. If errors are made during contract setup, automated systems can automatically generate adjustment accruals to ensure accrued amounts are correct. You can also track progress against rebate tiers and then adjust purchases to achieve a higher tier and maximize margins. Rebates and incentives have evolved to improve sales and profitability, not to put a leaky bucket in the system or strain relationships. By embracing intelligent automated rebate management, businesses can unlock their true value. No discrepancies or disputes and no revenue leakage.

The best pricing strategy is useless without consistent price enforcement. Discount management is a massively underestimated lever for increasing profits. In fact, many companies do not necessarily have a price problem but a price enforcement problem on an individual level, which leads to a considerable discrepancy between list and transaction prices – or, if list prices do not exist, between customers’ actual price acceptance and the finally negotiated transaction price. This sustainably destroys margins companies need desperately. Strategy and enforcement are the two inseparable sides of professional pricing. Especially in industries where list and transaction prices are typically far apart, such as in many B2B or negotiation-intense B2C businesses (e.g., insurance or automotive), the key approach to quickly and directly improving a company’s earnings is not necessarily to redesign the pricing strategy but to improve price enforcement. The bigger the gross-net gap, the bigger the potential for well-thought-out discount management. Every percentage point of discount given unnecessarily is a lost margin that cannot be re-gained by an alternative increase in sales in the future (more on this later). At the same time, the individual negotiation and discounting strategy of individual sales employees in the last mile (“in front of the customer”) represents a black box for many companies. It is often unclear what actually happens there. However, all the sources for unnecessary and margin-killing discounts center around this often routinized sales behavior and its influencing factors. Unnecessary Discounts Kill the Margin Twice Over the past 25 years, our price and sales optimization projects have repeatedly shown that up to 50-80% of the individually given discounts are granted unnecessarily. Companies thus give away considerable margin potential. Unnecessary discounts do not only waste margins and cost money in the short term but also have fatal consequences in the long term. The reason is that if a discount is unnecessarily awarded today, it will become the new reference price of the negotiation tomorrow, making it a margin killer in the long run. The short-term focus on quickly increasing sales by discounting typically neglects this expensive consequence. Figure 1: Discount iceberg When and How to Give Discounts Not all discounting is unnecessary or harmful in the long run. A discount can actually be an essential sales tool if: · The discount triggers a purchase decision that the customer would not otherwise have made, i. e., either helps the customer cross the “Rubicon” if that final spark has not yet been ignited or serves as an individual price differentiation to open up new customer segments that otherwise could not be won. · The discount draws customers into higher-value options or promotes cross-selling, increasing the wallet share. The most important rule is that discounts must be used selectively. They are not merely a price reduction but a reward for better customer behavior, and long-term consequences must be analyzed. We always need to ask ourselves whether the customer would not have made the purchase without the discount. Define what the customer must do to qualify for the extra rebate and quantify whether the short-term gain is worth the long-term costs. Why Are the Most Important Rules So Difficult to Follow? Two of the most common reasons for disregarding these rules are the following vicious circles that reinforce each other: 1st vicious circle: Companies often assume that customers are primarily bargain hunters. Any inquiry about the price is quickly misunderstood as a demand for more discount. However, customers do not always inquire about the price because they would not buy without a discount. They often only do so because they want to understand the calculation or to fulfill their obligation to have at least asked. If the company grants discounts because of the chronic “customer = bargain hunter” assumption, it quickly becomes a self-fulfilling prophecy: Even customers who were not bargain hunters were raised to be bargain hunters as they were rewarded with unexpected discounts whenever the issue arose. 2nd vicious circle: The second vicious circle is the orientation towards competition and is also a self-fulfilling prophecy: The most common internal justification for giving discounts is to keep pricing “in line with the market” to remain “competitive.” And if we ask a company that started price wars, the answer is a reference to the competition. This leads to undercutting and discounting competition, which is not the customers’ but the companies’ fault. These vicious circles underline that the core issues center around assumptions, perception, routines, and behavior. This is why all measures to minimize unnecessary discounts must start with challenging and systematically improving sales behavior, and this is why “Behavioral Discount Management” is the key to a sustainable profit increase. Figure 2: The self-fulfilling prophecies in discount management Reasons & solutions for unnecessarily granted discounts Individual negotiating and discounting behavior is always determined by many influencing factors. This is why we have divided the root causes of unnecessary discounts into the dimensions “Knowledge,” “Motivation,” “Necessity,” and “Ability” below and provided suitable solution proposals. Dimension #1: “Knowledge”: Biased assumptions, misleading and missing information 15-25% of all discounts are granted unnecessarily because of biased, misleading, or missing knowledge. Firstly, sales beliefs about customer decision strategies are often strongly biased. On average, they overestimate the percentage of bargain hunters in their customer base by factor two. At the same time, the ratio of price accepters in the same range is underestimated ( see GRIPS-Types ). It is often assumed that customers need “a good deal” to buy, and every question about the price is immediately interpreted as a call for a discount. It is often assumed that customers need “a good deal” to buy, and every question about the price is immediately interpreted as a call for a discount. Secondly, what they know pretty well are their costs, which is not only unnecessary as sales are supposed to be a value, not a cost expert, but it is misleadingly anchoring everybody in the sales team on the wrong numbers when setting the expectation level for the negotiation. Finally, the relevant data is not provided systematically, although potentially available: How many discounts have customers received in the past? Does this make sense from a CLTV point of view (see Figure 3 for a typical example)? Which sales representatives were able to sell with less discounts than the average? What is their secret? Collecting and exchanging these insights internally is easily possible. It would be highly insightful and motivating, but it is rarely done in practice. If you want to see what such information can trigger, start by providing information as shown in Figure 3, and then (announce) publish the ranking of sales reps by their average discount granted. You will see miracles happening to your average discount in the next quarter! Figure 3: Customer example – erratic discount allocation Dimension #2: “Motivation”: Misaligned and nontransparent incentives 15-30% of discounts are given unnecessarily due to sub-optimal incentive systems. No matter how well the sales training, tools, and tactics are designed, if the sales team is incentivized primarily by sales quotas and revenue targets while at the same time being able to grant discounts according to their discretion, the result is an explosive mix that continuously and reliably erodes margins. The