Pricing: Escaping The Territorial Trap

The importance of pricing strategy is highlighted in an article in Industry Week. It suggests many companies fail to strike the right local / global balance and therefore miss profit opportunities.

I always welcome articles on pricing because I think there are far too few of them. But in most cases, I feel they miss the fundamental opportunity that comes from better alignment of price with terms and conditions.

In most companies, prices are established without adequate reference to overall contract terms. This results not only in margin erosion, but also in failure to understand the potential for greater – and distinctive – market segmentation.

The Industry Week article falls into the standard trap. It discusses pricing in terms of country versus global strategies. Yet it misses the  point that geography is increasingly less relevant as a basis for segmentation. Towards the end, the author acknowledges “The right level of harmonization will depend on the individual business. For example, a manufacturing company that sells primarily to customers that source globally (e.g. semiconductor manufacturers) needs a high degree of pricing consistency globally, and should therefore be highly centralized with limited local variability. A more regionally-oriented customer base is best served with a less centralized approach, where global processes and tools are harmonized in one model, but also allow local variations.”

The truth is that many businesses today need to cope with far more sophistacted segmentations and they need to find ways to defend price variability within geographic territories. The best way of doing this is by distinctive terms and conditions, reflecting variations in commitment levels, in the allocation of risk and in offering structure. Indeed, the methods and timing of charging will be one of those sources of difference.

Performing on terms and conditions has a major impact on costs, often greater than those associated with the core product. The key to successful pricing (and profit optimization) is to undertake more effective market needs analysis, cutting across traditional segmentation. The problem in most companies is that segmentation is driven more by their organizational model and profit accountability than it is by the customer view or needs. Geographies, business units, product divisions are often the drivers of data that is constrained by their vision and visibility. And these constraints then eliminate alternative strategies.

The sort of questions we should ask include:

• How important is our product to different customer groups; what is its strategic significance?
• How might this impact the levels of responsibility / accountability they would like us to offer?
• What impact might this have on their valuation of accompanying services?
• What implications might these variations have to alternative charging models (eg one-time versus over time; fixed price versus variable or outcome based)?

In a simple example, I recall two contracts for the same data storage system. One system was to manage real-time data for a major stock exchange; the other was for financial reporting within a large international corporation. Both were important, yet represented very different levels of strategic significance. By offering standard product prices (based on their traditional market segmentation), the supplier found itself in tough negotiations with both customers. One was demanding onerous risk terms, far beyond the standard offering; the other was pushing for discounts because it saw limited value in the standard terms. Pricing strategies were driven by product divisions that were in turn measured on geographic performance; such parameters had little relevance to the realities of the market.