The PYRAMID

In today’s competitive business climate, creating a profitable pricing strategy has become more important than ever.  No longer can you use a simple formula to mark items up.  You need a comprehensive strategy that encompasses all aspects of pricing.  That is what The Pricing Pyramid gives you.   Employing the methodology used in The Pricing Pyramid, you will see tangible results in the form of a stronger bottom line.

Think of the pricing pyramid as a series of building blocks that when stacked form the pyramid.  Each block represents a stage to be completed towards your strategy.   The Pricing Pyramid consists of 10 blocks over 5 tiers culminating in your “Pricing Goal".

Visually The Pricing Pyramid looks like this:

A brief description of each tier is as follows:

Tier 1

Data Analytics                                                                                                                                                                 Data Analytics makes up the foundation of the pyramid because it is at the core of pricing.  Whether you are a $15k small business or a $150B Fortune 500 company, Data is created with every transaction and customer interaction.  Client, Product, Financial data is collected at the transactional level and stored in the system that runs the business be it QuickBooks or an Oracle/SAP system.  Competitive Data, Market Data and Industry Data can be gleaned by talking to customers and suppliers.  It is critical that the data is organized in a way that makes it easy to extract and analyze.

Tier 2

Cost
Cost when speaking in terms of pricing is not just about Cost of Goods Sold (CoGS), understanding Fixed vs. Variable expenses or being able to understand a P&L.  To truly understand cost, you must understand the effect that Price has on Cost, specifically; Profit Volume Ratios, Break Even Analysis, Capacity and Demand.  A change in price can have a cascading effect that ripples across your P&L and subsequently your profitability.  Having a complete understanding of your cost drivers is an essential starting point to your journey to price optimization.

Competitive Knowledge
In any business there are competitive forces.  Competitive information is not tied solely to pricing.  Understanding the products and how the competition goes to market will help to build a value proposition around your company and products.    All too often, competitive information is anecdotal and not factual.  To change this, competitive information needs to be carefully acquired and accurately data based in a manner that is easily accessible.

Price Realization

Price realization is a fancy term for manage your discounts and discount process.  Price Realization means that you realize as much of your list price as possible.  An analysis of discounting practices and putting controls in place will help curb discounts.  Every basis point of discount reduction will be tied directly to profitability.

RFP Management

Participating in RFP’s is an opportunity to gain business.  You look at the previous three items in your Tier 2 and try to put together the right price to win the business.  RFP Management takes this process to the next level.  By having a repository of data on all your RFP’s, you can analyze where you have been successful, what price won the business, are there business segments where you are more successful.  Having a firm grasp on this will help direct sales efforts to areas that with a higher win probability.

Tier 3

Value Creation
With Value Creation you are working with Marketing and bring in Competitive Information.  You are crafting a Value Proposition that has tangible value drivers and can be measured.  It is important to have the Voice of the Customer represented here.  It is finding out what motivates the customer that will truly define your value.

Segmentation
Customers will view your products and services differently.  What is important to one set of customers is less so to another.  You will find some of this out through the Value Creation.  You will also need to mine your own data.  You will find a rich trove of information that you will be able to use in creating segments; both customer and product.  You can then bundle them together to be able to efficiently go to market.

Value Training
This step cannot be overlooked.  All customer facing employees; from associates to senior management, need to be working from the same play book.  They need to be trained to be able to convey the value proposition to the customer.  Without proper training, sales people will lack confidence to sell the value and will invariably resort to price.

Tier 4

Sales Compensation

Sales Compensation needs to be aligned with company goals.  When sales personnel are compensated utilizing a revenue based program, focus tends to be on sales volume and not profitability.  Conversely, profit only compensation will dissuade sales from pursuing customers that provide scale that companies need.  Compensation needs to be crafted to address all needs. 

Product Strategy
The last step in the Pyramid is having the proper product strategy.  Product Tiering, Bundling, Product Add Ons, Product Life Cycle and other strategies all contribute to this step.  The right product line up will address all price points and will solidify your value proposition.

Tier 5

Pricing Goal
Upon implementing all 10 steps, you will see the fruits of your efforts - a well conceived and carefully laid out pricing strategy.