problem is not the employees but the design of the incentive system, which promotes this self-optimization to the detriment of the company’s profitability because of misaligned personal and company goals. However, even if the goals are aligned, an additional issue is that incentive systems are often too complex and nontransparent to effectively and efficiently steer sales behavior. Often, too many elements of the incentive and benefits plan have been added over the years, some of which contradict themselves. Moreover, the individual status is unclear daily, or the feedback provided to reach a specific target is not given properly. An incentive system is intended to steer behavior. Two things are essential for this. Firstly, the targets need to be aligned with the company strategy and across teams and departments. Secondly, the incentive systems, their requirements, and consequences must be transparent at any time, not only once a quarter or at the end of the year. However, an incentive system is often historically grown and hard to change. When changing the incentive system, it is not possible nor necessary to adjust everything at once. It is more about developing a target image and successfully migrating from the current status to this target. It is helpful to take a three-step approach: 1. A quick win is often to improve the sales team’s transparency and understanding of discounts’ monetary impact on individual incentives. A lot can be achieved with simple means and intelligent, preferably immediate feedback, e.g., the feedback on peer performance concerning discounting can be a very effective intrinsic motivation without any additional monetary incentive needed as the competitive aspect often triggers more commitment than any extrinsic incentive. 2. The next pragmatic step is to gradually evolve the existing incentive systems by eliminating inconsistencies and misleading incentives in the current system. In some cases, it is also possible to include a more profitability-related component in addition to the revenue-related incentive components, e.g., an incentive based on deviation from the target price. 3. To conceptually align corporate goals, desired behaviors, and incentives, developing a long-term vision based on a greenfield approach is necessary rather than an evolutionary perspective on the existing incentive system. With such a vision, negotiations on how, in which stages, and when this target incentive program will be achieved can begin immediately with the internal stakeholders involved. Read more about Incentives and the factors which need to be considered when optimizing incentive models here: https://www.vocatus.de/behavioral-incentives-higher-sales-growth-through-effective-incentive-models/ Dimension #3: “Necessity”: Confusion of price setting vs. execution and suboptimal escalation Two issues are essential when creating the structural necessity to avoid unnecessary discounts. Figure 4: Separation of price setting and price execution Secondly, besides the structural separation of price setting and execution, pricing governance must also define the escalation process in individual cases. Escalating the discount decision to the next hierarchical level is too easy, creating an enormous margin drain as any escalation separates customer expertise from discount authority and leaves the subordinate with a decision dilemma. If he does not grant the discount, the sales representative will argue that he cannot reach his sales targets. If he grants the discount, he has taken over the responsibility, and the sales employee with the actual customer contact is “off the hook.” This leads to notoriously excessive discounts and an enormously high burden on managers handling these requests repeatedly. Experience shows that 10-25% of all unnecessarily granted discounts in companies fall into this category, sometimes with strong aberrations, as the following real-life example illustrates. Client example One of our clients had an internally defined maximum discount of 25%. However, customers were granted an average of more than 32% discount. How could this happen? This discrepancy arose because over 90% of the negotiations were escalated to the next level, and 85% were waved through as the regional managers did neither know the customers nor did they want to have internal fights with their sales representatives. This whole routine induced enormous internal efforts to manage this process and a considerable margin loss for which no one felt responsible. Moreover, the customers learned to disrespect their direct counterparts and always trigger an escalation to the next level. So, one rule companies should embrace more when it comes to price execution is: “Keep the boss out!” If a sales representative requests a higher discount for their customer, the decision must be pushed back to the sales rep level by pointing to the sales increase they must achieve to make up for the additionally granted discount (see Figure 5). Figure 5: Transparency on the trade-off between discounts and sales All these measures – the increase in transparency (knowledge), the improved incentive system (motivation), and the more transparent governance (necessity) – eventually help to evolve an internal negotiation between manager and sales representative to an external negotiation between the sales rep and the customer, and this is where it should take place. Once we make this shift, we must ensure that the sales team is well-equipped to negotiate successfully. This brings us to the last dimension. Dimension #4: “Ability”: Ingrained routines instead of negotiation excellence When it comes to the actual negotiation with the customer, inadequate preparation, poor negotiation skills, and a lack of self-confidence to counter requests for discounts account for another 10-40% of unnecessary discounts. Most of these issues trace back to implicit yet ingrained sales routines. The first issue is typically the missing preparation. Firstly, the sales staff is unprepared with ways to defend discount requests. Secondly, they are not equipped with strategies to divert monetary discount requests into other currencies like more value or service, which is often more attractive for the selling company. And finally, they mostly forget to demand a counterpart from the customer, although this is the “golden rule” of discounting: never ever grant a discount without requesting the customer to give something in return. A discount is not a price reduction but should always and only be a reward for better customer behavior! The second issue is that salespeople often believe they are simply selling a product and its features. If possible, they have to explain all of them and then hope the customers understand them and buy. If they do not, they explain the advantages of the product again. If the customers still do not buy, they give a discounts. This classic sales approach only focuses on the product’s “value,” i.e., WHAT the customer presumably wants. It entirely neglects the customer’s decision-making strategy, i.e., HOW he decides. However, selling is ultimately about influencing purchasing decisions. That is why we need to stop selling products and start managing decisions. If the sales employees do not know the decision-making strategy of the customers and cannot read them on this dimension, they risk using the wrong tactics and may be too quick to offer discounts. The GRIPS-Typology (see Figure 6) describes this second dimension of sales excellence and helps to better prepare for and run negotiations to systematically avoid unnecessary discounts by training sales representatives on two tasks: identifying the decision strategy of the customer and negotiating accordingly. Leveraging this second dimension significantly improves profitability and conversion at the same time. If we focus more on managing these four dimensions of price execution, we will minimize the unnecessarily given discounts and increase margin beyond any expectation. However, we must realize that managing behavioral change and bringing more light into the “black box” of individual sales routines is not a sprint but a marathon. Yet, engaging in it pays off exceptionally well and can be started immediately with the small measures outlined above.

