Pricing used to be an overlooked aspect of business strategy, with many companies taking a haphazard approach to setting prices. However, this all changed in 1992, when an article in the Harvard Business Review highlighted the impact that optimized pricing could have on a company’s profitability. This article introduced the concept of the “price waterfall framework,” which helped companies to identify profit leakages in their pricing strategies. Since then, many companies have implemented formal pricing processes and centralized control to optimize pricing and increase profits. However, in doing so, they must also consider the customer experience to strike a delicate balance between profitability and customer satisfaction.
In this three-part blog post, we’ll discuss the history and evolution of pricing, and B2B selling behavior, including recent changes in buyer expectations and how they impact a company’s pricing capabilities. We’ll also explore how pricing has become a crucial element of the customer experience. If companies can strike a balance between profitability and customer satisfaction, they can ensure happy customers and healthy profits for years to come! Now, let’s get started.
The Big Ideas
Pricing used to be a bit of a mess. Before the 1990s, most companies didn’t see pricing as something they needed to invest in or be particularly good at. It was more like, “Everybody does pricing, nobody does pricing.” But then, in 1992, two smart people wrote an article in the Harvard Business Review called “Managing Price, Gaining Profit,” and it started to change things.
The article had two big ideas. The first was that small changes in price can have a huge impact on profits. They found that a 1% increase in price could lead to an 11.1% improvement in profitability on average. So, why weren’t more companies investing in making sure their prices were optimized if it could have such a big impact on profits?
The second big idea was the “price waterfall framework.” This was about how many companies didn’t really know how pricing impacted their margins and profits. They measured bottom-line profitability, but didn’t have a clear view of all the profit leakages that happen along the price waterfall. It was kind of a mess.
It took a while for companies to figure out what was going on with their pricing, but when they did, they often found a complete randomness to their pricing. Executives expected prices to follow a pattern, where larger customers would get lower prices due to their better negotiating power. But when they looked at the variation in prices across customers for the same product or service, they were surprised by the breadth and depth of pocket price variation.
Companies started to realize they were leaving significant profits on the table with their current pricing practices. So, they started to apply tried and true management techniques used in other functional areas to pricing. They added formal pricing functions, centralized control, and instituted formal pricing processes like approval processes for decision making.
All of this was good for the bottom line, and for the pricing profession, but there was a problem. The context for how to do pricing well was changing. Pricing increasingly became a customer experience issue in addition to a management discipline issue.
Part of the Customer Experience
So, while it’s great that companies are taking pricing seriously now, they need to remember that pricing isn’t just about maximizing profits. It’s also about providing a good customer experience. It’s a delicate balance, but if companies can get it right, they’ll be able to reap the rewards of both happy customers and healthy profits.
In Part 2 of this series, we’ll discuss the changing expectations of B2B buyers when it comes to purchasing products and services. Speed and trust are crucial factors, with buyers expecting quick responses to their requests for quotes and preferring pricing from suppliers that use algorithms. To stay competitive, companies must invest in pricing capabilities that align with these changing demands to capture an increasing share of the market and drive revenue growth. Stay tuned.