You Don’t Need to “Throw in the Towel”
Guest post by Stephan Liozu
Pricing can be a complex process. Many industry managers also consider pricing to be a headache, and some firms have even “thrown in the towel.” They complain that they have no control over prices because “the market sets the price and (they) have to figure out how to cope with it,” (Dolan and Simon, 1996 – complete references are available from the author, see below). But pricing strategy and execution are critical to the success of stakeholders both within and outside the firm. Pricing is complex because good pricing has to integrate information from inside and outside the company and consider both customers and competitors. And pricing involves many business functions from across the organization, from product development to operations and from marketing to sales. These are “multidimensional processes affecting customers, products, cost recovery efforts, produce margin levels, customer retention, market share, and domestic and international sales.” (Lancioni et al. 2005)
What makes pricing so complex? Can pricing management be considered as a complex system? How do firms manage the complexity generated by pricing this complexity?
My research with Dr. Andreas Hinterhuber and colleagues has led us to conclude that one of the critical elements of the organizational journey towards pricing excellence is the organization’s capacity to adapt and change. The work of Richard Boyatzis and especially his 2006 paper on Intentional Change Theory provides some useful perspectives on how to manage the challenges.
Boyatzis refers to complex systems as a “multi-level combination of systems that may behave in a way independent of any one of the component systems.” People who have experienced miss-alignment between marketing and sales, or product configurations and customers will know what this means. Later in his research, he explores what makes for a truly complex system: multileveled-ness.
Boyatzis’ ideas can be applied to value and pricing management. The figure below paints the picture. Complexity in value and pricing management is nested at various levels across multiple dimensions and cultures, and requires the convergence of multiple languages. Complexity is the result of all the interactions between internal subsystems (functions and departments) exposed to a changing external environment.
Pricing management is multi-functional, multi-dimensional, multi-cultural, multi-lingual, and multi-leveled. Pricing requires careful management of the multitude of players involved in value assessment and pricing decisions and of the plethora of information that needs to be considered to set, communicate and capture price. Because agents frequently act independently, tensions, conflicts, misunderstandings, difficult negotiations, and internal arguments are part of this complex price-setting process. There is plenty of room for failure, for poor decision making, and for breakdowns in the process. That may be why some managers “throw in the towel.”
The key to pricing excellence is to manage this complexity and not to ignore it. To win at pricing organizations need to get into what we call the C4 Zone: a zone of convergence, collaboration, conversation and consensus. It is imperative that all the actors in pricing come into this zone to have the value conversations that will create buy-in and generate excitement. My experience shows that the LeveragePoint value-based pricing platform can serve as the C4 Zone and allow pricing actors to reach consensus on the value story!
Faced with this complexity, pricing leaders must act as resonant leaders and work across the multi-levels, the multi-functions, and the multi-dimensions to create the necessary productive interactions. They are responsible for capturing the influence and power of the various groups involved in pricing and for creating coalitions across what Boyatzis calls social-identity groups. Building consensus, drive, and energy to support pricing activities will lead to greater collective confidence in implementing the pricing vision and the change agenda and in reaching greater outcomes. The journey to pricing excellence requires experimentation, teamwork, decisions, and significant investments, and which is potentially never-ending. It is a journey, and not a destination. But is a necessary journey for companies that want to make extraordinary returns for their stakeholders.
Stephan Liozu is President & CEO of Ardex America Inc (www.ardexamericas.com), an innovative and high-performance building-materials company located in Pittsburgh, PA. He is also a PhD candidate in Management at Case Western Reserve University. Please contact him at regarding references for this blog post firstname.lastname@example.org.