For our February Webinar, Tim J. Smith, PhD, Founder and CEO at Wiglaf Pricing, explored the key actions a new Pricing VP or Director should undertake to deliver a positive impact from day one.. At the end of the session, he answered questions from the audience. In this blog, we share part one of his live answers.
What pricing data have you historically found hard to find when stepping into a new leadership role?
What I do in my engagements, and what I advise clients to do when they start off this role too, is take your historical data group and try to compare it. I’m getting pushback right now, because COVID was a very strange year, but still you want to start to take baseline measurements. And the problem of me saying that is this “well, what measurement do I take? Which is the right measurement?” And I’m like, “do that, please. It’s not just one measurement.”
I try to create a price waterfall of the entire business. I try to create that price band as a percentage of the target price if there is one. If there is none, then as a percentage of the average price for a particular product. I want to see net price bands. I might want to see it per segment. Or might want to do box and whiskers per segment.
I know someone who spent a year or two creating tons of measurement. First listening to marketing people saying you got to measure everything by these 21 different segments. It turns out those 21 different segments had no correlation to the price capture. So what you’re trying to do is try to figure out how to first debunk the myths of the organization, and to create a truth for the organization move forward.
And when he finally finished his results, he found the number one correlation with price for selling truck tires was market share at that particular distributor. And that was the major driver of who gets a high price, and who gets a low price. A company that was highly dedicated to their brand of tires tended to get a lower price, regardless of their volume, whereas a company that sometimes also carried competitors got a higher price. And this seemed to work well for them, but it took them a while to prove to the organization that that intelligence assessment was accurate. A lot of that.
In organizations where the pricing function is new, where in the organization do you most often see the temptation to discount sitting?
In industrial products, it’s going to come directly out of sales or the commercial officer of you’re in Europe. That’s where you’re going to see the big discounting. For consumer packaged goods. You see this huge bias by marketing to go for market share at all costs. And I’m even hearing the marketing director says, “well, market share is always a winner.” And my response to that is: “does Kellogg’s makes a lot of money?” We saw in the recent year, the CEO of Hershey’s raised prices and reduced the amount of promotions, but increased advertising. And profits went up. It might have been counter to what the Nielson/IRI data analysis says of lower price, [leading to] lower prices, and you get more market share and you make more money. It’s different.
It’s hard to persuade an organization, much less an entire culture, raised in saying market share is everything when it’s not. And [this was] one of the things I did with a client in the consumer goods market. She was saying, “well, we’re launching a new product, so let’s go ahead and put a coupon on it. Let’s go ahead and do a price promotion on it.” And I asked her, “does your biggest competitor have discounts? And she was like, no.” And finally she realized, “wait a minute, there is actually an option here.” And this relates exactly to what LeveragePoint is great at: clarifying the value, communicating the value, and enabling the frontline salespeople to communicate that value.
What team structure/roles do you recommend building out, and what capabilities do you look for when building a pricing organization?
I’m a consultant and a professor. So the way I work, this might be slightly different. Okay. As a professor, I know that if you have the raw skills I can teach you. What’s next? So I’m really looking for, do you have that pure curiosity, intellectual acumen? Can I count on you to get something done when I tell you to? Can you do math?
I’d say about 75% of my students can get through the pricing class. They learn a lot, but the math really drags them down. I’m like, “you know, then that’s fine. At least you know when to ask for pricing, to engage you and you won’t be asking for market share at all costs at all times.” But 25% of those students – they can actually do the math, they enjoy it. And then suddenly clicks – “wait, this is all I have to do. I can do this. I can make this. I can make that work.” And so I’m looking for those raw math skills and the raw business intelligence. And the pricing-specific application of statistics or thinking is different.
I’ll say, “those are nice emotional benefits. I liked Mickey Mouse too, but that’s not going to make me buy stuff that much. Actually show me the money. Give me the wallet, give me the economic reasoning, which goes back into the economic value to customer (LeveragePoint calls it EVE, I use the Harvard term economic value to customer), followed by maybe voice of customer, doing some sensitivity analysis and measurements, maybe even conjoint analysis. So that’s a different training set where you’re looking for that raw business question/inquiry model, building skillset. That’s like creating a word problem from nothing and then solving the word problem. That requires a good algebra sense, which is different from the statistical sense of a different group.