Pricing Landscape As We See It

As a consulting company, we generally work with enterprise customers in the $500M to many billion-dollar range.  It’s not that we won’t work with smaller companies, this is just where the majority of our contacts lie given our collective backgrounds in enterprise software and consulting.  We operate mostly on the sell side of enterprise companies implementing eCommerce, master data management, configurators, pricing systems, CRM, and content management solutions and integrating them into our customer’s business processes.  We consistently see that better pricing practices stand out as the area where we can provide the most value to the companies we service.  Specifically, when we talk about Enterprise Pricing we are referring to large companies with complex pricing processes.  As described in a previous article, fixing pricing errors and providing the foundation for optimization yields an enormous benefit.

In our work, we span both B2B and B2C pricing. We approach the pricing process differently for these channels.  This is how we view the difference:

B2B.  Business to business commerce is usually done through relationships and typically requires a sales person to negotiate contracts or deals.  A target price or deal envelope can be used to drive sales people to the final price that is in line with a company’s goals.

B2C.  Business to consumer commerce might have floor sales people but typically no negotiation.  B2C pricing is usually done in a back office where a marketing or merchandising team determines the price.  The price is then sent down to stores and the eCommerce site.

Supply chain management commonly refers to the planning funnel which flows from strategy to planning and then execution.  Strategy is focused on activities for the next few years. Planning horizons deal with the next 6-12 months.  Execution focuses on immediate actions taken over the next few weeks.  I like to borrow this terminology when discussing pricing.  In this blog, we will focus on the medium and short-term processes of planning and execution:

Planning.  Planning, aka analysis and optimization, work in conjunction with each other to determine what the right price should be at a given location or for a particular channel.  In B2C, the systems typically employ a forecast that shows both base demand and promotional lift. Price elasticity can be used to analyze secondary impacts of price changes such as cannibalization and halo effects to determine what the right price should be.  B2B planning uses the same techniques, but also provides guidelines in the quoting process that direct the sales people towards the company goals.  These tools also measure performance against those goals.

Execution.  Execution takes the price from planning and gets the price to the place your customer will see it on an eCommerce site or to the POS.  Execution can include systematic checks to ensure that actions taken by the different business functions such as marketing and merchandising don’t conflict.  Also, store managers may need the authority to deal with unknowns such as local competitive actions. The optimized price coming from corporate may need to be overridden. In B2B, execution is really the quoting system.  This is where prices are negotiated, contracts are managed, and price commitments are sent to customers.

When we talk to customers about pricing, one of the initial things we establish is where they fall on the spectrum of pricing needs between B2B and B2C.  Companies that do both typically have different business units that handle marketing and pricing functions for the separate units.  Sometimes the lines can be blurred but in general we see these business functions at the intersection of these categories:

Planning Lifecycle analysis and planning including promos, mark downs, and initial pricing.  In general, optimization is based on a forecast which drives a price-elasticity curve to determine the best price. Setting guidelines for sales people and targets that are in line with business goals.  Measuring sales people against those goals.  Setting tier discounts and negotiation parameters.
Execution Execution is rules based pricing and verification.  There may be different systems affecting price such as mark downs from merchandising and coupons from marketing.  Execution is where it comes together. Creating contracts, customer specific pricing, enforcing deal envelopes, creating quotes, approval processes, and spot quotes.

In B2C we’ve seen that the execution system is usually different than the planning system, but in B2B we’ve seen the planning and execution systems can be a single system.  I can only venture to guess why this is the case.  B2B systems typically have a lot of interactive users and workflow whereas B2C systems seem to focus more heavily on transaction speed.  I assume there’s enough of a market for these separate business problems that vendors have specialized in one or the other.

For analysis, the dividing line seems to be how much transaction data you have.  When you have enough data, then you can apply science to determine the optimal price and be statistically confident in the recommendations.  If you don’t have enough data, then you employ boundaries and reports to aid negotiation and rely on the sales person to ultimately make the decision.

The typical path we suggest to achieve pricing excellence is to first identify if you have a pricing problem and where you can improve on the process.  For many companies the starting point could be a price execution system to stem the price errors and put controls around how the price is calculated.  If this foundation is in place, you can progress to optimization.

In the next topics, we will cover the process we use to identify pricing problems and how big the opportunity is.  Then, we will discuss how you go about fixing the process.

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