Author: Avy Punwasee In the ever-evolving world of business, staying competitive and maximizing profitability is a constant endeavor. Pricing, often considered the unsung hero of profit generation, has the potential to play a pivotal role in helping businesses outperform their competitors in 2024. To capitalize on pricing potential, every organization can master a few essentials of pricing: identifying and using the key pricing levers for 2024 and the best practices in budgeting for pricing. The Pricing Process: A Hallmark of High-Performing Companies First, a little motivation to include pricing in your strategy and budget for 2024. The 2023 Survey conducted by Alexander Group Inc. and Revenue Management Labs* revealed some compelling insights about the correlation between pricing practices and business performance: Annual Repricing Reviews: High-performing companies are more proactive, with 80% engaging in annual repricing reviews, compared to 56% of low-performing companies. Regular reviews are essential to adapt to market dynamics. Supply and Demand Management: A staggering 73% of high-performing companies use pricing as a tool to manage supply and demand, while only 44% of low-performing companies do the same. This emphasizes the need to employ pricing strategies that align with market conditions. Ignoring Price Elasticity: Surprisingly, 51% of low-performing companies do not review price elasticity, regardless of their performance. Understanding price elasticity is essential for optimizing pricing strategies. *The joint Alexander Group Inc. and Revenue Management Labs 2023 CEO survey reached out to more than 300+ companies with a minimum of $150 million in annual sales. Three Budgeting Levers to Drive Profitability in 2024 Going into 2024, companies must pull the right pricing levers. In brief, there are three essential budgeting levers to consider to drive net price: price optimization, being more efficient with discounts and promotions, and mix management. Price optimization involves raising list prices, which is a commonly used and quick-to-implement approach but may lead to customer pushback due to its high visibility. The goal here is to apply price increases strategically. Discount and promotion strategy focuses on reducing discounts to ensure they drive incremental revenue, offering low client-side visibility and account-level flexibility but requiring advanced analytics and potentially encountering resistance. Mix management, centered on premiumization, is an underutilized lever that can provide enhanced customer value and drive transformative changes, though it demands a deep understanding of customer needs and significant sales effort. Budgeting for Pricing: Best Practices It is one thing to budget for pricing but another to effectively allocate resources for setting and managing prices. Effective budgeting for pricing requires meticulous planning and consideration. Here are some best practices to guide your approach in 2024: 1. Market Benchmarking We first recommend market benchmarking for price to assessing your performance in the three key areas below and to set a standard for which you can compare your performance in 2024. Assess Market Trends. Here you want to focus on the movement in the market across price and discounts, customer buyer behavior, regional differences. Your analysis can help identify whitespaces and opportunities to increase market share, price, and margin. Price Position: Analyzing your price position involves assessing how your product or service is priced in relation to competitors and the market. We recommend identifying your key competitors and evaluate your price and discount position relative to them. Then, understand how competitors typically adjust pricing strategies and assess regional differences. Value Offered: Evaluate the value your product or service offers compared to the next best alternative. This is a good opportunity to overlay your customer segmentation and where these unique customer groups find value. 1. Understanding and Anticipating Your Pricing Cost Structure in 2024 Understanding and anticipating your pricing cost structure is a critical aspect of pricing strategy and fiscal management for any business. Companies use this information to adjust prices in anticipation of cost increases. This is an essential step but just the bare minimum of how this information can impact your bottom line. We have split these into internal and external cost drivers and have identified below several key components that make up the cost structure associated with pricing your products or services: Internal cost drivers for pricing are the factors within a business’s control that influence the cost structure associated with delivering a product or service. They can include supplier or vendor prices, overhead costs, and transportation costs. External cost drivers are outside a business’s direct control and can significantly impact a business’s cost base. They may include inflation induced rising input and raw material costs, upward shifts in labor costs, and supply chain bottlenecks such as what we saw during the pandemic. How High Performing Companies Applied Cost Structures to Pricing Strategy In response to the disruptive market conditions witnessed in 2022, high-performing companies adopted a multifaceted approach that clearly diverged from low-performing companies: Raised prices in anticipation of inflation. Built solution-based value into their product offerings to improve their competitive pricing position. 1. Focus on Driving Incremental Profitability through Mix Management Inflation is clearly slowing though not at the rate federal banks would consider ideal. From June 2022 to June 2023, the Consumer Price Index (CPI) dropped by 59%, according to the U.S. Bureau of Labor Statistics. Slowing inflation means that inflation-based pricing is becoming increasingly unfeasible as a pricing strategy. If raising prices remains your sole strategy, we predict a few outcomes. Profit margins will become increasingly squeezed as real-time cost data constantly evolves. Competitors will seize the opportunity to lead price and expand profit margin capture. The question becomes how to realize price increases without the visibility of changing prices. First, developing granular customer segments by region using behavioral metrics. The second is to identify whitespace opportunities in the following areas: total out of pocket, new pack sizes, and additional unmet needs. Main Takeaways In the face of slowing inflation, companies need to consider the long-term implications of pricing strategies and prioritize those that drive sustainable profitability. In preparation for 2024, it is essential to: Assess your current price position against competitors in the market. Develop a deep understanding of your cost structure to enable value-based pricing. Enhance long-term customer value through strategic product and service mix offerings. In conclusion, pricing is not just a number; it is a dynamic and strategic tool for unlocking profits and outperforming competitors. By budgeting for pricing at a granular level, pulling the right pricing levers in 2024, and adhering to best practices, businesses can navigate the competitive landscape with confidence and drive sustainable profitability.

Author: Danielle Ray A global strategic plan (GSP) is a document built from an organization's mission, vision, and objectives to achieve its long-term success. Beyond that, it is a powerful tool that will assist in aligning your pricing department with corporate strategy to improve communication and collaboration while gaining a competitive edge and increasing profitability. These are most often used in the context of international expansion or growth because it considers diversity in markets, cultures, competition, and legal or regulatory conditions. Even regional organizations can utilize a GSP because it provides strong inputs for decision-making. Some of the elements used to build a GSP are vision and mission statements, SWOT analysis, External Factor Evaluation (EFE) Matrix, Competitive Profile Matrix, and Internal Factor Evaluation (IFE) Matrix. A pricing organization benefits by capitalizing on the work already done in the creation of the corporate GSP. A GSP for Pricing ensures that everyone has a common vision that can lead to improving performance and efficiency. The consistency in objectives provides a clarity that can prevent unintended discrepancies in pricing strategies or goals. The communication between departments and to leadership improves, and the collaboration will increase as contradicting strategies are eliminated. By utilizing and building upon the competitive information from the GSP, pricing can implement better strategies and improve execution to further the company's competitive advantage and market position. The alignment results in better decision-making, competitiveness, and profitability. The tools used to build a GSP are ones that pricing may already create for themselves. By sharing the information across departments or teams, there is a better allocation of resources to the priorities important for supporting market penetration or expansion, value propositions, forecasting, and product lifecycle strategies. The resulting measures and analysis provide pricing the opportunity to give feedback on what is working and what is not. Adjustments can then be made to the GSP to maximize success. In today's fast-paced and ever-changing landscape, pricing is critical to driving profitability and long-term success. The challenge and complexity of setting optimal prices in diverse markets requires pricing to maximize their effectiveness by using the corporate GSP to create their Global Strategic Plan for Pricing. Ultimately, the GSP provides pricing with a roadmap to success. If you want to learn more about how to create a global pricing strategic plan that aligns with your GSP, join me at the upcoming 2023 European & Global Professional Pricing Society Conference.

