How to guide to create stable and predictable pricing

Pricing works well when everyone is making money.

Over 15 years I have asked customers what their biggest issue with pricing is.

9/10 it's the same answer.

Unpredictable pricing !

That's when they know they'll make margin/profit on the product today but tomorrow is unpredictable because your pricing in the market is disorganized.

Pricing is disorganized in the market when too many price points are chasing the same product in the same market.

This unpredictability in pricing usually comes from one of these sub-issues.

1. Not knowing your master value prop- price or brand ?
2. Poor pricing strategy
3. Poor sales planning
4. Poor channel strategy

In fact these issues have a cascading impact on each other. Not knowing your master value prop will lead to poor pricing off the gates, and that will lead to poor sales planning because you couldn't forecast right based on your price and that will lead to bad channel strategy decisions where you flood the channel with product at prices that are going to hurt you. It's a vicious cycle.

Every company that is struggling with keeping prices stable in the market has all or at least 2 of these issues. But remember no company stars out by saying we are going to create this bad unpredictable pricing strategy. It's a by-product of bad planning.

But it's all fixable !

In this newsletter we will cover what each of those issues truly mean and how to make your pricing more predictable and stable in the channel !

1. Knowing your master value prop.

What is a master value prop ?

In the simplest terms its knowing what is your base value proposition. When your customers talk about you, do they think low cost or do they think brand ?

You can only choose one ! It it PRICE or BRAND ?

They both are at the opposite end of the spectrum. You have to force yourself to purposely make a choice because it provides clarity on all the next steps.

Once you decide what your master value prop is then it's easy to understand the next steps, which are:

1) Which channels you will compete in ?

2) What pricing strategy will look like based on that channel ?

3) What cost structure you will need to support it ?

For example:

Walmart competes on price.

Whole Foods competes on brand.

It is easier to communicate value when you are on either extreme sides of this value prop spectrum. Competing in the middle is difficult, because you are competing on some version of a cocktail of brand and price, and that's where brand make the most mistakes as they navigate this duality.

So if you are a product that will compete on price then you will naturally gravitate towards channels that are more aligned to sell products with low cost structure. On the flip side if you want to compete on brand, then selling at a low cost supermarket should not be your jam.

So in summary pick a side in price vs brand and stick to it. Make it clear organization wide what you are competing on and then make choices to support that decision accordingly across the organization.

2. Poor pricing choice

Every company wants to make sure that they maximise their distribution. That's a nobel north star metric to go for ! However, the real distribution goal should be to maximise your distribution in the cohort of similar channels with similar pricing strategies. Any attempt to go outside of your cohort will lead to pricing friction and confusing for the customer. For example:

Banana boat wants to maximise its production. Great goal ! But then..

Banana boat ends up selling the same product in two different channels with opposite pricing strategies with one channel consistently selling at 30% discount compared to the other.

One channel projects high consumer confidence because they associate that store with no questions asked everyday low price(EDLP), where as the other store has low customer confidence for the same product because consumers know it can be purchased 2 weeks later at the same store for cheaper at a or at Walmart today for 30% cheaper if really need it today. This does not mean EDLP does not work, it absolutely does but only when the product is unique to the channel.

This issue in pricing should be unforgiven because there are so many ways for Banana Boat to differentiate like pack size, product attributes etc. but it chose to compete with the same product across different retailer at different prices. This is a bad pricing choice given the scale of their distribution and visibility.

To fix this:

1) In the first step chose what you are going to compete on price or brand,

2) Then supplement it with a pricing strategy that complements that decision. If you compete on cost then stick with low cost channels that support that decision. A low price in high margin channel just means lower margin.

3) If you want to compete on brand then stick with channels that support that higher selling price and you can afford to go more premium. Competing on cost in a high margin more premium channel will lead to buyer confusion as they may not associate the product with that channel and again sales will suffer.

3. Sales planning issue

Third biggest issue that plagues bad and unpredictable pricing strategy is bad sales planning. That sales planning issue is a catch all for all issues arising from bad budgeting, forecasting, and selling.

