Zone Your Pricing

I had the privilege of addressing a group of pricing professionals attending Zilliant’s MindShare conference.  Sitting in on several of their sessions, I was once again reminded that pricing can be a hot potato, particularly in B2B enterprises.  As such, it is often not clear who owns it, or even who should own it, and thus, depending on the company and the industry, you can see the function being hosted by any number of organizations, including finance, sales, product, or marketing.  Wherever it lands, its authority is at best provisional, which can make agile execution all but impossible.  Given the economic volatility we appear to be in for this year, that is dangerous indeed.

To address this challenge, consider applying zone management to position pricing where it can be most effective, given the outcomes you seek to achieve.  Here’s a sketch of how that might play out:

Pricing in the Productivity Zone

For markets that are on Main Street, and especially in categories that have become commoditized over time, margin-based pricing represents the best approach.  Attackers may counter with a low-price tactic to gain market share, but this is normally a losing play, as market share pecking orders are held in place by an ecosystem of relationships that is hard to displace.  When attackers are state-funded, however, they can be persistently challenging, and this is a situation where protective tariffs do make sense.

As the airlines taught us several decades ago, price optimization is the discipline at the core of margin-based pricing.  What is new is the emerging opportunity to exploit big data, machine learning, and AI to optimize pricing with a speed and proficiency that is beyond human capability.  This is not low-hanging fruit, but in the long term, the practice is bound to be game-changing.  As such, it represents an existential threat to organizations that do not adopt it, which means it would be good to start your engines now.

Pricing in the Performance Zone

For markets that are still growing, the market share pecking order is still in play, and building a sustainable customer base with a web of ecosystem relationships surrounding it is job one.  Everybody in the industry knows this, and so sales competition is fierce, and competition-based pricing is an everyday reality.

The goal of competition-based pricing is to find the efficient frontier of discounting based on balancing the estimated lifetime value of gaining the customer with the immediate hit to margins.  This is the responsibility of the deal desk.  To execute it successfully, the team needs to explicitly model where it thinks that efficient frontier lies and then make its decisions accordingly.  Of course, you never can get the frontier exactly right, so continual tweaking with the model is also part of the game.  What is not part, on the other hand, is capitulating to a knee-jerk reaction that overrides the model after a painful competitive loss.  You have to stay with a game plan, even when it is wrong, as there is no other way to learn.  The motto never changes: Win or learn!

Pricing in the Incubation Zone

For categories that are nascent, having yet to cross the chasm, there are no budgets as yet, nor are there any established pricing models in place.  Typically, the new product is launched on the back of an existing pricing model, but time quickly reveals that it does not correlate properly with the value being delivered.  For example, Phaidra, an energy management software offering focused on data centers, originally priced itself on a per facility basis but came to realize subsequently that it should be pricing on per megawatt under management.  Similarly, Salesforce, which rose to SaaS prominence pricing per seat, has come to realize that much of its added value now correlates better with consumption-based pricing.

The key point here is that when categories are still forming, the right pricing model typically needs to be discovered, and until it has, scaling up is a big mistake.  Instead, the early market is best served by making special deals with visionary customers, typically bundled with a load of professional services, thereby setting a high price to correlate with the first-mover advantage and white gloves attention the customer is getting.  As the category develops, more and more of that price can be delivered by the software itself, so margins can steadily improve.  That still leaves the question of pricing model open, but it creates air cover during the discovery period.

Pricing in the Transformation Zone

For categories that are likely to be disrupted by the current unpredictable tariff policy, the best-laid plans for pricing are moot.  Instead, one must be prepared to act both swiftly and coherently to preserve relationships with both customers and suppliers.  These are not normal pricing adjustments, and they will likely involve allocation decisions as well.  For these reasons, the CEO needs to take the helm, not to make the price changes per se, but to approve them and ensure they are executed without hesitation.  Until things settle down, this will likely call for a pricing council to meet weekly with escalation access open to anyone in the enterprise who is encountering a pricing obstacle.  Agility, not bureaucracy, must be the order of the day.

This applies not just to decision-making but to execution as well.  Leaving partners and customers in the dark erodes the very trust you need to get through these times.  Timely, transparent communication is critical, and to maintain accountability, this must be centralized.  The goal is to be as responsive as possible while avoiding knee-jerk reactions.  Because external constituencies are involved, a monthly cadence evolving over time to a quarterly one is likely to be best.

Key Takeaway

In any given moment, more than one zone is likely to be active.  Because their charters are not only different but incompatible with one another, it is critical to be explicit which zone’s rules we are playing by and not let the rules of another zone be applied.  That is the whole point of zone management, and it very much applies here.

That’s what I think.  What do you think?