"90% of the reason I’m successful in my job is because PPS conference experiences, the education, and this networking group. The rest is just executing." Nicole Sepulveda, CPP Pricing Manager at Rogers Corp Attending PPS conferences is not only a chance to leave the office for a few days, but also to gain new knowledge that can change your career perspective and grow your skills. The recent Fall Pricing Workshops and Conference focused on the latest trends, strategies, and best practices for pricing professionals in a variety of industries across the country. The conference provided many popular networking and connecting opportunities with like-minded professionals and created space to analyze and respond to the changing climate of the pricing environment. Check Out The PPS ATL Conference Photo Gallery Here! Keynote Sessions When planning an event, selecting the right speakers is critical for its success. Keynote speakers, specifically, set the tone for the event by providing a thought-provoking and engaging perspective on the topic at hand. Ensuring that the audience is captivated and attentive is no cake walk, but instead requires a great deal of preparation, careful consideration of talking points, and often a great deal of experience to lend to the speaker’s credibility. This fall conference speaker line-up not only presented riveting topics like “Top 10 Learning From 20 Years of Pricing” and “Inside the Minds of Generative AI”, but also consisted of heavy hitters such as: - Sonya Roberts , President, Cargill - Joanne Smith , President, Price to Profits Consulting - Jean Manuel – Izaret , Sr. Partner, Boston Consulting Group - Jeet Mukherjee , VP Head of Pricing, Holden Advisors The sessions also left viewers with some food for thought with some of the more popular quotes being: - " Things left uncontrolled will deteriorate over time." - Joanne Smith - " Never let a good crisis go to waste. It will trigger rethinking ." – Florian Bauer - " A 3% price increase across the board doesn’t work ." - Fred Puech Workshop & Breakout Sessions Workshops and breakout sessions are an incredibly effective way to engage participants and facilitate meaningful conversations. Some of the more popular sessions amongst attendees were Florian Bauer’s “Success Factors of Discount Management”, Frederico Zornig’s “A Complete Pricing Journey”, and Vinicius Silvestrin’s “Demystifying AI: Understanding Machine Learning& It’s Practical Applications”. By striking the right balance between engaging content and personalized interactions, facilitators were able to create highly anticipated and well-attended sessions that were both enjoyable and impactful. In Conclusion Attending a professional pricing conference can be a great way to build your network and create lasting connections with other pricers. With learning and networking opportunities available in an encouraging environment, you won’t find a better event for pricers looking to further their career goals. Learn more about our next conference by visiting pricingsociety.com , where there's plenty of useful resources for networking and getting the most out of your experience. We invite you to join us in 2024 and continue revenue management conversations around topics that matter most!

Author: Debra Patek Pricing, at its core, is about capturing value. Through segmentation, we can capture even more value by leveraging differences in willingness to pay (WTP). The idea is simple: set lower prices for those less willing to pay, and higher prices for those who'll pay more. By doing so, we optimize revenue across diverse customer scenarios. Yet, segmentation extends beyond categorizing customers or adjusting prices—it’s about aligning with broader objectives while adapting to business and competitive constraints. The key lies in matching segmentation to these underlying realities. Here’s the challenge. Segmentation methods are as varied as the customers and products they're designed for, differing in scope, granularity, and technique. With so many options available, understanding and choosing between them can be overwhelming. The Big Picture: Fences and Magnets However, when we step back and take a broader view, we see that price segmentation essentially boils down to two core actions: building 'Fences' to ensure the right price reaches the right customer and creating 'Magnets' to attract customers by aligning products and pricing with their needs. ‘Fences’ are about capturing existing value, while ‘Magnets’ are designed to draw in additional value. Whether used individually or in tandem, each plays a distinct role. For clarity, we'll use the terms ‘Fences’ and ‘Magnets’ to represent these foundational approaches. Now, let's unpack these core approaches in more detail. Segmented Pricing Strategies [Fences] Core Concept: Often referred to as segmented or differential pricing, ‘Fences’ create clear price boundaries to isolate and monetize differences in willingness to pay. Economic Basis: You might recognize this type of segmentation from economics, where it is called "price discrimination". Despite the negative connotation, it can make products more affordable for price sensitive buyers, without compromising total revenue. The left demand curve shows limited revenue from a single price. The right illustrates increased total revenue through segmented pricing, showcasing multiple, additive revenue streams. If you love this blog, be sure to check out other related pieces: - The Domino Effect - Price Model Optimization - Raise The Bar Application in Practice In theory, price segmentation is straightforward: match the price to a customer's willingness to pay. But in practice, it hinges on the effective identification of significant variations in willingness to pay and the enforcement of 'fences'. Quantifying WTP can be a challenge. It often involves combining insights from various data sources like sales records, surveys, and customer feedback to understand buying behaviors, gauge price elasticity, and assess economic value. It's also beneficial to draw on the insights and experience of customer facing employees (sales, customer service) as a supplement to data analysis. Often, direct measures of willingness to pay or elasticity are replaced by proxies. These substitutes, based on personal or situational attributes correlated with value or willingness to pay, act as 'fences' that deter resale and maintain price integrity. Figure 2 illustrates some common segmentation fences. Figure 2 : Common Segmentation ‘Fences’ Real world examples of this type of segmentation include: · Apple’s Education Pricing offers reduced prices to students and educators · Soft drinks are priced significantly higher at entertainment venues than at fast food restaurants · Senior citizen discounts rely on age as a proxy for WTP · Theater Tickets are higher for weekend evening shows compared to weekday matinees · Bulk Purchases typically have reduced per-unit prices Segmented Pricing Opportunities and Challenges: ‘Fences’ can offer quick returns but demand careful planning to balance the associated benefits and risks. The Upside: When done right, ‘Fences’ offers several benefits: · Increased Revenue: Aligning prices with each segment’s WTP boosts revenue · Market Expansion: Attracts diverse customers by offering varied pricing · Purchase Incentives: Motivates increased purchases or long-term commitments · Quick Adaptation : Enables rapid price adjustments to market shifts The Downside: There are challenges to mitigate: · Customer Alienation Risk: Clear criteria are essential to avoid trust erosion due to inconsistent pricing · Risk of Brand Dilution: This can occur especially when lower pricing is introduced in expanded markets · Regulatory Considerations: Potential legal and regulatory challenges, especially globally · Arbitrage