If you set the wrong sales target come budget time the prior year, you have already set your channel pricing up for failure. And when I say wrong budgets I usually mean 'over budgeting' sales, as that puts more downward pressure on price down the line.

Over budgeting usually comes from a place of:

1) Over-optimism: Sales teams being over optimistic about deals. I have sat in several rooms where pressure to hit the target beats the reality of the pipeline.

2) Lack of robust data analysis: Good forecast require backward looking data data and forward looking insights to help optimize the budget. A lot of times forecasts are only based on backward looking numbers which can be misleading and we end up over forecasting.

3) Lack of information sharing protocols: There is always new information that impacts forecast and sometimes that information doesn't flow through to the right people in time thereby creating a situation where prior history and forward projections could differ. For example marketing may have new opportunities not available in prior months or finance may have another restriction that impacts forecast.

That red zone where products are excessively discounted when there is gap to budget has a long term impact on pricing instability in the market and also trains customers to wait for deals.

Fix for these is relatively easy.

1) Right size your budget: Usually means meticulously planning your budget and stripping over optimism out of it when it is being set the prior year. Particularly the deals/business which has low chance of success in the next year. This may mean selling less, but usually selling less comes with better pricing and higher profit margin as you don't have to compensate with discounting for budgeted deals that won't happen.

2) Robust forecasting: Using backward looking data but layering forward looking insights to it. This can be done via manual forecasting or automated forecasting tools that can use multivariable forecasting etc. Track forecast accuracy by sales rep. What's not measured can't be fixed.

3) Information sharing: Move away from siloed forecasts. Use backward looking numbers and then layer in any new information available from cross functional groups like marketing that could impact the future or even product team making changes that could impact sales. Any structure that allows for more information sharing is better than siloed forecasting.

4. Bad channel strategy

A well oiled channel strategy is important for a clean predictable pricing strategy.

Where you sell, how you sell and who you partner with has an important impact on pricing strategy. There are various ways where conflict can arise in channel from a pricing POV:

1) Multi channel conflict: Often companies will sell into retail and in online channels at the same time. Those channels have different channel operating costs and every now and then brands will provide an incentive to one channel while not the other and this will immediately trigger a price war of sorts.

2) Multi distributor conflict: Brands inherently want to avoid giving too much power to its distributors in a region and often deploy a 2 distributor strategy or sometimes distributors cross across territories. When 2 distributors chase the same customers, price wars and price destabilization are bound to happen.

Solutions for channel strategy conflicts:

1) Clean territorial rights: Set expectations of boundaries that they can sell into, and customers that they can target. Doing this sets the right expectation and you are less likely to get into destabilizing price wars.

2) One distributor: When possible use one and only distributor in any region to avoid price wars.

3) Terms in multi channel: When you are selling into multi channels in the same location avoid at all costs any favoritism in terms. Keep terms transparent so there is no ambiguity in channel strategy and multiple channels can be serviced without any price issues.

If you did all of the above then chances are that you will have relatively stable pricing strategy and won't fall in the bucket of your products being in the 'unpredictable margin' bucket.

Summary

Avoid flip flopping in your pricing strategy, and ensure your pricing is predictable and customers/retailers can make money on your product consistently everyday.

To do so:

1) Ensure you know what is your master value prop: Cost or Brand.

2) Don't over complicate pricing by selling a product on EDLP and high/lo at the same time. Chose one strategy and stick with it, and then make decisions based on that chosen strategy.

3) Better forecasting: Layer forward looking insights into your forecast to avoid over forecasting and then resorting to discount based deal that make your pricing unpredictable

4) Clean channel strategy: Avoid selling to multiple middle man who serve the same end customer. Set territorial rights and provide transparency in deals being done in the market.

And that is likely the best way to have a predictable and stable pricing strategy.

Let me know if you have any thoughts on the topic. Love to hear your opinion.