Risks: The potential for customers to exploit pricing differentials · Operational Complexity: The necessity for well-organized management and system support ‘Fences’ are a potent tool for tailored pricing strategies, driving both revenue growth and market diversification. However, the associated challenges require careful thought to protect brand image and customer trust. While ‘Fences’ offers immediate financial gains, the second strategy, 'Magnets,' focuses on building long-term value by understanding and aligning with diverse customer needs. Value-Based Segmentation [Magnets] Core Concept: More commonly known as value-based price segmentation , ‘Magnets’ align offerings with each segment’s distinct value drivers, enhancing perceived value and WTP through tailored strategies. Bottom of Form Economic Basis: Different segments are driven by distinct value propositions, each with its own demand curve. Value-based 'magnets' stimulate demand, resulting in a rightward shift in the demand curve, as shown in Figure 3. Figure 3: Value-Based Demand Shifts The left demand curve shows limited revenue from a single price. The right shows the results of an increase in demand resulting from a value-based strategy, which shifts the demand curve to the right, resulting in a higher price at the same quantity demanded. APPLICATION IN PRACTICE Understanding Purchase Drivers: ‘Magnets’ is more than just an understanding of customer needs or wants, but a deeper dive into the underlying factors driving purchase decisions, emphasizing the role price plays in these decisions. Specifically, this approach looks at the trade-offs customers are willing to make between price and other benefits, with a focus on where those needs intersect with profitability. Techniques like conjoint analysis and maxdiff are especially useful for quantifying these trade-offs, providing insights into how customers value different features and benefits relative to price. One of the core advantages of ‘value-based segmentation lies in identifying varied drivers behind different levels of willingness to pay (WTP). Regardless of price sensitivity, every segment has distinct buying motivations. A customer on a tight budget, for example, has different purchasing triggers than a bulk buyer looking to minimize unit cost. Similarly, those less sensitive to price may prioritize innovative features, brand reputation, or environmental benefits. Uncovering these underlying motivations is key and helps move the conversation from price to value. Figure 4 highlights common factors that drive willingness to pay a premium price. Figure 4: Common Drivers of Premium Pricing ‘Magnets’ Increasing WTP via Distinct Value Propositions: Building on these insights, increasing WTP via distinct value propositions becomes the next focus. The first critical step is identifying customer motivations. It goes beyond just satisfying customer needs. It's about attracting customers by tailoring offerings and prices to their unique values, which in turn enhances loyalty and boosts profitability. Though cost cutting and boosting volume have their place, aligning price with perceived value is often a more substantial source of value enhancement. The goal is straightforward: align price with perceived value and elevate perceived value to raise the price. Quick wins can be achieved by aligning prices and communication to the value already inherent in products. For a more lasting impact, and to enhance perceived value, in-depth research and the development of tailored offerings can cater to the needs and values of different segments. Strategies might include expanding the product line to offer more variety or even introducing new sub-brands specifically designed to appeal to particular customer groups. Real-world applications of these drivers are diverse, with companies either zeroing in on niche markets or broadening their horizons to tailor offerings that resonate with varied customer values and expectations. Examples include: Delta and other airlines segment based on the level of service and comfort Buffalo Trace Distillery offers bourbons at different price points (Buffalo Trace, Eagle Rare, Pappy Van Winkle) each catering to a different segment based on aging, rarity, and taste. Estée Lauder offers luxury products via different brands e.g. MAC for younger audiences and Aveda for eco-conscious. Value Based Pricing Opportunities and Challenges: Value-based approaches shifts the focus from price to value, justifying higher prices and building loyalty but introduces complexities. Opportunities: Enhanced Customer Loyalty: Tailored offerings increase customer satisfaction and loyalty Higher Perceived Value: Tailored offerings can command higher prices. Brand Differentiation: Alignment with segment value propositions helps stand out in the market. Enhanced Brand Perception: Balances brand while accommodating cost-sensitive customers Challenges to Consider: Increased Complexity: Due to need for tailored products and marketing. Investment Required: Upfront research and customization cost can be substantial. Delayed ROI: Due to the investment needs ROI may not be immediate. Value-based approaches involve upfront investment but can unlock higher levels of WTP by aligning offerings with specific customer needs and values. Companies must balance customer expectations with brand identity. Application of Insights ‘Fences' capitalizes on immediate revenue by exploiting current customer willingness to pay, though it can pose challenges to the brand and customer experience. 'Magnets', requiring an initial investment, builds long-term loyalty by aligning offerings with customer needs, elevating perceived value. Together, they form a balanced strategy. 'Fences' quickly taps into existing value from the market; while 'Magnets' nurtures and expands that value over time. This combination helps deliver near term revenue and promotes long-term loyalty and growth. High Level Steps: Segment Identification: Combine data analytics and qualitative insights to identify and understand distinct segments. Fences Application: Establish, communicate, and review pricing boundaries, ensuring they are clear, justified, and effectively enforced. Magnets Development: Uncover each segment's unique value drivers and adjust offerings and messaging to reflect these, ensuring optimized pricing for increased value capture. COMPARISON OF APPROACHES The following table provides a detailed comparison of two primary segmentation strategies, 'Fences' and 'Magnets', breaking down their respective impacts, opportunities, and challenges across key business areas. Conclusion 'Fences' yields immediate revenue at the potential cost of the brand experience. 'Magnets' invests in long-term loyalty by aligning offerings with customer needs. Combined, they balance quick profit and long-term value, leveraging the strengths of both for revenue growth and customer loyalty.

A well-designed and properly implemented monetization strategy makes all the difference for companies seeking to accelerate profitable growth. Yet, unfortunately, some treat pricing more tactically, operationally or as an afterthought. If you are looking for a pragmatic approach to quickly and tangibly improve your business impact, then join me on October 13 at the PPS conference where I will be speaking on “Giving Pricing a Seat at the Table”. For over 20 years I’ve been pricing and packaging some of our world's most innovative technologies with the likes of Cisco, Workday, Hitachi, ServiceNow and Okta. I’ll be sharing insights from my proven growth playbook that effectively balances simplicity and value capture. We will cover strategic choices around offer packaging design, tools to optimize sales pricing execution, organization design and cross functional operating model best practices.

It is undeniable that sustainability is top mind in the C-suite. Companies are getting ready for the deluge of regulations and requirements. They have no choice but to pay attention and take the bulls by the horn. They do have a choice on how they embrace the trend and position their companies in the marketplace. Will they do it purely for compliance or will they embrace sustainability to create competitive advantage. This choice is highly strategic, and the consequences could be dire if not taken seriously. Consumers, investors, shareholders, and regulators are watching! For companies that embrace sustainability as their next source of strategic differentiation, they need the help from all go-to-market teams. That includes the pricing team. Integrating sustainability initiatives in a portfolio of products, services, and customer-focused programs leads to the following question: who is going to monetize and price these offers? Pricing teams are the de facto go to in the organization. 1) Engage other teams in the sustainability discussions: this is particularly relevant to make sure they pay attention to the customer implications and the go-to-market dimensions. Sustainability cannot be 100% internally focused. There needs to be a connection to marketing, pricing, and sales. We can help make this connection. 2) Shape the strategy to be customer-centric and monetization-focused: most sustainability programs will focus on technology, reporting, and materials used in the organization. Strategies will focus on circularity, materiality, recyclability, and social impact. The key question here is “so what?”. How does this help customers? How can we contribute to the customer bottom line and sustainability strategies? 3) Demonstrate the value of monetization, and pricing tools: these tools include segmentation, business model innovation, pricing research, pricing strategies, sales enablement, and value-based selling. These are already part of the existing pricing toolbox. We can adapt them to the topic of sustainability and connect them to the go-to-market strategies. 4) Participate in and lead the calculation of ROSI: CFOs and CEOs are now extremely focused on return on investment and return on capital employed. ROSI (return on sustainability investments) is a new method used to justify sustainability programs with the C-suite. The same needs to be done with customers investing in sustainability capabilities. So, we also need to provide impact to our customers’ ROSI through the use of TCO and EVE® models. 5) Connect the relevant teams by creating a monetizing and pricing sustainability workstream: Part of the sustainability strategy needs to focus on monetization and pricing. We can make the case for this with the Chief Sustainability Officer, the CMO, and the CFO. We can either create a workstream or a taskforce. For the past 10 years, most companies invested heavily in digital transformations. For the most part, pricing teams were excluded from participating and leading the monetization efforts. The end result was a lack of impact and demonstrated ROI in terms of pricing power, value extraction, and profit. Today, the pricing function has a unique opportunity to get involved and lead the monetization strategy for sustainability. It is not going to happen on its own. Pricing teams need to be proactive and assertive! They cannot take no for an answer. Or at least they need to push for attention and have the opportunity to make the case for it. Join me on October 11th, 2023, in Atlanta for a workshop dedicated workshop to the topic of monetizing and pricing sustainability. During this new workshop, we will discuss the sense of urgency for sustainability, the sustainability monetization maturity model, the pricing, and monetization tools that can be used to translate sustainability into a source of value, and how pricing teams can play a key role in this emerging area. Register here to join this unique workshop. Bio: Stephan Liozu ­­­is Founder of Value Innoruption Advisors, a consulting boutique specializing in industrial pricing, XaaS pricing, and value-based pricing. He is also the co-Founder of Pricing for the Planet (HOME | PricingForThePlanet & Sustainable Pricing) which specialized in pricing for sustainability. Stephan has 30 years of experience in the industrial sector with companies like Owens Corning, Saint-Gobain, Freudenberg, and Thales. Stephan sits on the PPS advisory board.

For as long as modern businesses have operated, price changes have lived alongside them, as they are an inevitable part of a company’s lifecycle. When a company decides to undergo a price change, there are many different stakeholders and factors to keep in mind. At a high level, management should pay close attention to the internal and external stakeholders involved in the process of a price change. In this blog post, we will discuss some of the typical reactions by these stakeholders, how to handle them, and why they occur. When a company alters its prices, the impact is deeply felt within its internal teams. Particularly, their sales and customer service team. The Effect on the Sales Team In terms of the sales team, they are the ones usually taking the lead during these big shifts, so they are the first affected. Through ripple effects, even their compensation and work strategies may be impacted. If the prices are increased and the perceived value of the product/service remains enticing to the customer, it could lead to higher sales commissions due to higher-value transactions. However, if the price hike is seen as unjustified by the customer, the sales team may have to face very difficult and uncomfortable conversations with customers when securing deals. This increased difficulty to closing sales may negatively affect their compensation, and in turn, also affect their overall morale. If you like this article, you may also like these related articles: How To Price Products 1 1 Determinants of Pricing Change Management for Pricing Initiatives Preparing the Sales Team To combat potential negative financial and emotional effects of price changes on the sales team, the team needs to re-evaluate their sell stories to be more in-tune with the new price changes. If possible, the team needs to double-down on the value they are providing to justify the price increase. If the perceived value of the offering is actually increasing, then their jobs become easier. If there is no improvement in perceived value, then the transition may require additional training and resources from management. Perhaps management can provide them with a playbook on customer pushbacks in order to best equip and prepare them to proactively handle price changes reactions prior to the change happening. The Customer Service Team Now that we know how to deal with the sales team during a price change, we can focus on the other key internal stakeholder: the customer service team. The main impact of pricing changes to the customer service team is their intensified workload. This is because customers typically approach the customer service team when searching for explanations about price changes. When a price hike occurs, the customer service team should prepare themselves for an influx of customer complaints or negative feedback coming their way. This could overwhelm the team and impact their work environment, which subsequently affects their overall morale. This is why it is crucial for management to prepare this team prior to the price change. The best way to approach this is by ensuring the education of the customer service team on the reasoning behind the pricing changes and how the change affects any internal backend systems. Once they are educated on the changes, they should be trained to convey them to the customer in an empathetic and effective way, perhaps through a playbook management provides them. Customer Loyalty After handling the internal parties involved in price changes, we can move on to the central external group involved in the changes: the customers. A shift in pricing inherently calls customers to re-assess the value of the offering they are receiving. If the price increase is minimal, or the perceived value of the offering is increased alongside the price hike, then brand loyalty may be enoughto keep the customers around. Brand loyalty is a useful defense against negative price change reactions, but it has its limits. Loyal customers may initially convey their understanding towards the price altercations, but after continued increases, or a substantial increase, even these loyal customers may start reconsidering their options. Customer Variations Aside from testing their loyalty, the direct financial implications price changes have on customers varies by customer. Customers on tighter budgets can find themselves disproportionately affected by price increases. They may be forced to halt the use of the offering, or at least reduce their consumption of the offering, while more financially free customers may come out unscathed. Whenever possible, if customer retention is the goal, all customer types should be kept in mind when implementing a price change to preserve the broadest group of them. If it's not feasible to cater to the needs of budget-conscious customers, then the persuasive/communication strategies and techniques that management has trained the sales and customer service teams with become crucial in convincing these customers to remain loyal. Customer Reactions Now having dealt with their reactions, we can discuss the customer’s main expectations when pricing changes occur: clear and honest communication. They seek to understand the reasons why the price hikes occurred in the first place, and what they can look forward to in terms of a perceived value increase. This is why internal training of your sales and customer service team with a response playbook is so crucial, so that customers can avoid any dissatisfaction on the communication side of things. Structured responses on the internal side of things can really help foster customer understanding. Summary In conclusion, the process of navigating through price changes calls for a deep understanding of all the stakeholders involved. It begins with recognizing the uncertainties and pushbacks your internal teams will be experiencing and providing them with the necessary strategies and tools to anticipate these pushbacks. The more confidence you instill in your internal teams through preparation and training, the more clarity they will externally convey to your customers. From an external standpoint, management must ensure an understanding of their customer’s sensitivities and values, and tailor their internal playbooks to capture those values. Generally, for customers, transparent communication ranks above all, as price changes aren’t merely a financial decision, they are a test of the company’s relationships with its employees and customers. Successfully handling this test can foster an even stronger bond between the company and its stakeholders, paving the way for sustainable future growth. As the world’s business landscape is ever-changing, keeping these keystone strategies in mind will be crucial for managing the inevitable pricing altercations your company will be encountering.

Author: Frank Frohmann “This thing called ‘PRICE’ is really, really important. The only difference between companies ones that SUCCEED and the one that fail is that the champions figured out how to MAKE MONEY. They were deep-in thinking through the REVENUE-, PRICE-, and BUSINESS MODEL. That’s under-attended to generally.” (Steve Ballmer, Microsoft, ex CEO) My vision is to support companies with an integrated consulting approach which tackles the challenges mentioned by Steve Ballmer. The article below gives you a first idea about the definition of business-, revenue and price model. The definition is based on more than 25 years of business experience. For more detailed information please contact us or refer to my book ‘Digitales Pricing (Springer Gabler 2018). The second edition will be published in 2022. 1. Price management processes consist of numerous challenges that have different relevance depending on the sector (B2C, B2B, C2M, C2C), industry and company. 2. Important business decisions are upstream of the pricing process: • The definition of revenue sources (the revenue model). • The definition of the value-to-customer and the operating model as central pillars of the business model. This means: professional price management must go beyond the pure optimization of the pricing process. Pricing has to reflect the higher-level decisions on the business model and the revenue model (cf. Frohmann, 2018). 3. In digital business models (platforms, marketplaces, ecosystems, etc.), price is no longer a reliable metric for competitive pressure. Many companies (like Google, Amazon, Alibaba or Tencent) cross-subsidize parts of their business. Not all business units have to contribute to profit. Services are therefore offered for free (Google, e.g., search engine, cell phone operating system) or below production costs (Amazon, e.g., Kindle Fire). The Levels of Digital Pricing at a Glance The starting point for digital pricing is the business model (cf. Figure 1). A business model is a structured representation of the value creation and value extraction of a company (cf. Osterwalder & Pigneur, 2010). The business model definition results in potential revenue sources (products, services, software, digital content, advertising, digital services, etc.). The revenue model of a company or business unit answers the following questions, among others (cf. Frohmann, 2018, p.55ff): 1. With which business offers do we want to generate revenues? 2. Which revenues come from which sources? 3. Can individual revenue sources be combined? Or do we want to offer our business services separately? Most companies operate with multi-tier revenue models. Particularly in the case of digital business models, these are based on a deliberate decision not to generate revenue from certain offers. Examples of two-part revenue models are: 1. Software for free - make money on advertising. Google offers the Android software free of charge. In this way, it promotes the penetration of its mobile operating system, the number of users and its revenues through context-specific advertising. 2. Service for free - make money on advertising Google offers its search engine for free. Advertisers pay for access to user data. Facebook uses the same revenue model for its social media platform. 3. Software for free - bundled with paid service Red Hat Linux offers its open-source software for free. Services must be paid for by customers. Similarly, there are revenue models that aim to generate revenue in all components. One of these 2-part revenue models is "Bait and Hook". "Bait and Hook" is based on the revenue linkage of 2 products that are used jointly. Revenue is generated with both components. Very important for subsequent pricing processes (price level optimization and price model definition) is: The link consists of a durable good and a consumer good that is consumed at regular intervals. Examples of this are the following product combinations: • Copier and paper • Razor and razor blade • Printer and cartridge • Water descaler and water filter. With increasing penetration of digitalization, “Freemium” has become a successful revenue model in numerous industries. 2-tier freemium models are particularly relevant for digital services such as software, content, video games, apps, contact platforms and social networks. The distinction between user perspective and company perspective serves as an explanation: From the user's perspective: "Freemium" is a combination of free and fee-based parts of the offer ("basic for free, premium for fee"). The free version is associated with limited functionalities. Extensions of the basic version (e.g., via premium features) are subject to a charge. From a provider's perspective: Many freemium models rely on 2 main sources of revenue: • Advertising • Digital service. The world's largest music streaming provider Spotify operates with a "freemium” revenue model. Crucially, there are several potential price models for the premium component. For music streaming, for example, subscriptions (e.g. Spotify) or pay-per-use (e.g. Apple i-Tunes). Definition Price Model A price model is based on the revenue model definition. It is created by logically linking six essential pillars. The six dimensions (see Figure 3) of a price model can be defined based on the following questions: 1. Are business services combined into a bundle or do we charge for a single offer? → Scope 2. What does the customer pay for? → Reference base 3. How many components does the price model contain? What is the unit of measure? → Price metric 4. How does the customer pay? → Form of payment 5. Who sets the price? → Degree of interaction 6. at what point of time is the price set? → Time of price setting Price models (how much to charge?) define the qualitative basis to which quantitative price levels (how to charge?) refer. All six dimensions of a price model are logically linked. Linking the answers to each of the six outlined questions defines a model. 1. Scope: As a direct consequence of the higher-level revenue model definition, the number of revenue sources is defined. A current example is the "Apple One" price model. This involves the bundling of 4 revenue sources from the field of digital services (Apple Music, TV+, Arcade and News+). 2. The Reference Base of a price model is based on the question: which offer is the customer paying for? Traditionally, customers pay for a transaction, such as the purchase of a product (ownership) or service. Other potential reference bases are (cf. Buxmann/Lehmann, 2009, p.519ff.; Stoppel, 2016, p.58ff; Frohmann, 2018, p.227ff): a. Access: the customer pays for access to an offering. b. Usage: the user pays to use a revenue source (e.g. products, services, software, digital content, digital services). c. Outcome: Customers pay based on the results achieved. Fulfilled value propositions are monetized. d. Success: customers pay for achieving a defined economic outcome (cost reduction, profit increase, profitability improvement). 3. The price metric is defined by 2 elements: The unit of measure and the number of price components. In particular, the unit of measure can take different forms, depending on the revenue source. Examples are: Price per transaction, Price per storage requirement (in GB), Price per usage in hours or minutes, Price per mile, Price per number of users. As 3 further pillars of the price model, payment form, degree of interaction and time are added (cf. Figure 3). These serve to describe in more detail how the price model is implemented for the customer. The logical connection of the answers to the questions outlined above defines a price model. Example: A flat subscription model for music streaming (e.g. Apple Music) refers to „a single revenue source“ - is based on “access” - covers „1 component“ and a „monthly rate per user“ - is based on “regular payments” – is “not interactive” and an “ex ante price model". The following Figure 4 serves to precisely delineate the 2 challenges (revenue model definition and pricing model optimization). The figure shows 4 revenue sources (software, digital services, advertising and digital content) for Google's automotive division as an example. The 4 revenue components result in 4 potential price models for the different services of Google's "autonomous driving" business model (license fee, two-part rate (base fee + cost per minute), auction/pay-per-click and subscription). The Reference base in particular is of enormous importance in the definition of the price model, as it determines the first milestone with regard to the price level decision. Price models which are based on ownership or access are usage-independent systems. Across different offers, a common denominator is established to which the respective price level (in the numerator) refers. This promotes the comparability of prices from different competitors. This forces the intensity of price competition. A particularly striking example is the music streaming business, in which all competitors operate with a similar pricing model. Subscription models are interesting for some companies, but they are only one of numerous price model options. Many B2C and B2B companies have been able to differentiate themselves with usage-based approaches. Examples of sectors that apply "pay-per-use" are: • Car insurance • Sharing business models (e.g. bike sharing, car sharing, e-scooters) • Online advertising (pay per action). Ultimately, a customer only ever pays for the satisfaction of a need or the solution to a problem. The needs-based perspective generates a much broader basis for price model design. Digitalization triggered the evolution of price models which led to value-driven reference bases: - "outcome-based" - "success-based" Innovative price models focus on the customer's benefit (outcome, success) rather than the transaction, access or usage. In creative - outcome-based - approaches the reference base is aligned with the value drivers of a product. Value metric and price metric are fully aligned. The basic idea of an outcome-based price models can be described using a case study from the B2B sector. In mechanical engineering, pricing is traditionally done on a unit basis: The business customer pays for a machine or the purchase of certain components. But: the actual benefit results from the service provided by the machine and the resulting end product. Therefore, an outcome-based reference base for the price model is appropriate. The basis of assessment is then no longer the machine, but its performance (e.g., the products manufactured or the number of operating hours). Outcome-based approaches exist in various forms: • Price per “mileage” (Michelin) • Price per “cubic meter of purified water” (Enviro Falk) • Price as a “function of transported weight” (Schindler) • Price per “laugh” (Pay-per-smile; Comedy theater in Barcelona: Teatreneu) All 4 examples demonstrate the enormous potential of digital technologies (operating model, level 1) for Price Management processes (level 3). Optimizing products, developing new services and designing creative price models go hand in hand. In the case of innovations or significant product improvements, a variation in the pricing model is often the decisive lever for profit optimization. One of numerous examples is Michelin's "pay per mile" approach in the B2B segment (truck tires). With the traditional pricing approach, Michelin would not have been able to implement a price increase in a double-digit percentage range. Monetization of the technical advantage required a completely new pricing model (from "price per tire" to "price per mile"). In success-based price models, the company's revenue is based on the economic benefit that the customer derives from the offer. Billing is not based on a discrete unit (e.g., time or data volume). The wind turbine manufacturer Enercon offers a successful price model example. Enercon only generates revenue when its turbines generate electricity for the customer. The higher the running performance of the wind turbines (and the electricity generated as a result), the higher the customer's payment to Enercon. The basis for this is digitalized value-generation processes, including automated recording of the necessary process data and sophisticated measurement technology. The price metric is the running performance of each individual wind turbine recorded via sensors. Through its creative pricing model, the manufacturer takes some of the risk off its business customers. If the return is low, Enercon earns correspondingly less. Conclusion: Price Model Optimization Digitization offers enormous opportunities for differentiation in pricing. Not via the price level as such (numerator of the price formula). But via the price model (the "denominator"). The object of price model design is to answer the questions for what, when, by whom and on the basis of which parameters the price is designed. Innovative price models do not only lead to a better monetization of the benefit. As an independent value driver for the customer they increase the value-to-customer (and thus enhance the business model)! The consequence of this: price management is not only "value capture" (monetization). Pricing can also contribute to value “generation”. The selection of the optimal price model is a complex process that requires methodical support. A prerequisite for decision support logics for price model optimization is a stringent definition (cf. Digital Pricing, p. 239f). The introduction of new price models in the market should be carefully planned and prepared. The decisive factor is the benefit argumentation for the customer.

Author: Frederico Zornig, CEO – Quantiz Pricing Solutions Until three years ago, prices were predictable, reasonably stable, or less volatile, supply chains were relatively balanced and the buying behavior of customers and consumers, although constantly evolving, followed an expected trajectory. However, as soon as the world was affected by Covid-19, what we knew until then about how to manage prices fell apart. We were forced to change prices at an unusual frequency, working with wildly fluctuating raw material costs, a challenging macroeconomic environment and consumers and clients rapidly migrating to online shopping channels. In a new unstable scenario, like what seems to be the new reality, companies will depend even more on more assertive and dynamic price management. Some fundamental pillars for capturing market value remain, for example, a clear and well-defined pricing strategy and respective positioning in the market is the starting point. Defining the best method to form your selling price also requires a correct self-analysis, as not every product or service has differentials from the customer's point of view to allow the use of Value Based Pricing. Often, allowing us to work with prices in relation to the main competitor (when we have reliable information) ends up being a more profitable way of pricing. Using analytical models, based on cross-elasticity, that define our main competitors and how vulnerable we are to their price changes, in addition to break-even studies, allows us to make accurate decisions about our own price movements. The basis for any price management process is associated with a reliable, up-to-date, easily accessible database with relevant information for pricing issues, encompassing marketing, sales, finance and even supply chain data. Nowadays data lakes are available in most companies, but there are still few that can transform the amount of data they have into information and knowledge for decision making. Going further, sophisticating the ways in which we do business, or negotiate prices, with our customers, can be a lever to change the rules of the game and strengthen relationships. It is common in the market to see companies delegating this definition of discounts and incentives to the commercial area, failing to seek a more strategic role in negotiations, when we offer incentives connected to the purchasing behavior we want to encourage from our customers. We can also work with price optimization, in the appropriate dynamism (hourly, daily, weekly) for each business, using Price Response Curves in B2C, when prices are published and visible, or Bid Response Curves in B2B, when we do not have much visibility of market prices. In both, we were able to establish what we call the Optimal Price Ranges by SKU, with lower limits, maximizing sales volume (revenue) and upper limits, maximizing margins (profit). All this can currently be supported by pricing algorithms running in real time on artificial intelligence platforms such as Amazon (AWS) or Microsoft (Azure). In other words, the time when companies needed to invest millions of dollars to implement pricing software or even be hostage to some SAAS solution to manage and optimize prices is gone. With the democratization of the technology currently offered, it is enough to want to develop a customized internal solution and you will get excellent results for a fraction of the cost necessary for this. Not to mention the advantage of building and mastering all the knowledge of what is being processed with your data and information. The governance of all the activities listed in this brief article must be the responsibility of a Pricing and Revenue Management area, duly structured and with clear and well-defined roles within each organization. Some with the area more centralized and with greater decision-making power, while others may be more decentralized and act more as support to other areas, each case is different, and the company's level of maturity allows us to find the best format. Finally, I believe that everyone who has come this far understands the importance and potential that Pricing and Revenue Management can bring to your company's results. The theme gained relevance in this troubled moment we are living and due to the greater competitiveness of the market, I understand that it will be even more valued by companies that really want to come out victorious.